fling93 loves fishies

Implications of the Wealth Gap

There was a good deal of discussion of the wealth gap in the blogosphere last week. As usual, I’m late to the dance (partially cuz of my new iBook). But time lets you absorb more information and gives you a chance for greater reflection anyway.

First, start with Paul Krugman’s piece in The Nation:

…America was once a place of substantial intergenerational mobility: Sons often did much better than their fathers. A classic 1978 survey found that among adult men whose fathers were in the bottom 25 percent of the population as ranked by social and economic status, 23 percent had made it into the top 25 percent. In other words, during the first thirty years or so after World War II, the American dream of upward mobility was a real experience for many people. Now for the shocker: The Business Week piece cites a new survey of today’s adult men, which finds that this number has dropped to only 10 percent. That is, over the past generation upward mobility has fallen drastically. Very few children of the lower class are making their way to even moderate affluence…. In modern America, it seems, you’re quite likely to stay in the social and economic class into which you were born.

My wife has pointed to me that even in this country, the primary predictor of one’s social class at death is their social class at birth, so this isn’t that much of a surprise to me.

Brad DeLong links a New York Times piece by Louis Uchitelle claiming that the workers’ share of profits is falling. Some of his numbers are disputed in his comments section, but I haven’t been able to read them in enough detail to understand them fully.

Dan Drezner has some more discussion, including a response from Mickey Kaus:

Economic inequality’s clearly growing, because the rich are rapidly getting richer. What I resist is the idea that the average worker is getting poorer in absolute terms…. Casual empiricism suggests that the vast majority of citizens are also getting richer, just more slowly—i.e. not enough to stop the rich-poor “gap” from widening. That gap creates lots of profound problems, but the progressive immiseration of the citizenry is not one of them.

He doesn’t supply any evidence, but I wouldn’t doubt that this is probably true. Indeed, measuring income is not enough; you need to take into account the decreased cost of goods (largely due to the economies of scale that are encouraged by our free-market economy — and this includes poor people being able to afford to buy more things because of stores like Wal-Mart).

However, I think it’s missing Krugman’s original point warning about us becoming a caste society, where mobility is nonexistent. Krugman’s conclusion of the New York Times column was this:

Suppose that you actually liked a caste society, and you were seeking ways to use your control of the government to further entrench the advantages of the haves against the have-nots. What would you do?

One thing you would definitely do is get rid of the estate tax, so that large fortunes can be passed on to the next generation. More broadly, you would seek to reduce tax rates both on corporate profits and on unearned income such as dividends and capital gains, so that those with large accumulated or inherited wealth could more easily accumulate even more. You’d also try to create tax shelters mainly useful for the rich. And more broadly still, you’d try to reduce tax rates on people with high incomes, shifting the burden to the payroll tax and other revenue sources that bear most heavily on people with lower incomes.

Meanwhile, on the spending side, you’d cut back on healthcare for the poor, on the quality of public education and on state aid for higher education. This would make it more difficult for people with low incomes to climb out of their difficulties and acquire the education essential to upward mobility in the modern economy.

And just to close off as many routes to upward mobility as possible, you’d do everything possible to break the power of unions, and you’d privatize government functions so that well-paid civil servants could be replaced with poorly paid private employees.

This strikes me as being a little too paranoid and partisan (typical of Krugman), but the point he is trying to make is that the wealth gap is causing the decrease in mobility. It’s not a strong argument, relying on the implication that if the upper classes wanted to create a caste society, these are the things that they would do, and they happen to be the very things the Republicans are doing. He conveniently ignores that there are valid ideological reasons behind many of these policies.

But the underlying point is valid. It’s all very well and good for the poor to be getting richer (even if it’s more slowly), but this does not prevent a caste society. The key is mobility, and if that is decreasing, it is cause for serious concern.

Regardless of what is causing it, it must be addressed, and here’s why. Note first that capitalism does best when the pool of people/companies competing with each other is as wide as possible. Well, under a caste society:

• the talented rich have less incentive to use their talent
• the talented poor have less opportunity to showcase their talent

What this means is that mostly just the middle-classed talent will be contributing to our society and economy. Not only does this filter out a great deal of talented candidates, the ones that remain will not compete as fiercely.

What’s even more worrisome is what a lack of mobility does to the wealthy class. Note that money is power in our society. With money, you can buy ads and air time, or better yet, an entire media corporation. Even better yet, you can wield direct influence with our government through campaign contributions and lobbyists. I’ll eventually make a stronger case of this in a future post, but for now, remember this: if corporations could not influence the government with campaign contributions and lobbying, the corporations would essentially be wasting shareholder money on this and would lose out in the free market to those that invested that money more wisely, and the flow of money to politicians would stop. But this doesn’t happen. This means there must be a return on that money.

So you can make a case that our current ruling class (politicians, CEOs, etc.) is already mostly made up of the wealthy. Nothing strictly wrong with that, since our economy rewards the successful with wealth, so it’s likely that many of them are very qualified. However, in a caste society, our ruling class — the people who make all the important decisions — will be increasingly made up of talentless people who inherited their wealth and never proved themselves at anything.

That prospect does not bode well for our society, and it would probably cause us to lose whatever competitive advantage we have over the rest of the world.

Update 9/27/04

Meant to write a followup post ages ago, but the draft has been sitting around gathering dust for months, so let me at least point out that Tyler Cowen has some more interesting discussion and data, noting that, “Yes, there is some correlation in wealth across the generations. But most of that correlation (almost seventy percent) comes from continued hard work and savings.”

He doesn’t really cover Krugman’s claim about decreased mobility, but from the various studies I found myself, I couldn’t find much support for it, so I would have to say that Krugman’s concerns seem rather premature.