The
financial crisis of 2008 was a major turning point in our country’s
history. The stock market had multiple days of losing hundreds of points
as the political and economic institutions and the leaders grappled
with ways to staunch the bleeding (Amadeo). The inflection point of the
crisis coincided with a presidential election. That election was polling
close until Barak Obama pulled away and won, placing the Democrats at
the head of the executive branch while they still had their majority in
both houses of congress that they gained in 2006. During the transition,
Congress passed a bailout for the banks known as TARP (Troubled Asset
Relief Program), and the Federal Reserve flooded banking the system with
liquidity, pushing the federal funds rate to its lowest point in
history (Amadeo). As Obama came into office, he and his economic
advisors realized that the lame-duck motions of the end of the Bush
Administration would not be enough to fill the hole left by the
financial crisis. Obama and the new congress narrowly passed a stimulus
of $787 billion dollars. The bill, ARRA (American Recovery and
Reinvestment Act of 2009), was designed such that even though many
people saw direct benefits from the new law, it did not create a new
constituency. In fact, some polls showed that people thought that their
taxes increased (“ARRA”).
The
effects of ARRA were welcomed, but even looking back in 2015, the CBO
estimated the program had limited effect: “The effects of ARRA on output
peaked in the first half of 2010 and have since diminished CBO
estimates. The effects of ARRA on employment are estimated to have
lagged slightly behind the effects on output; CBO estimates that the
employment effects began to wane at the end of 2010.” (“Impact”, p 3).
The limited effects were anticipated at the start from some economists.
Paul Krugman, Nobel Prize winner and New York Times Columnist, gave a
speech in early 2009 noting: “[ARRA]’s helpful, but it does not cover
even one-third of the gap, so it’s disappointing. Out of the $789
billion approved, only about $600 billion adds real stimulus. You’ve
only got $600 billion to fill a $2.9 trillion hole.” (America).
Economists like Krugman wanted the stimulus package to be big enough to
fill the hole that was created with the crisis and to kick-start
spending. Even with a headline number that made all but the most jaded
gasp, the number was not big enough to fill the hole and create the jobs
needed to get the economic activity up to par, with what it had been
before the recession had started.
The
recession, however, was a bit different from other recessions. Between
the depth of job losses and the slowness of the recovery, the Brookings
Institute estimates that though the absolute number of jobs hit the
pre-recession level as of April 2014, it was not until July of 2017 that
the overall gap closed adjusting for demographic variables such as
population growth and aging. This now decade-long recovery had economist
calling the recovery “L-shaped” or a “jobless recovery” since similar
returns to normalcy aftershocks in 1981 and 1990 only took 40 and 48
months (“jobs gap”). The same study notes that the recession and
recovery were also notable for variabilities in place and race and
educational attainment. In addition, where the real-estate bubbles were
higher, the crash was greater, and the recovery took longer. For whites,
and those with more education, the crash was not as deep nor as long
lasting in term of overall employment.
The
depth of the crash and the long duration of the recovery matters in
part because the political response. Once Obama was sworn in as
President, Republicans in congress dragged their feet on teaming with
the Democrats. Despite attempting to work with the Republicans, the ARRA
stimulus was passed with no GOP votes in the house and only three
voting in the Senate. (Calmes). The dissatisfaction with the recovery
effort spread out from the halls of congress. In early 2009, Rick
Santelli, a commentator on the cable financial news channel CNBC, went
on a tirade broadcasting from the floor of the Chicago Mercantile
exchange, saying, “The government is promoting bad behavior. How about
this, president and new administration, why don’t you put up a website
to have people vote on the Internet as a referendum to see if we really
want to subsidize the losers’ mortgages.” Then he turned, and the
traders clapped, adding, “President Obama, are you listening? We’re
thinking of having a Chicago Tea Party in July. All you capitalists show
up to Lake Michigan, I’m going to start organizing. I’ll tell you what:
If you read our Founding Fathers — people like Benjamin Franklin and
Jefferson — what we’re doing in this country now is making them roll
over in their graves.” (Kirell). Santelli’s monologue started a movement
that had been coalescing against President Obama and the Democrats. The
GOP in the next years at the federal level dug in its heels and opposed
any initiatives in the House and the Senate that the Democrats
proposed, from health care reform to lowering the risks in the banking
system to try to stave off another crisis of the magnitude of that in
2008. (Staff). The Tea party resistance to Obama paid off for the
Republicans as in 2010 where the Republicans lowered the Democrats’
majority to below the filibuster-proof threshold and gained an absolute
majority in the house (“Senate Results Map”). Republicans were heartened
with their new powers, with Speaker Boehner outlining his plan: “The
single most important thing we want to achieve is for President Obama to
be a one-term president.” (Barr).
