There is no single policy fix to address America’s widening inequality. To create equality of opportunity, we will need to change our minds. (More)

The Great Divide, Part II: Changing Our Minds (Non-Cynical Saturday)

This week Morning Feature looks at the New York Times series THE GREAT DIVIDE. Yesterday we saw how policy, luck of birth, and resulting social capital combine to create wider, increasingly rigid inequality. Today we’ll discuss how that is hurting us all, and how better policies can help.

THE GREAT DIVIDE is a series on inequality – the haves, the have-nots and everyone in between – in the United States and around the world, and its implications for economics, politics, society and culture. The series moderator is Joseph E. Stiglitz, a Nobel laureate in economics, a Columbia professor and a former chairman of the Council of Economic Advisers and chief economist for the World Bank.

“Our society is squandering its most valuable resource: our young”

So writes Dr. Stiglitz in discussing why Inequality Is Holding Back Our Recovery:

Our skyrocketing inequality – so contrary to our meritocratic ideal of America as a place where anyone with hard work and talent can “make it” – means that those who are born to parents of limited means are likely never to live up to their potential. Children in other rich countries like Canada, France, Germany and Sweden have a better chance of doing better than their parents did than American kids have. More than a fifth of our children live in poverty – the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece.

Our society is squandering its most valuable resource: our young. The dream of a better life that attracted immigrants to our shores is being crushed by an ever-widening chasm of income and wealth.

Dr. Stiglitz explains that our shrinking, struggling middle class can’t afford the consumer spending that would create jobs, can’t afford to educate themselves and their children or start or improve small businesses, earn too little to pay taxes to fund better government, and must borrow so much that our entire economy is destabilized.

As he emphasizes, the question among economists is no longer how much economic growth we must sacrifice in order to reduce inequality, but how best to reduce inequality in order to revive economic growth.

“The rug rat race”

Discussions of inequality routinely turn to education, yet as Sean Reardon writes in No Rich Child Left Behind, the problem begins and extends outside the classroom:

The most potent development over the past three decades is that the test scores of children from high-income families have increased very rapidly. Before 1980, affluent students had little advantage over middle-class students in academic performance; most of the socioeconomic disparity in academics was between the middle class and the poor. But the rich now outperform the middle class by as much as the middle class outperform the poor. Just as the incomes of the affluent have grown much more rapidly than those of the middle class over the last few decades, so, too, have most of the gains in educational success accrued to the children of the rich.

The issue is not our classroom teachers. An average American 9-year-old today tests two years ahead of his/her parents’ generation in math. Instead, Reardon found, the issue is household income. Wealthy parents can spend more to prepare their children for kindergarten, and continue to spend more to provide their children with better learning opportunities at home and during the summer:

The economists Garey Ramey and Valerie A. Ramey of the University of California, San Diego, call this escalation of early childhood investment “the rug rat race,” a phrase that nicely captures the growing perception that early childhood experiences are central to winning a lifelong educational and economic competition.

“Getting a smaller slice of higher education spending”

Government widens that gap that as children enter college, as Rebecca Strauss writes in Schooling Ourselves in an Unequal America:

The real quality crisis in American higher education – where the dropout rate is sky high and climbing – is in community colleges and lower-tier public universities. They have also absorbed most of the historic increase in college enrollment and disproportionately serve minority and low-income students. Money is a big reason for their worse performance.

At the college level, the divergence in per-pupil spending is staggering. Since the 1960s, annual per-pupil spending at the most selective public and private colleges has increased at twice the rate of the least selective colleges. By 2006, the funding chasm in spending per student between the most and the least selective colleges was six times larger than in the late 1960s.

In short, more money is being spent on wealthy students who have never been more prepared to excel in college. Meanwhile, poorer students who are less prepared – those who a generation ago would not have even enrolled in college – are getting a smaller slice of higher education spending.

The result is elite universities whose students increasingly come from upper middle class or wealthy families, and whose degrees and social capital provide entry into high-paying jobs. Meanwhile, students of middle and working class families enroll in public or for-profit universities and community colleges, where they increasingly drop out or graduate awash in debt and with few if any job prospects.

Lessons from afar

Ever since the 2008 financial collapse, calls for greater public investment in infrastructure and other job programs met with warnings of Japan’s “lost decade.” Dr. Stiglitz admits even he echoed such concerns. Yet he had changed his mind, as he writes in Japan Is a Model, Not a Cautionary Tale, concluding:

Those who see Japan’s performance over the last decades as an unmitigated failure have too narrow a conception of economic success. Along many dimensions – greater income equality, longer life expectancy, lower unemployment, greater investments in children’s education and health, and even greater productivity relative to the size of the labor force – Japan has done better than the United States. It may have quite a lot to teach us. If Abenomics is even half as successful as its advocates hope, it will have still more to teach us.

