Wednesday, April 24, 2013

Inequality in the blood...  

I have long asserted that the most relevant predictor of your success as a farmer was if your father (or father-in-law) was a successful farmer. While our profession may be an extreme due to the nature of landowning, it is not alone.
The advantages of a privileged background don’t stop at graduation. Tufts economist Linda Loury suggests that half of all jobs in the U.S. are found through family, friends, or acquaintances. Canadian economists Miles Corak and Patrizio Piraino look at how often men end up working at the same company where their father worked, finding that as many as 40 percent have done that at some point. The proportion rises to 70 percent among the top 1 percent in income distribution. This helps to explain why the relationship between the earnings of parent and child is even higher at the top end than it is across the population at large, according to Corak. One-third of successions between chief executive officers in publicly listed companies in the U.S. involves an incoming CEO related by blood or marriage to the old CEO, the founder, or a large shareholder. That’s bad news for the share price, according to Francisco Perez-Gonzalez of the NBER, but clearly good news for the newly appointed relative. [More]
The longer I look at this troubling (to me, anyway) trend the less sure I am if it is correctable (assuming we can agree on what correct looks like). There seems to be a snowball effect that can only be overcome by astonishingly poor choices of the wealthy (NBA stars, for example) or extraordinary rare coincidences of luck and opportunity - usually in a developing economy or entertainment industry.

But wealth inequality feeds income inequality to accelerate the trend. The American economy is already past the peaks we have seen historically.

The debate rages, and rightly so, about possible cures or even the advisability of a cure. I don't see our tax system getting radically more progressive anytime soon. More to the point, I don't the the old reliable equalizer, education, packing the same therapeutic power as before as systemic changes in our workforce lower the value of many degrees, and higher education costs spiral beyond the payback threshold.

The biggest question for me is how our economy will look and work after another decade or so of lop-sided growth?



someguy said...

I find the charts interesting and somewhat surprising. I think it is really surprising that the difference present wealth concentration and the past are not far greater. I guess what I tend to disagree with is the implication in many comments about this phenomonon that 'our system is broken'.
A few points that come to mind as being worthy of consideration regarding this....
- The effect of women joining the workforce and particularly the highest paying professions. This seems to me to be huge since it means that high earners often marry other high earners and that means the difference in 'family income' is doubled when the family of 2 high earners is compared to the family of 2 low earners on the other end of the bell curve. (I'm not making a judgement on this. I'm happy my daughters have the choices they do, but it seems obvious that this will have an effect on the income disparity we see among families)
- I think a corollary of this is the effects on public education. When I look back a generation, many very intelligent women were channeled into teaching as a career. In our generation the most intelligent over-achievers had many other options for careers and overall, the quality of student that chose teaching declined. I think this has put a greater premium on the advantage that accrues to those families that can afford private education.
- I'm skeptical if all the government benefits that are available today are really counted in the lower incomes. Certainly there is a lot available today that were not available to the lower incomes in the previous dates that the bar chart reflects.
- The incredible effects of technology that can magnify our individual effectiveness and thus, our ability to get paid for our effectiveness. If you're one of the top 10% of the farmers (in terms of judgement, skills, and results) in
1764 or 1850 you still couldn't farm many more acres. Today, the technology we work with allow you expand your acres by both geography, and volume of acres in ways far beyond what would have been possible before. Likewise in other industries, whether in entertainment, commerce through the internet, or others, technology allows the best to either reach far more customers or specialize in the high-return aspects of their activities.
- Free choice of individuals. It seems self-evident that when a society's standard of living increases far above the subsistence level, there will always be some that are pushing the envelope of achievement, and some that choose not to compete. Some will choose to 'get by' and prefer to spend their time in relaxation or other pursuits. You can be judgemental and call it 'laziness' but it's really freedom. I don't know how to measure this, but clearly we all know people that choose to pass up economic opportunity for quality of life. Conversely, some choose economic opportunity over quality of life. A society that is economically successful and also embraces individual freedom seems certain to have these differences in personal choices result in increased income disparity.

John Phipps said...

Good points. Some comments.
-Virtually all economic data for lower income citizens include transfer payments (EITC, SNAP, ADC) because without them the numbers are truly horrendous. Also because this has been a common complaint by critics.
- There is some evidence that the very poorest do make fairly rational economic decisions. I will try to post on this (or maybe I have). The tricky thing for us to grasp is how microeconomic logic changes if there is literally NO perceived hope of things ever getting better: no ladders upward via thrift, education, effort, etc. Most of what we consider good economic rationale is dependent on being able to affect the future (or at least believing you can)
-Your comments suggest some inequality agnosticism (not the top of your worry list). If so, is there any level of income inequality that would trouble you even if caused by what you see as justifiable or free market forces?

someguy said...