The
backlash to the bailouts and the slow recovery was not just on the
right. After the wave election that put many of the Tea Party
Republicans in place, there was a movement on the left. Posters from the
magazine Adbusters went up in New York and spread on social media. The
poster had a ballerina standing atop the famous Wall Street Bull statue.
On the bottom was the “hashtag #OccupyWallStreet. From an initial
protest, the Occupation grew. It was not just at the original planned
site in lower Manhattan. Encampments grew up in cities large and small
in the fall of 2011. The main criticism of the encampment was that there
were no direct demands. Occupy was a loose confederacy of anarchical
gatherings. Winter came and the police broke up the main encampment. The
ultimate legacy of the gatherings was that a new light was brought on
the gross inequities of wealth and income that existed in our society.
Wall Street bankers had to look face to face with protesters in the
camps. Online, the phrase “We are the 99%” spread as people told their
stories and spread them with their social media networks. (Lalinde).
There was not as strong an electoral consequence with the Occupy
Movement as there was with the Tea Party. Obama did win reelection
against Mitt Romney in 2012 but did not make up for the wave election in
the house or greatly make any movement in the Senate. (“Election
Results”) Bernie Sanders, Senator from Vermont, used rhetoric that was
familiar to the Occupiers in his bid for the Democratic Nomination in
2016. This bid was ultimately unsuccessful as he lost to entrenched
party favorite Hillary Clinton. Clinton, in turn, lost to the GOP
candidate Donald Trump who won a narrow victory speaking with
exclusionary language and nationalistic triumphalism, running an outside
campaign like the Tea Parties eight years earlier.
The
crisis of 2008 was such a turning point for the United States because a
clear line can be drawn from the crash and the response to it both from
monetary and fiscal policy standpoints and the rhetoric surrounding
that response from both sides of the political aisle. The response
echoes down today to our president threatening trade wars with anyone
who looks at him funny with the lowering of the tax rates on high
earners and their capital gains. What it comes down to on both sides are
questions of distribution and equity. How do we define the pie, how do
we decide how it is divided, and who gets what parts of the pie? In this
paper, we will explore the ideological response to the crisis, as
inequality gained greater attention after 2008. We will examine
gathering evidence of inequities with the American economic system as
these inequities exacerbate and give lie to the idea of America as the
land of equality and the land of opportunity. Finally, we will suggest a
different ethical framework for evaluating the economic systems, and
show how policy choices can be driven by that framework.
There
are several different ways to look at what the pie means economically.
The first way is to define income that comes in on an hourly basis or in
terms of salary. Other things that we might include in this measure are
such things as benefits or bonuses or deferred income. This measure of
wage income is defined as pay. To take a broader conception of the money
coming in, there are many other ways that someone could receive a flow
of funds such as dividends, capital gains, royalties, and rent. The sum
of all the money coming in over a defined time span is your income.
(Galbraith p. 2)
A
different way to look at the pie is to see the total of a collection of
assets. As James Galbraith explains, this sum “includes financial
assets, such as money, and stocks and bonds at their market value. It
includes the value of houses, real estate, art, automobiles, jewelry,
and other possessions, net of any debts held against them. And it
includes the capital value of present or future income flows.”
(Galbraith p. 3).
Once
the pie is defined, there are several different ways to compare the
differences in either income or wealth. One can look at an individual’s
share of the pie, or perhaps the household’s share of the pie. The
aggregate totals at a high level can be looked at to get a sense of the
distribution and to examine how the overall distribution has changed
over time. As Galbraith notes, one simple way to make comparisons is to
“line all the observations from low to high and to count them off in
percentage terms, point by point” (Galbraith p. 61). This ordinal
comparison then allows the examiner to look at ratios of certain
percentile groups, for example, how much income the group in the middle
as earns defined by the 50th percentile as how the group at the 90th
percentile earns much income.
One
of the most common measurements of inequality is the Gini Coefficient.
