The Real Problems of Poverty and Inequality Exist Today, Not Decades or Generations From Now: Part Two of a Two-Part Series on Income Mobility and Inequality

Posted in: Tax and Economics

Last week here on Verdict, in “Poor, Rich, and Very Little Movement in Between: Part One of a Two-Part Series on Income Mobility and Inequality,” I discussed one of the more persistent and dishonest responses by conservatives to the problem of poverty and inequality. Any problem that might exist, they argue, is not a matter of policy concern, because there is a great deal of mobility in Americans’ economic status, making it unnecessary to worry about people being permanently rich or permanently poor.

In reality, by contrast, even as the U.S. has returned in recent decades to levels of inequality of both income and wealth that have not been seen since the era of The Great Gatsby, this country has also seen a decrease in its citizens’ likelihood of moving significantly from one economic status to another—up or down. We are a country in which there is shockingly little opportunity for the poor break out of their station in life, and in which wealth reinforces wealth. A few poor kids might make it big, and a few fortunes might be squandered, but in the big picture, our economic class structure is becoming ever more calcified.

In the face of these overwhelmingly dispositive facts, those who argue that there is no reason to worry because mobility will save the day have tried to muddy the issues by playing games with statistics. For example, they have described the normal path of a person’s lifetime earnings—no income while in college, rising income during the working years, and reduced income during retirement—as evidence that practically every person experiences both poverty and wealth during his lifetime.

As I also described in last week’s column, conservative apologists for inequality grab onto one-time events, such as a middle-class person who works an unusual amount of overtime or earns a big bonus in one year, as evidence of upward economic mobility. Similarly, one bad year’s investment by a wealthy person can make him look “poor” in terms of his annual income for one year, and this is taken as evidence that rich people do not stay rich, even though the bad years are more than offset by good ones in the vast majority of these cases.

What the Statistical Game-Playing Hides: Debilitating Hurdles for the Poor and Middle Class, Built-In Advantages for the Rich

These statistical manipulations are deliberate distractions, and it must be good fun for those who abuse the statistics to tell fantasy stories about economic mobility. There is no end of possibilities. I could, for example, point to people like me, who are paid on a nine-month academic schedule, and say that I am “poor” for three months out of the year, because my income is zero, and then argue that I am experiencing economic “mobility” because I return to my prior status for the following nine months.

This is oddly reminiscent of the gallows humor among cigarette smokers, who will sometimes say, “I’m very good at quitting smoking. In fact, I successfully quit twenty times every day.”

But there is nothing funny about the health effects of chronic smoking, just as there is nothing funny about the effects of long-term income and wealth inequality. These vain attempts to trivialize inequality make a mockery of what it means to be truly poor, which involves facing the future without a meaningful possibility of permanently changing one’s prospects. Educational opportunities for all but the top income ranges are extremely limited. Poor and near-poor people choose between eating and taking their children to the doctor, and one illness can cause a person to lose her job and her family to lose its home.

Similarly, the privileges of being rich are self-reinforcing. Financial institutions cater to the wealthy, offering valuable services and investment assistance without the crippling fees that are imposed on lower-income people. Even if it is now only rarely possible literally to buy one’s child a place in an elite college, the wealthy can move to better school districts, or pay for the best private schools, and in either case they can lavish money on tutors, test preparation courses, and so on. They can afford healthier diets, physical fitness regimens, and top-flight health care, leading to greater longevity. And they can manipulate the political system to protect their privileges.

Again, if it were really the case that it was easy to escape poverty, or that the people on the higher rungs of society did not stay there for very long, then we might tell a different story. But people in the United States who are rich overwhelmingly tend to stay rich, and those who are poor tend to stay poor. In addition, increasing numbers of middle class people fall into poverty, finding it difficult to climb out. And those who do avoid the worst are essentially walking a tightrope without a net.

The Danger of Focusing On Rising Inequality, Not on Inequality Itself

All of the available data tell us that income and wealth inequality have risen over the last thirty to thirty-five years. As each new report is released, it is tempting for those of us who decry inequality to focus on the changes in inequality over time, noting that the situation is becoming ever more extreme.

For example, we might emphasize that the ratio of the earnings of corporate chief executives to the pay of the average worker “has increased 1,000 percent since 1950, according to data from Bloomberg. Today Fortune 500 CEOs make 204 times regular workers on average, Bloomberg found. The ratio is up from 120-to-1 in 2000, 42-to-1 in 1980 and 20-to-1 in 1950.” That sounds ominous, and it is certainly one useful indication of the underlying problem of inequality.