I do think that the way in which microeconomic logic and individual decision-making are affected by today's economy, is an interesting topic. I tend to believe that most people are basically risk-averse and are very attracted to the 'sure thing', especially when their personal lifestyle is at risk. When given the option of the perceived certainty & predictability of the myriad of social saftey net programs available today vs. the uncertainty & unpredictability of the future rewards & payoffs that are the reality of entry level jobs, the choice will nearly always be for the former.
I think it's also clear that most people have a finite amount of energy & focus. I suspect that learning the byzantine rules, procedures, watchouts, and most importantly, the little tricks to maximizing benefits in ways that aren't intended and are only known to those who have an economic incentive to really delve into it - think crop insurance, ACRE, etc - may end up occupying the recipients rather than thinking about perusing want ads, how to sell yourself, and tolerating the overwhelming sense of low self-worth, gloom & despair that comes to most job hunters in a tough market.

I'm not sure that there aren't economic opportunities available to most people in America that offer similar rewards that were always offered by the free markets. The free market however, offers potential rewards - no guarantees. I think the biggest difference from the past is the fact that in today's world there is the alternative path of government dependency with less time and effort required and in many social circles, none of the negative connotations that used to be associated with that path. We're all pretty quick to blame the system and the inequality it's causing.

The issue of 'inequality agnosticism' is an important point. Like most people, I'm 'troubled' by lots of things. Income inequality is one of them. But our emotional response shouldn't drive our actions (I think it was in an old Ronald Reagan GE speech that I heard the quote that "most people can't see a fat man standing next to a thin man without coming to the conclusion that the fat man got that way by taking advantage of the thin man"). I don't think you, me, college professors, think tank executives, editorial writers, or anyone else has the right to interfere with the free choices of individuals. Capitalism is an extension of individual freedom and liberty because it allows for free choices of the individual and is not subject to review and manipulation of the government. The results of our actions are the feedback loop that cause us to adjust our choices. The more we screw up the results because we're troubled by what we see the more we destoy the ability of people to adjust their behaviour for the most beneficial economic outcome. I'm not talking about deceptive, monopolistic, or other illegal behaviours. I'm talking about limiting the free choices of other individuals because we feel troubled by seeing one family in a 20 year old taurus and another in a new SUV, or one family with a 1000 square ft. house (with cable TV or a satellite dish), and another in a $400000 home. I think it's obvious that talk of how out of control, unprecidented, and troubling income inequality today is, just puts us on the same path as the "our health care system is broken" mantra that Hillary started and was parroted in the media for a couple of decades until it lead us to the 'solution' we're about to experience now. Trying to modify the way the free market works to moderate income inequality because it troubles us. I believe that urge (along with the propensity to buy votes - whether it welfare recipient votes, farmer votes, teacher votes, or any other group with a common economic interest) is a big part of how we got here.

Anonymous said...

If most people would prefer the certainty of government assistance vs. the uncertainty of the job market, why is the unemployment level below 10%? Furthermore, aside from death and winning the lottery, why would anybody ever leave the safety of government assitance once they had the chance to experience its joys? You are entitled to your opinion but pretty much the entire history of the U.S. from the New Deal on contradicts your hypothesis there. A strong majority of the working-age population has always preferred work and self-sufficiency to government assistance. The fact some people (usually those with no personal experience) seem to think that government assistance is so great is just bizarre.

Also, wanting to reduce income equality can not be written off simply as an emotional reaction. Any rational look at economic history will show that extreme economic polarization leads to bad things. And the problem is that as you polarize more, institutions naturally adapt to take advantage of that condition, which feeds further polarization. The educational system is a prime example. The longer we ignore the problem the more painful it will be when we try to address it.

Avoiding this issue just because we're upset about a few people "working the system" is simply irresponsible. That's the emotional reaction you should really be concerned about.

someguy said...

I don't think the unemployment figure you site (the 'headline' U3 number) is a very telling metric since it does not tell the story of the 9-10 million people of working age who have been dropped out of the workforce (for the purposes of the unemployment statistics) as well as the record number of people on permanant disability. I think the best number to look at is the % of workforce that is employed full-time. That number has been steadily decreasing over the last few decades and is presently down to the low 60's. This number (plus the well-documented 47% receiving some type of government payments that Romney opined about) demonstrate that people are indeed slowly moving away from employment and toward that safety net. It is a slow transition over generations, but it is occuring. My point is not that the various govt. payments are so attractive people quit jobs to hop aboard the gravy train, but that when people find themselves in the unfortunate situation of being out of work, the natural incentive (fear of not being able to afford food and shelter) is not as effective of a motivator as it once was to endure the arduous process of finding another job, since the 'safety net' removes much of that concern.

I don't think there are many past situations similar to ours that demonstrate "extreme economic polarization leads to bad things" as you state. I'm guessing the situations you might site in the past are cases where people at the low end of the spectrum are starving or are in abject poverty. I would argue that is the impetus for political upheaval, not the disparity between the poorest and the richest. In our country (as has been observed by Rush) the poor are plagued by obesity and most have flat-screen tv's, cars, and air conditioning. Hardly the type of situations that drive the political upheaval that you are assuming is caused by the disparity of income and I'm suggesting is more attributable to the low absolute level of income in other societies.