The Gini Coefficient is based on the Lorentz curve. To map out the
coefficient, one takes the cumulative share of income and draws out a
curve against the cumulative share of people. If there were perfect
equality in the population being studied, the curve would be a straight
line with a 45-degree angle. In practice, there are very few examples of
perfect equality. What is seen instead is that as you move from left to
right, the total share of the income grows slower than the total share
of people. In all but perfectly populations, the units on the right will
have more than the units on the left. This creates a curve that is
below the line of equality, and the Gini Coefficient is measured as the
ratio of the area between the line of equality and the Lorentz curve
over the total area. The more unequal in distribution the wealth or
income of population is, the higher the Gini Coefficient. The highest a
Gini Coefficient can theoretically be is a measure of one, where one
person accrues all the income or wealth of a measured population
(Galbraith p. 64–65). At the other end would be where all members of a
population have equal share of the resources.
Having
a measurement like percentile ratios or the Gini Coefficient means that
you can start to measure inequality within or across countries and
across time. In the western countries, especially the United States, the
broad consensus is that in the past few decades inequality is
increasing. Galbraith notes “The economies of almost all nation states
have experienced significant increases in economic inequality in the
past generation, so that with almost no exceptions, the world’s people
belong to more unequal countries than they did in 1960 or even in 1980”
(Galbraith p 123). Branko Milanovic, former chief economist of the IMF,
traces the move in US Gini from “a historically low level of about 35
Gini points until the trough in 1979. After that, it rose steadily,
reaching over 40 Gini points by the second decade of the twenty-first
century (Milanović p. 71). French Economist Thomas Piketty looks at
similar data and calls the increase in income inequality an “explosion,”
as the US income for the upper decile (top ten percent) increased from
between 30 to 35 percent to between 45–50 percent. Piketty postulates
that “The shape of the curve is rather impressively steep, and it is
natural to wonder how long such a rapid increase can continue: if change
continues at the same pace, for example, the upper decile will be
raking in 60 percent of national income by 2030” (Piketty p. 294).
Ultimately,
this high and increasing inequality of both wealth and income in the
United States is detrimental because there are many negative social
effects. We have already seen one of these, in the political
polarization that has become exacerbated since the financial crisis in
2008. The crisis was like the tide going out. The false good times of
the bubble that preceded the crisis masked many negative effects of
inequality that existed — and not just the loss of jobs, income, and
wealth that the crisis carried with it. In The Price of Inequality, Nobel-Prize
winning economist examines in-depth many ways that the high
inequalities were exacerbated by the crisis. One of these is that the
composition of wealth for earners at different point on the distribution
scale. Stiglitz notes that the poor and middle class, if they have any
positive net worth at all, have most of their wealth tied up in their
housing stock. So that when the housing market turned downward, it is
these people with their wealth tied up in housing that suffered most. He
notes that on the well-off side of the scale this was less of an issue:
“At the top, CEOs were remarkably successful in maintaining their high
pay; after a slight dip in 2008, the ratio of CEO annual compensation to
that of the typical worker by 2010 was back to what it had been before
the crisis, to 243 to 1” (Stiglitz p. 3).
This
greater bifurcation between the middle and the top creates unequal
societies, and not just in theory. Stiglitz dreads a world full of gated
communities for the rich while the poor and middle class exist as
servants, a world where “populists promise the masses a better life,
only to disappoint”. He continues drawing this word as one where there
is an absence of hope for most people, knowing that their state in life
is one that they cannot move on from (Stiglitz p. 3). These are lines
written in 2012 but speak to us now as uncanny warnings from the past.
Stiglitz draws a grim picture of the American economy as he saw it when
he was writing in the immediate aftermath of the Tea Party wave and the
rise of the Occupy Movement. For him, those at the top were capturing
most of the gains and inequality was increasing. In addition, there were
many different policy decisions that led to a more precarious existence
at the lower end of the distribution. The economy as a whole was
growing slower, so what growth the poorer were able to capture was less
and less. The safety net was in tatters as unemployment insurance, food
stamps, and cash assistance were increasingly hard to get. For those who
had lost their jobs in the recession, the federal government stopped
extending unemployment even though the job market remained weak. These
problems led to problems with health, with Stiglitz highlighting that
“America’s poor have a life expectancy that is almost ten percent lower
than that of those at the top” (Stiglitz p. 14). Even those that have
fought through these limitations, there is less equality of opportunity.
A poor child who does well in school is less likely to graduate than a
rich child who does not do as well in school; even after graduating, the
children of the poor are less well off than the children of the rich
(Stiglitz p. 19). For Stiglitz, this can be summed up that “America has
more inequality than any other advanced industrial country, and it does
less to correct these inequities, and inequality is growing more than in
many other countries” (Stiglitz p. 24).