However, framing inequality as a problem because of the changes in inequality over time is dangerous, because it could suggest that inequality is a problem because of the direction in which it is moving, or even merely because of the speed with which it is getting worse, not because it is harmful on its own terms. Although seeing a bad problem quickly become much worse is certainly a good reason to become motivated to solve the problem, the danger is that any subsequent leveling off of inequality will be deemed a “victory” and reason to stop worrying, rather than merely a first step toward restoring some measure of meaningful economic justice.

Consider, for example, what would happen if the CEO-to-worker pay ratio were to remain at its current level of roughly 200-to-1 for ten years. We would not have become more unequal for a solid decade, which is good as far as it goes. But is that a reason to say that there is no longer a problem?

The answer is clearly no, and the reason goes back to what is really at stake in the inequality debate. The people at the bottom, and increasingly even the people in the middle and upper-middle, are trapped in lives of chronic economic uncertainty, living contingent existences and facing increasingly bleak odds of staying afloat. For too many Americans, the hope that they might one day enjoy some measure of comfort and stability has become a cruel hoax, while the tiny slice of people at the top are able to bolster their advantages.

In short, although it is rhetorically potent to focus on the increases in inequality over time, we should not be focusing on getting the income or wealth ratios back to any particular range, but to making this truly a middle class society once again, where nearly everyone can go to bed at night knowing that they are not likely to wake up to a disaster, and no one has outsized influence over others’ lives. Even if things were to stop getting worse, they are already so bad that we need to do much better than simply putting on the brakes.

The Other Misleading Mobility Argument: Focusing on Changes Over Generations

The trap for liberals, therefore, is also a kind of economic mobility argument. If the people who wish to fight inequality become focused on the changes in inequality over recent decades, emphasizing that income and wealth are becoming mobile in the wrong direction, then they will potentially misdirect their political resources by fighting battles over how to return to arbitrary levels of inequality (or, even worse, merely slowing the growth in inequality), rather than focusing on the real reasons to fight inequality in the first place.

An even more puzzling version of this argument arises in the context of predictions about the likely path of income and wealth over the space of future decades and generations. Conservatives have long argued that capitalism is hard-wired to increase levels of equality over time, offering various reasons to think that competition and innovation will lead to a convergence of income and wealth, not a divergence, in the grand sweep of history. If we are simply patient, they say, the problem will solve itself.

Conservatives would never argue, of course, that the long-run equilibrium would involve perfect equality of incomes or wealth. Indeed, neither conservatives nor liberals view perfect equality as desirable. But the question here is whether a person could at least console himself by saying something like this: “I might never get out of my current station in life, but nothing is going to keep my kids—or maybe their kids—from breaking through. The United States is not a caste system, after all. My progeny will surely be the beneficiaries of economic mobility.”

This argument, in fact, is the target of Thomas Piketty’s now-famous book, Capital in the Twenty-First Century. Piketty shows that the trend toward greater equality we saw in the middle decades of the twentieth century was an aberration, and he argues that capitalism’s long-term trend is inevitably toward greater concentrations of wealth, not greater equality. He does so by marshaling evidence that suggests that, in future decades, the rate of return on assets held by the rich will persistently exceed the economy’s overall growth rate.

If Piketty is right, then over time, the likelihood of large fortunes being dissipated will shrink, and the ranks of the have-nots will grow, as society as a whole falls farther and farther behind the increasingly narrow group of haves. The wealth and incomes of the rich will grow until, at a mathematical limit, they swallow the entire economy.

If he is wrong, then that will not happen. But why is that the argument that has consumed so much of our time over the past several months? Piketty could, indeed, turn out to be wrong about his forecast, such that the largest fortunes will slowly shrink over the space of a century or so, perhaps returning to the levels that we saw in 2000, or 1990, or 1980. Or maybe they really will grow, as he predicts.

In a way, I suppose that it would be interesting to know what would happen if we were simply to allow the economy to follow its current path, doing nothing about inequality. Being interesting is, however, not the same thing as being useful. Nothing about today’s inequality debate should meaningfully change, based on the truth or falsity of Piketty’s forecasts. True, if we knew that he was not only wrong about the direction of inequality, but that the convergence toward greater equality was likely to be extremely rapid, then we might conclude that the problem is about to solve itself.

All of the evidence (with or without Piketty’s interesting and important work), however, obviously undermines any confidence in that happy forecast. Therefore, those who believe that we are on the cusp of a sudden turnaround, where we will soon see the lot of the poor improve en masse while the wealthy come back to earth, are engaging in something far beyond wishful thinking.

In that sense, therefore, focusing on long-term trends in inequality—on changes in income and wealth mobility over long stretches of time—is a disastrous misuse of everyone’s time, imagination, and political energies. If we knew that there probably would be less inequality in 2064 or 2114 than there is today, or that Piketty is right that there will be more inequality, that would simply not be especially important to us today (again, other than in the most extreme cases).