Dr. Stiglitz offers another model in Singapore’s Lessons for an Unequal America:

There were many things that Singapore did to become one of Asia’s economic “tigers,” and curbing inequalities was one of them. The government made sure that wages at the bottom were not beaten down to the exploitative levels they could have been.

The government mandated that individuals save into a “provident fund” – 36 percent of the wages of young workers – to be used to pay for adequate health care, housing and retirement benefits. It provided universal education, sent some of its best students abroad, and did what it could to make sure they returned.

Of course, requiring young workers to save over a third of their incomes would not work unless they were earning enough to survive on the other two-thirds, and here the government again played a role:

[T]he government intervened in the distribution of pretax income – to help those at the bottom, rather than, as in the United States, those at the top. It weighed in, gently, on the bargaining between workers and firms, tilting the balance toward the group with less economic power – in sharp contrast to the United States, where the rules of the game have shifted power away from labor and toward capital, especially during the past three decades.

“If economic growth depends on rewarding effort….”

That is one key to redressing inequality, as Timothy Noah writes in The 1 Percent Are Only Half the Problem. It’s true that we have a growing skills gap: a relative handful of young adults graduating from elite schools to land among the 1%. But an elite degree should not be a prerequisite for a middle class income:

The decline of labor unions is what connects the skills-based gap to the 1 percent-based gap. Although conservatives often insist that the 1 percent’s richesse doesn’t come out of the pockets of the 99 percent, that assertion ignores the fact that labor’s share of gross domestic product is shrinking while capital’s share is growing. Since 1979, except for a brief period during the tech boom of the late 1990s, labor’s share of corporate income has fallen. Pension funds have blurred somewhat the venerable distinction between capital and labor. But that’s easy to exaggerate, since only about one-sixth of all households own stocks whose value exceeds $7,000. According to the left-leaning Economic Policy Institute, the G.D.P. shift from labor to capital explains fully one-third of the 1 percent’s run-up in its share of national income. It couldn’t have happened if private-sector unionism had remained strong.

Reviving labor unions is, sadly, anathema to the right; even many mainstream liberals resist the idea. But if economic growth depends on rewarding effort, we should all worry that the middle classes aren’t getting pay increases commensurate with the wealth they create for their bosses. Bosses aren’t going to fix this problem. That’s the job of unions, and finding ways to rebuild them is liberalism’s most challenging task.

“If the government let things get this bad”

Reviving labor unions is largely a public policy task. But to accomplish that, we will need to change our minds about government, as Ilyana Kuziemko and Stefanie Strantcheva write in Our Feelings About Inequality: It’s Complicated. Working with economist Emmanuel Saez and psychologist Michael Norton, they conducted an online survey of 5000 Americans. They randomly assigned half of the respondents to do this 10-minute online tutorial, which both informed them about how policy affects income distribution and helped them calculate what their household income would have been had economic growth since 1980 been equally distributed. They then asked both groups a series of questions about income inequality and government responses.

Our respondents did, in fact, react to our tutorial by increasing their already significant concern about inequality: the tutorial raised the share of respondents who indicated that inequality was a “very serious problem” by over 40 percent.

However, our results also revealed – with one key exception – that support for redistribution increased to a much smaller degree. Our tutorial had only a small effect on support for increasing taxes on millionaires and raising the minimum wage, and no effect on support for other policies that help low-income families, like the earned-income tax credit and food stamps.

The lone exception was sharply increased support for the estate tax. But why did their tutorial-informed respondents not support other government policies to more fairly allocate the benefits of economic growth?

Our experiment suggested an answer: Those who saw our tutorial became 20 percent less likely to agree that government could be trusted at least “some of the time” – a surprisingly large effect. By emphasizing to respondents the level and growth of income inequality over the last several decades, our tutorial appears to have simultaneously undercut their trust in government’s ability to fix the problem. After all, if the government let things get this bad, respondents might logically conclude that it is also unable to do much to fix the situation.

To build support for policies to restore labor unions and other policies to address income inequality, we must push aside President Reagan’s toxic dogma of “government is the problem” and restore confidence in government. And to do that, we must elect more Democrats, so that government can again be a viable actor in solving problems.

Cynicism makes our problems worse. To redress income inequality, we must change our minds.

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Happy Saturday!