The
problems with inequality are not just at the individual or economic
level. For Stiglitz there is an invisible thumb on the scale, as
inequality is not just driven by market forces. Instead, “much of the
inequality that exists today is a result of government policy, both what
the government does and what it does not do. Government hast the power
to move money from the top to the bottom and the middle, or vice versa”
(Stiglitz p. 30). This illustrates the main social problem with
inequality as Stiglitz sees it. Inequality does not just happen, or if
it does the impact is not made better through policy, instead it is
often increased through various kinds of rent-seeking such that: “Those
with power use that power to strengthen their economic and political
positions” Stiglitz p. 29). Those with power have done such things as
using their political influence on shape policy that is pro-business
instead of pro market (Stiglitz p. 35), they have created a vast
financial system that absorbs more value than it creates, funneling
resources to the top (Stiglitz p. 37). They have maneuvered themselves
to be granted license to valuable natural resource deposits (Stiglitz p.
39) or created barriers of entry to business, creating monopoly rents
that those at the top can take advantage of (Stiglitz p. 44). All these
structures allow the already powerful and wealthy to cement their hold
on the income and wealth of the country. It also creates a positive
feedback loop that is positive only for them, as it allows them to
capture more resources which in turn gives the already rich more money
and then more power and so on to the third and fourth degree.
Not
everyone believes in a critique of inequality like that presented by
Stiglitz. In 2013, Harvard Professor Gregory Mankiw made waves with his
essay “Defending the One Percent” that was eventually published in the Journal of Economic Perspectives.
In the essay, Mankiw directly dismisses Stiglitz’s thesis, saying, “I
was not convinced. Stiglitz’s narrative relies more on exhortation and
anecdote than on any systemic evidence. There is not good reason to
believe that rent-seeking by the rich is more pervasive today than it
was in the 1970s” (Mankiw p. 26). Instead, Mankiw makes the case for
what is called “skills-based technological change” where the demand for
skilled labor goes up and thus the pay rate for those possessing the
valued skills goes up in tandem with the demand for their skills. In the
essay, Mankiw tries to diminish the arguments of people who think that
inequality is a problem. For example, he looks at the finance industry
and sees not a nest of rent seeking, but instead an issue “primarily one
of efficiency. A well-functioning economy needs the correct allocation
of talent. The last thing we need is for the next Steve Jobs to forgo
Silicon Valley in order to join the high frequency traders on Wall
Street” (Mankiw p. 24). For Mankiw, the one percenters will become one
percenters no matter where in the economy they are, so what we need to
worry about socially is not that they exist, but that they are doing
productive jobs in the economy. He is also not concerned that many of
these top earners come from families of top earners. Mankiw looks at a
measure of mobility that Stiglitz draws, one where we should measure the
odds of ending up in the top ten percent and say that a well-structured
society, these odds would be the same for the rich child or the poor
child. Mankiw waves that away by saying we should be looking more at the
state of the poor and not the lofty heights of the rich (Mankiw p 25).
Mankiw
is not the only supporter of the current level of inequality. In a
title similarly wearing its allegiances on its sleeve, Edward Conard, a
former business partner of Mitt Romney, released a book in response to
the rising interest around inequality, called The Upside of Inequality. In
it, Conard tries to show why many of the points that more left-wing
economists make about inequality are more myth than truth. He argues
that incentives do matter, that those at the top have earned their pay,
that there is no secular stagnation and investment opportunities are out
there, that the middle class is doing well, and that mobility has not
declined. The thesis he goes back to repeatedly is that “Higher payoffs
for success increase the supply of properly trained talent, and these
higher payoffs motivate innovators, entrepreneurs, and investors to take
risks. […] Faster growth increases middle- and working-class wages when
the supply of lesser-skilled labor is constrained” (Conard p. 5). Now,
Conard is not an economist and he is writing to non-economists from his
class position, but he does occupy a space in the business and
publishing elite by previously having been a best-selling author. Thus,
his pronouncements do hold some weight when he claims that the “Critics
of the 1 percent are wrong” that they have not achieved their success
through cronyism or unearned rents, instead they “have largely earned
their success by commercializing successful innovation” (Conard p. 189).
As we saw earlier, he is not a lone voice, but echoing the arguments of
a noted Harvard professor writing in the AEA’s general interest
journal.