Even after getting past the silly conservative arguments about hidden mobility, therefore, we play a dangerous game when we imagine that economic mobility over decades and generations is a serious policy concern today. If we design good policies now, we can alleviate the pain that millions are experiencing every day, and we will as a matter of course guarantee that, in those future decades and generations, society will be sufficiently egalitarian that accidents of birth are no longer the key determinant of people’s financial, social, or political destinies.

Posted in: Tax and Economics

Tags: Economics, Legal

  • Ian Quinn

    One of the barriers that must be surmounted – aside from “silly conservative arguments” – before a meaningful inequality debate that has as its goal the designing of good policies that will ensure society “will be sufficiently egalitarian that accidents of birth are no longer key determinants of people’s financial, social, or political destinies” is the belief that accidents of fortune (or birth if you prefer) are NOT key determinants of people’s financial, social, or political achievement (or destiny).
    A comment made on the first of Prof. Buchanan’s two articles spoke of immigrants starting out with next to nothing who go on to build a thriving business. The rags to riches via hard work stories are endearing, but people seriously need to realize that such stories (if and when they are true) are the exception and not the rule. Consider a Tennessee mayor gathering the homeless of his city to show them “The Pursuit of Happyness”, an acclaimed movie that tells the story of stockbroker Chris Gardner’s struggle with homelessness and his path to success. I’m sure the homeless rather enjoyed the film and am glad to know that a mayor took so active an interest in his homeless citizens – but I suspect the purpose was to teach a lesson to those homeless folks “Y’all just gotta work those phones!!!” Why don’t poor people just telemarket their way outta poverty?

    There is a pervasive belief that people earn their lot in life – that the well-off have worked for every cent in their bank accounts, and that in the long-run, it is the poor who are to blame for their poverty. People on both the right and the left subscribe to notions like: “If only the poor were more savvy with their finances, if they knew how to budget, if they could just figure out that they cannot spend more than they earn – then they would not be in their predicament” OR “If they would just summon the wherewithal to increase their earning power by earning a degree or acquiring marketable skills, then they wouldn’t be poor anymore.” President Clinton was/is praised for “ending welfare as we know it” by signing the Welfare to Work law that was a cornerstone of the GOP Contract w/ America.
    The underclass has served as scapegoat to the right and whipping boy to both left and right for too long. The mentality that funding of “entitlements” for the poor is a threat to the fiscal health of the nation must be eliminated. Austerity measures in eurozone countries have inflicted misery upon millions and swelled the ranks of the poor just to appease rich creditors who want the return on their state-issued bonds to be undiluted by inflation (or some such nonsense). The economy serves two purposes: production and allocation. Austerity in the midst of abundance constitutes a failure of the economy to efficiently allocate the goods (services) it has produced. It is not that goods have been over-produced, it is that they are not distributed efficiently and this is the cause and effect of inequality. Purchasing power should be distributed more democratically than it is and one of the most effective and obvious ways to accomplish that is by welfare payments to the poor. Indeed, welfare entitlements do create a disincentive to work and you know what? that’s fine when there isn’t much work to be done anyhow.
    A policy idea (for anyone interested)

    How are these welfare entitlements to be paid for? Progressive taxation is one way, and so is deliberate inflation of the money supply, and another tool that is available (but never used) is altering the ratio of deposits that banks and credit unions are required to keep in reserve in the form of vault cash. Banks keep only a fraction of the money that is deposited with them as reserves and they lend out the rest as loans that earn interest. The lending decisions of banks invariably favor the least risky borrowers (ie those already financially secure) and finance the most routine ventures (home mortgages, parking garage construction, car loans) and these are the institutions that are expected to somehow stimulate job creation when they are given more money to lend? The required reserve ratio for deposit institutions in the US is currently 10% and has been so for a very long time. US banks and credit unions are currently holding excess reserves because of the Fed’s buyback of treasury bonds. When the required reserve ratio (R) is 10%, the money multiplier (1/R) should theoretically be between 9 or 10 (increasing R to 20% would cause the supply of “bank money” to contract by nearly half) If the government simply printed cash money to compensate for the contraction in bank money and used this cash to pay generous welfare benefits to the poor, then inflation would be less of an issue. I just wanted to put my little idea out there: wealth redistribution by bank regulation (maybe I’ll start my own blog someday and bloviate further, but for now I gotta go try an hustle a little money (after all, in the very short run, I am the architect of my fate, and I don’t want to be evicted or have vehicle registration suspended)) viva la underclass