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. 

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