To
fully determine which of the two sides is right, we need to turn
towards the stories we tell ourselves about ourselves to examine the
criteria by with we judge which is more correct. Does the economic
system as it exists reward those who are already powerful through
various rents that are created and enforced by the well off, or is the
economy a blind lottery that is rewarding the skilled without hindering
the advancement of people through the class structure?
One
of the things that is fairly unique about the United States that it
shares with other nations of the Americas is that it is new as a
country. By the time of independence, there had been only a century and a
half of continuous European settlement. This framing is not to dismiss
the tens of thousands of years of native settlement of the land of the
Americas. They played a role in inspiring some of our political ideals
(Loewen p. 82), as well as playing a continual role in these stories as
the dwellers on the frontier as mutual contact changed both cultures
(Loewen p. 110). The land that we call the United States was not a
tabula rasa for the white settlers, but instead an active social plane
that was depopulated in acts of plague and famine through settler agency
and negligence. That is not the story that we tell about ourselves. The
native peoples are often side characters if they come up at all. The
story of America that we tell the children so that they are proud to be
Americans often starts with settlement in the early 1600s with some
people in buckled hats and then jumps forward to developed cities in the
1770s. It is there, in Philadelphia where the name that are familiar to
schoolchildren laid pen to paper, declaring their sovereignty as men:
“We hold these truths to be self-evident, that all men are created
equal, that they are endowed by their Creator with certain unalienable
rights, that among these are Life, Liberty and the Pursuit of happiness”
and declaring their sovereignty from the British yoke: “ these United
Colonies are, and of Right ought to be Free and Independent States”
(“Declaration”). This document kicked off a war in which the small
rebellious band of patriots showed that freedom from the yoke of tyranny
was possible, and to set forth on a road to self-governance was the
goal of the enlightened men. In popular imagination, the Articles of
Confederation might as well not exist, so the next step after declaring
independence and beating the English was to write the constitution.
These men got together and debated a new social contract in a way that
has not been fully replicated in our nation’s history. The Constitution
was the best possible, state of the art. It had three branches, and a
stronger legislature than the other two branches. It also had a Senate
that was answerable to the states and a House of Representatives that
was answerable to the people.
The
story of America is not a single strand of triumph, however. The story
of America has been one of conflict both physical and ideological. Often
you hear the initial conflict between the Hamiltonians and the
Jeffersonians, the original urban rural divide, and one that grew even
from the document itself, one that enshrined slave-holding while
declaring at the start “We the People of the United States, in Order to
form a more perfect Union, establish Justice, insure domestic
Tranquility, provide for the common defence, promote the general
Welfare, and secure the Blessings of Liberty to ourselves and our
Posterity” (“Constitution”). It was this document, measured but
imperfect that Hamilton, Jay, and Madison defended in the Federalist
Papers, asking, “Whether societies of men are really capable or not of
establishing good government from reflection and choice, or are forever
destined to depend for their political constitutions on accident and
force.” (Hamilton et al p. 27). The founders, for all their faults,
worked at a groping towards perfectibility — an ideal that is forged in
enlightenment thought. This perfectibility was bound up in conflict. In
another of the Federalists, Number 10, Madison recognizes the competing
claims on wealth and power in a republic:
But
the most common and durable source of factions has been the various and
unequal distribution of property. Those who hold and those who are
without property have ever formed distinct interests in society. Those
who are creditors, and those who are debtors, fall under a like
discrimination. A landed interest, a manufacturing interest, a
mercantile interest, a moneyed interest, with many lesser interests,
grow up of necessity in civilized nations, and divide them into
different classes, actuated by different sentiments and views. The
regulation of these various and interfering interests forms the
principal task of modern legislation and involves the spirit of party
and faction in the necessary and ordinary operations of the government. (Hamilton et al p. 74 emphasis added).
The
foundation laid was built upon brick by brick, as when De Tocqueville
visited fifty years later, his opening remarks in his travelogue and ode
to Democracy in America was to note: “Amongst the novel objects that
attracted my attention during my stay in the United States, nothing
struck me more forcibly than the general equality of conditions.” (De
Tocqueville p. 11). The question is how we got from the place where the
founders were careful to note the balance between competing classes to
the one where foreign visitors would call our equality the most notable
thing about our civilization to one where some of our most eminent
economists are worried about the rich creating a separate society walled
off from the rest of their fellow citizens. One answer would be to look
at a separate, but related thread that flows from founding ideals.
