America's Growing Inequality Crisis

March 23, 2013

I recently read a sobering and mid-opening book, "The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It", by Timothy Noah

I will begin by citing some key facts--and then the author's and my own conclusions.

1.     On primary and secondary education.  To note that as late as the 1930s, America was virtually alone in providing universally free and accessible secondary schools (page 88).  By the end of the century, Europe had caught up with or exceeded average educational attainment in the United States.

2.     In 1970 the high school graduation rate stopped climbing for the first time since 1890.  Since 1980 it has leveled off at about 75%.

3.     While the college attendance rate in the United States has continued to rise, the college completion rate has slowed sufficiently to put our 25-34-year-olds behind many other countries including Canada, Japan, Korea, Australia, Belgium and Ireland.  We are now in the middle of the pack.
  •  Among other things, this highlights the need for us to be bringing children into technical colleges for specific degrees matched with developing job markets.

5.     The book tells a crystal-clear picture of how we have constantly resisted immigration.

For example, the immigration of Southern and Eastern Europeans, who accounted for more than 75% of the 8 million European immigrants who entered the United States during the first decade in the 20th century, drew this diatribe from President-to-be Woodrow Wilson in his “History of the American People” in 1902, the year he became President at Princeton University:

“Throughout the (19th) century men of the sturdy stocks of the north of Europe had made up the main strain of foreign blood.  But now there came multitudes of men of the lowest classes from the south of Italy and men of the meaner sort out of Hungary and Poland, men out of the ranks where there was neither skill nor energy or any initiative of quick intelligence; they came in numbers which increased from year to year, as if the countries of the south of Europe were disburdening themselves of the more sordid and hapless elements of their population.”

This vicious cultural stereotyping bore the imprimatur of the academic elite.  To try to prevent immigrants from voting, literacy tests were put in place in 1917 and then quota laws in 1921 and 1924.

The book develops in a compelling way the fact that the “richest of the rich” have moved back to a position they had in the late 1920s, with about 24% of all income going to the top 1% of the population.  It had drifted down to be as low as about 13% during World War II.

The author reviews many contributors to this inequality.  They include the demise of labor unions, a greater premium being afforded to higher education, the growth of single parent homes (40% of homes where children are growing up with a single parent are in poverty), the outsourcing of jobs in a re-configured global economy, particularly in Asia, tax policy (not really a big factor as he reviews it; interestingly, no matter what the nominal rates have been on higher income, the net effective rates have varied fairly little) and at the upper end, just a dramatic growth in those wages.  For example, the average CEO in 1973 was earning about 27 times more than the average worker.  That has now increased 10-fold to about 270 times.  I witnessed it first-hand.

As to how to tackle the issue of income inequality, which I agree is something to be pursued, the key instruments, it seems to me, are providing the education and skills that young people need to participate in the best jobs in the emerging economy, eliminating the most egregious laws and policies that afford more money than is truly earned by top wage earners (e.g., carried interest, obvious tax loopholes), ideally (though not likely practical) imposing a minimum effective tax rate on high income earners (the idea that Warren Buffett pays only 17% is, in his own view, absurd). 

The even bigger issue for me is to ensure the possibility of upward mobility, i.e., every child and young man and woman has the opportunity to fully use his/her abilities.  The key here within our control is education.  It starts at the very earliest age (pre-natal/pre-school).  I won’t spell out again here suggestions that I have made in other blogs on this space. 


March 3, 2013


Capitalists for Preschool

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IN his State of the Union addressPresident Obama called for making preschool available to every 4-year-old in America, opening a welcome discussion on whether and how to make the investments needed to realize this vision.

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Is Public Preschool a Smart Investment?

Would quality child care that included a preschool curriculum be a better national goal?
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As two longtime corporate executives who have been engaged in education for decades, we have no doubt about the answer to this question. Children who attend high-quality preschool do much better when they arrive in kindergarten, and this makes an enormous difference for their later success. The data on preschool is overwhelmingly positive. Although some studies suggest that the positive impact decreases over time, this is mainly attributable to differences in the quality of preschool and of the schooling that follows — not a deficiency in preschool itself.
The effectiveness of quality early childhood education has been affirmed by many business-related groups, includingReadyNation, a coalition of business leaders, organized in 2006.
The Institute for a Competitive Workforce, an affiliate of the United States Chamber of Commerce, found in a 2010 report that “for every dollar invested today, savings range from $2.50 to as much as $17 in the years ahead.” Research by the University of Chicago economist James J. Heckman, a Nobel laureate, points to a 7- to 10-percent annual return on investment in high-quality preschool.
Local examples of the impact of early childhood education abound. In greater Cincinnati, a program called Success by 6 has raised the proportion of children testing as “ready to read” upon entering kindergarten to 57 percent, from 44 percent in the 2006-7 academic year. Of those children, 85 percent still read at (or above) age level at the end of third grade — compared with only 43 percent of the children who do not test as “ready to read” when they start kindergarten.
In short, early educational interventions really matter, and have long-term consequences. Children who are not proficient in reading by third grade are four times more likely to drop out of high school than children who read at or above grade level — and 13 times more likely, if they live in poverty. A child’s brain grows to roughly 85 percent of its full capacity in the first five years of life. These are also the years when a child’s sense of what is possible is being formed.
The connections from preschool to reading proficiency to high school completion — a bare-minimum requirement in today’s economy — could not be clearer.
And it shouldn’t take scientific research to reach this conclusion. Families who can afford quality preschool don’t generally consider long-term cost-effectiveness when they enroll their children. Indeed, among affluent families in which both parents have full-time careers, there is strong demand for quality learning environments as early as age 2.
To be sure, the debate over preschool is also partly a debate over inequality. Our nation is becoming divided: an America of well-off, well-educated families, who can afford pre-K education, and struggling families who are living in poverty or close to it (often, even while holding down full-time jobs), have modest educations, living in challenged circumstances, and can’t.
Do we really think it is fair to predetermine children’s chances for success in life based on what ZIP code they live in? Doesn’t every child deserve as close to the same chance to develop her or his abilities as any other child?
Universally available prekindergarten is not only the right thing to do, but the smart thing to do. Raising lifetime wages (and thereby tax revenues) and reducing the likelihood that children will drop out of school, get involved in crime, and become a burden on the justice system more than make up for the costs of early childhood education.
Other countries have realized this. China reportedly has set a goal of giving 70 percent of all children three years of prekindergarten education — far ahead of the modest one year proposed by President Obama — by the year 2020. Our greatest deficit in this country — the one that most threatens our future as a nation — is our education deficit, not our fiscal one.
Some will ask where the money will come from, at a time when states and localities are even more strapped than the federal government. While there are a variety of financing proposals, we do not believe higher taxes will be necessary in every jurisdiction.
Rather, we believe the right approach will be to rebalance and optimize the money we are spending now. The amount of money being spent on early childhood education is so small currently that we are confident it is possible to achieve the efficiencies needed to shift money from other areas of investment.
Last year, only 2 percent of Ohio’s general-fund budget went to early childhood education. We believe that, with proper planning, that amount could be doubled without compromising other financing streams.
We have spent most of our careers in business and have come to support quality prekindergarten for all children, especially those whose families cannot afford it, because we know these programs work. The only question is how to bring them to a huge scale. Our nation’s future demands it. If there ever was a nonpartisan issue, this is it.
John E. Pepper Jr. is a former chairman and chief executive of Procter & Gamble and a former chairman of the Walt Disney Company. James M. Zimmerman is a former chairman and chief executive of Macy’s.