There is the idea of the individual alone in nature, at the frontier who
can make or break his or her own destiny because America is the land of
opportunity. It runs from the pioneers and the gold rushes to the
entrepreneurial spirit of gilded age robber barons from Carnegie to
Rockefeller to Ford to Gates to Zuckerberg. This is the America that
capitalism made with the risk-taker’s hand on the tiller, a dynamic
system where the Schumpeterian creative destruction contains the seeds
of the new rebirth (Schumpeter p. 84). These are the two conflicts that
have been in tension from the earliest days of society, but these
tensions helped birth the American dream, one where everyone had a shot,
and one where, as the sociologist Robert Putnam puts in in his
examination of one town’s encounter with modernity and the loss of that
dream: “The children of manual workers and of professionals came from
similar homes and mixed unselfconsciously in schools and neighborhoods,
in scout troops and church groups”. This was a world where families were
intact with homes owned by those families and a sense of community
existed — there were no strangers (Putnam p. 34).
What
is interesting is that in many ways, American society is failing both
ideals, the land of equality and the land of opportunity. As we saw
above, both the Occupy and Tea Party movements birthed books and thought
on inequality in the society, and research continues to shine a light
on the struggles of average Americans. For example, Princeton economists
Anne Case and Angus Deaton made headlines as they surveyed the white
working class, telling their readers: “Although midlife mortality
continued to fall in other rich countries, and in other racial and
ethnic groups in the United States, mortality rates for WNHs age 45–54
increased from 1998 through 2013. Mortality declines from the two
biggest killers in middle age — cancer and heart disease — were offset
by marked increases in drug overdoses, suicides, and alcohol-related
liver mortality in this period.” (Case and Deaton p. 398). If we accept
their findings, we must accept the idea that there is something going on
that is more than economically driven, a moral rot created by
hopelessness of some kind, post-capitalism anomie. The authors called
this excess mortality “deaths of despair”. Looking at it from the
accelerated end-of-life perhaps is the wrong starting place though. The
American system fails to live up to its founding ideals economically
from the beginning. First off is that we still have many of our citizens
living in absolute poverty. Dylan Matthews in Vox.com writes “In early
2011, 1.5 million American households, including 3 million children,
were living on less than $2 in cash per person per day. Half of those
households didn’t have access to in-kind benefits like food stamps,
either.” These are numbers, he adds, that have gone up since the
Clinton-era welfare reforms. (Matthews). Unfortunately, many of the
people who suffer at the low end of the income scale are people of
color, those whose ancestors do not fit nicely into the stories we tell
about ourselves. Though America ended slavery, it took over eighty years
in which all Americans were complicit in the exploitation of the slave
population, north and south. These inequities continue. A report from
the Center for American Progress notes, “In 2016, the median wealth for
black and Hispanic families was $17,600 and $20,700, respectively,
compared with white families’ median wealth of $171,000.” This gap can
be observed “regardless of households’ education, marital status, age,
or income.” (Hanks). Education reinforces these inequities, as recent
research from Georgetown University’s Center on Education and Workforce
notes that in Alabama, “32 of every 100 college-age residents are black,
but only seven of every 100 students at the state’s selective public
colleges are black.” (Mitchell). Even those who do get to school often
find themselves loaded with student loan debt, which Julie
Margetta-Morgan, a fellow at the Roosevelt Institute, calls a “failed
social experiment where the government thought that it would be fine to
give people student debt because that would pay off in the long run and
we’re seeing that’s not the case.” (Berman). Increasing educational
attainment has not full paid off in terms of life outcomes. One
mechanism is that as more people go to college, jobs can require more
credentials for the same position at the same pay. This credential
inflation devalues the return to the new degrees.
At
the same time the idea of opportunity is dropping. One way to look at
this is the creation of new businesses. Though the companies in Silicon
Valley get the lion’s share of the attention, and the idea that the
current American business model is one of the new Schumpeterian creative
destruction as the tech elite disrupt existing business models, the
light shined over there ignores the rest of the economy. The rest of the
economy shows a different story. Census Bureau reporting tracks the
creation of new companies. In 1980, almost fifteen percent of all
companies were new companies, defined as companies as less than a year
old. By 2015, that total had dropped almost half, to eight percent. New
companies inject the dynamism in the economy, create new jobs, and are
often more productive. One economist who has studied this, Marshall
Steinbaum, points to the power of existing firms: “You’ve got rising
market power. In general, that makes it hard for new businesses to
compete with incumbents. Market power is the story that explains
everything.” (Casselman). On the other side of it is a lack of mobility.
One way of looking at mobility is how a person’s initial position in
the income distribution cements the ultimate position in the income
distribution. Examining data on this from the Panel Study of Income
Dynamics, Bhashkar Mazumder notes a broad consensus that
intergenerational income mobility is “relatively low in the United
States, especially when compared with other advanced economies”.
Mazumder observes that the view of America as a highly mobile society
and a “land of opportunity” may be unwarranted. (Mazumder). Part of this
is limited by geographic immobility. Raj Chetty and his coauthors of
the American Opportunity Atlas where they “trace the roots of outcomes
such as poverty and incarceration back to the neighborhoods in which
children grew up. We find that children’s outcomes vary sharply across
nearby tracts” (Chetty et al p. 2). Geography is destiny as past social
engineering projects like redlining and selective zoning, combined with
white flight and blockbusting, have created zones of entrenched poverty,
so that looking at “data shows many neighborhoods where families had
little money decades ago and produced kids who make little money as
adults. And even though many of the kids have moved away, these
neighborhoods continue to house families that make little money.”
(Reyes). Finally, we also see that moving away is difficult. In
examining geographic mobility data, the Brookings Institute notes that
those lower on the income scale are able to move. This geographic stasis
being a problem as moving, throughout the nation’s history, has been a
way for seeking out new opportunity and bettering one’s self. Of course,
moving takes resources the poor do not often have, “diminished mobility
is often caused by limited means: young adults from low-income families
may have less of a family safety net to fall back on in the event of
employment setbacks, less information about opportunities in distant
locations, or simply fewer resources to fund a move.” (Nunn).
Ultimately, from the evidence we have looked at here, the conclusion is
easy to draw. Those who are concerned about inequality and its effects
have a stronger case. Not only is absolute poverty persistent, but also
through the educational system race based, class based and geographical
inequities follow people through their lives so that it is much harder
to move both through the income distribution and in place. Putnam’s
mingled communities of his 1950’s American dream have turned towards the
Stiglitzian fear of gated communities where the rich never see the poor
unless they are checking them out at the store or moving their lawn.
Why
does this inequality persist? To understand the debate between those
who are concerned about inequality and those who dismiss it we need to
look at the ethical framework driving the arguments of those who have
the power and make the policy decisions that help entrench the rich and
prevent mobility of the poor. This understanding must come from an
understanding of economic history. The standard welfare theorems of
economics have their base in utilitarianism philosophy from the
nineteenth century, when there was less of a solid wall between
philosophy and economics. The thinker John Stewart Mill defined
utilitarianism, in his book of the same name thusly: “The creed which
accepts as the foundation of morals “utility” or the “greatest happiness
principal” holds that actions are right in the proportion as they tend
to promote happiness; wrong as they tend to produce the reverse of
happiness. By happiness is intended pleasure and the absence of pain; by
unhappiness, pain and privation of pleasure.” (Mill p. 7). On the face
of things, this is not a bad framework for a moral stance, but it does
beg some questions from an economic standpoint, about units and
aggregates: How does one measure happiness, is happiness subjective, are
there diminishing returns to happiness, what does a society where
happiness is maximized look like? Economists coming after Mill
formalized these questions into the marginal neoclassical economics that
we know today, where every economic actor is solely a self-interested
agent. These self-interested agents as they maximize their happiness
will eventually attain a point of Pareto Optimality, which is an outcome
where there would be no other outcome within the existing economic
constraints that would make one person better off without making any
other person worse off (Bowles et al p. 60). A problem with a Pareto
condition is that there are many Pareto Optimal distributions. If the
Gini Coefficient is one, and one economic actor has all the resources,
this is an “Optimal” point, as it is impossible to make any of the other
economic actors in the population better off without taking resources
away from the singular economic actor who has somehow obtained all the
resources. What the Pareto Optimal condition based on utilitarian
thinking does is cement the status quo as it assumes that the current
position is optimal in terms of efficiency because the point has been
reached through mutually beneficent trade. In this view, if inequality
exists, it is through the benign workings of the market mechanism and
not through the exercise of power of any sort, be it economic or
political.
What
is needed is a different perception of ethics than the one based on
utilitarianism happiness maximization. By using a different framework,
namely that as outlined by the philosopher John Rawls in his A Theory of Justice,
policy decisions of both economic and political import will be made in a
more equitable manner. Rawls, in his work, uses the utilitarian
framework as one that runs counter to his preferences of justice as
fairness. He writes, “The striking feature of the utilitarian view of
justice is that it does not matter, except indirectly, how the sum of
satisfactions is distributed among individuals,” continuing, “Society
must allocate its means of satisfaction, whatever these are, rights and
duties, opportunities and privileges, and various forms of wealth, so as
to achieve the maximum it can” (Rawls p. 26). Instead of using the
utilitarian framework, Rawls looks instead at utilizing a social
contract. With this social contract, the basics are that the principal
of justice are those so that the basic structure of society is based on
original agreement. In this agreement, the basic rules of the game would
be played out, where “Men are to decide in advance how they are to
regulate their claims against one another and what is to be the
foundation of the charter of their society” (Rawls p. 11). As we have
seen earlier, the United States has just this chance earlier in its
history as they wrote the constitution and its framers defended the
document in the Federalist papers. The key part of a Rawlsian social
contract is that the for the framers of the contract “no one knows his
place in society, his class position or social status, nor does anyone
know his fortune in the distribution of natural assets and abilities,
his intelligence, his strength, and the like” (Rawls p. 12). The
formulation is such that no one when choosing the setup of society knows
where they will be in terms of class or race or in the income
distribution so that they cannot make policy to benefit themselves or
their peers. The blind position is called by Rawls the “Veil of
Ignorance”. The Rawlsian approach is not a novel approach for evaluating
inequality. Anthony Atkinson, in his book Inequality: What Can Be Done, acknowledges
that a Rawlsian framework “takes us well beyond utilitarianism”
(Atkinson p. 12). Mankiw also regards the position in his ode to the one
percent. He takes the argument and tries to over-extend it: “Take the
logic a bit further. In this original position, people would be
concerned about more than being born rich or poor. They would also be
concerned about health outcomes. Consider kidneys, for example.” Mankiw
want the reader to imagine a world where all outcomes are considered and
thus from the start, we would sign insurance contracts against having
kidney disease. (Mankiw p. 32). What Mankiw fails to consider is that
uncertainty about the original position is the entire point of justice
as fairness, so that the framers of the social contract make sure that
all have access to the needed resources.
What
Mankiw does as he tries to reduce the veil of ignorance to absurdity is
raises the question of what policy-making looks like in a world in
which we have accepted a different theory of social justice that is not
based on utilitarian thinking. To think about these policy
recommendations, it is simple enough to walk back though the identified
current inequities and suggest alternatives. Americans like to think of
themselves as working in the land of opportunity and the land of the
free but so much of the rhetoric is about the current position and not
what would be the most equitable from an original position. Policy is
seen in terms of zero-sum games so that any redistribution is seen as
stealing what has been rightfully earned. Barring another major civil
war or constitutional convention, there will not be any chance to
formalize the social contract in line with a Rawlsian approach to
justice. This means that we need to think of policy as if we are behind
the veil of ignorance, which is a harder thing to do, since we are
already aware of our class and race geographic positions and cannot
readily deny them. One example of policy that would be recommended is to
rethink how we fund or institutions of education from the primary to
the tertiary level. The current method of funding at the primary and
secondary level are based on property taxes. By funding them in this
manner, the more well off districts can create the atmosphere for better
learning and more opportunity for their students. At the same time,
those students in poorer districts eat lunches of low quality that are
prepared at a central office and study at schools that do not have their
own library. As we saw, this inequity passes onto the college level,
were the makeup of the college classes are tilted towards the well off
and towards the racial majorities at the expense of the minorities.
Those from the less well-off areas who borrow end up with debt which
replicates the cycle of poverty as increasing student debt inhibits
household formation and other consumption that meets the expected
standards of living. So instead of looking at the funding of schools
from local tax receipts, this could be funded at the state or national
level to erase some of the inequities of geography and to give all the
same opportunities at an educational level. A counter example to this
methodology is looking at the implementation of the Affordable Care Act.
By relying on states to design rules for and implement the program,
there is a divergent access to health care across the fifty states.
Reformulating the educational taxation methodology is not a rewriting of
the social contract, but one place we could start as we grasp towards
creating a society that we would want to be part of even if we did not
know where we would start from.
And
yet! School funding just scratches the surface of what is possible if
we were to move towards a non-utilitarian ethical framework. A society
could be created that moves back towards American ideals and against the
gated communities where many would never have the chance to scale the
walls because they are so high and the gates are so thick. Nevertheless,
this is not to dismiss the possibility. With the Occupy Movement and
Sanders candidacy and the long shadow of the 2008 financial crisis, a
new generation has arisen acknowledged that the current social structure
is untenable.
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