Normative Narratives


2 Comments

The Politics of Division and Class-Based Affirmative Action

During a March 2008 campaign speech at the National Constitution Center in Philadelphia, Barack Obama said:

Most working- and middle-class white Americans don’t feel that they have been particularly privileged by their race. Their experience is the immigrant experience – as far as they’re concerned, no one’s handed them anything, they’ve built it from scratch. They’ve worked hard all their lives, many times only to see their jobs shipped overseas or their pension dumped after a lifetime of labor. They are anxious about their futures, and feel their dreams slipping away; in an era of stagnant wages and global competition, opportunity comes to be seen as a zero sum game, in which your dreams come at my expense.

Obama then noted the consequences:

When they hear that an African-American is getting an advantage in landing a good job or a spot in a good college because of an injustice that they themselves never committed…resentment builds over time.

Obama’s words ring just as true today, as highlighted by the Public Religion Research Institute’s 2015 American Values Survey. While the majority of Americans believe that historically marginalized groups face “a lot of discrimination”, there is a large portion of all Americans (25%) who believe whites face “a lot of discrimination”. Predictably, certain groups (Republican, Tea Party) hold these views even more strongly.

These perceptions fuel the “politics of division”–the “us” versus “them” mentality where “we” are hard workers who bust our butts just to make ends meet, while “they” are lazy “takers”. Of course at the macro level there are examples of “us” and “them” in every race / culture. But the diffusion of news sources and social media “echo chambers” counter this obvious truth, reinforcing the politics of division.

The politics of division always comes to the forefront during Presidential campaigns, when voters want to know what a candidate will do for “us”, and how they will punish “them”. In the current campaign season, national security and immigration concerns have made the politics of division even more acute.

These are not just philosophical considerations, the politics of division has real world implications. By turning issues that affect people of all races (globalization, stagnant wages, social immobility, etc.) into racial ones, people end up voting against their economic interests in the name of cultural / lifestyle considerations. When their economic situation consequentially continues to deteriorate, they double down on their scapegoating, moving further away from the real answers to their problems. And if those 25% of people (who believe that whites face a lot of discrimination) happen to come out and vote in droves, then something that sounds as absurd as “President Trump” could come to fruition.

So how do we counter the politics of division? While no one government program can fix race relations, one obvious program to reconsider–the one that Obama alluded to in 2008 and is before the SCOTUS todayis the current structure of affirmative action systems. I believe an economic class-based system would not only help bridge racial divides, but would also more effectively promote opportunity and social mobility.

Before you deride me for being at best misguided and at worst a racist, consider the following arguments:

Low Hanging Fruit:

A common argument against the current affirmative action model is that colleges pursue “low-hanging fruit”–minority students from good backgrounds who would have gone to college anyways. 

The number of minority students accepted through a class-based affirmative action system would be lower compared to the current model (although, due to racial inequalities in income and wealth, a class based system would still disproportionately benefit minorities). However, it is possible that a class based system could actually lead to greater total enrollment by minority groups, by targeting those who otherwise would not go to college. 

More research and testing would be needed to determine how a class-based system would impact total enrollment figures among various minority groups.

College Enrollment Rates by Race and Class:

College Enrollment Rates for Recent High School Graduates

2008 2013
All 68.6% 65.9%
High income 81.9% 78.5%
Middle income 65.2% 63.8%
Low income 55.9% 45.5%

…one possible theory offered by the analysis to explain the drop is that the perceived cost of college may be the issue at play here. “The rapid price increases in recent years, especially in the public college sector, may have led many students — particularly low-income students — to think that college is out of reach financially,” the report says.

“These data are even more worrisome with this fact in mind: while the percentage of low-income students in elementary and secondary schools is increasing, the percentage of low-income students who go on to college is falling,” the analysis says. “Said a bit differently, at the same time that low-income individuals are enrolling in college at lower rates, the majority of young adults in the precollege education pipeline are from those same low-income communities.”

While enrollment for “low income” students of all races has declined, enrollment rates for black students have been increasing:

casselman-college-race-1

Graduation rates are still much lower for black students, but affirmative action impacts enrollment, not graduation.

A college degree remains the best investment a person can make in themselves. The issue affecting social mobility is not getting minority students into college, it is getting “low income” students of all races to graduate from college.

Admittedly, affirmative action is only a small part of the solution. But due to its linkages to the politics of division, and that the current model seems to address an problem that no longer exists (low enrollment rates for minorities), affirmative action should be changed to a class-based system.

(The question of how affirmative action should be used for private sector hiring is less clear-cut. Unlike college enrollment, minorities still face many barriers to gainful employment, some of them due to racial bias, although new research suggests this bias could be waning).


3 Comments

Economic Outlook: For-Profit Failures Further Support Free Community College Plan

Your Student Government '13 to '14

New Research:

On Thursday (9/10), two researchers — Adam Looney of the Treasury Department and Constantine Yannelis of Stanford University — released an analysis of a new database that offers much more detail. It matches records on federal student borrowing with the borrowers’ earnings from tax records (with identifying details removed, to preserve privacy). The data contains information about who borrows and how much; what college borrowers attended; their repayment and default; and their earnings both before and after college.

the data suggests that many popular perceptions of student debt are incorrect. The huge run-up in loans and the subsequent spike in defaults have not been driven by $100,000 debts incurred by students at expensive private colleges like N.Y.U.

They are driven by $8,000 loans at for-profit colleges and, to a lesser extent, community colleges. Borrowing for both of these has become far more common in recent years. Mr. Looney and Mr. Yannelis estimate that 75 percent of the increase in default between 2004 and 2011 can be explained by the surge in the number of borrowers at those institutions.

It’s not hard to see why. The traditional borrowers from four-year colleges tend to earn good salaries out of college and pay back their loans, even during the recent years of economic weakness. The typical borrower who left a less selective four-year college in 2010 earned $35,000. For those leaving more selective colleges, the figure was $49,000. Those salaries obviously aren’t lavish, but they’re high enough to let most people meet their initial loan payments — and they tend to lead to bigger salaries in later years.

Borrowers at for-profit and community colleges, by contrast, earn low salaries — a median of about $22,000 for those exiting school in 2010 — and have had difficulty paying their loans.

The new findings are consistent with earlier data — such as statistics showing that default rates are actually lower among borrowers with large loans than among borrowers with small loans.

But the new data, which goes back two decades, shows how much the landscape of borrowing has changed. Today, most borrowers are older and have attended a for-profit or community college. A decade ago, the typical borrower was a traditional student at a four-year college.

Why did the face of borrowing change so rapidly in just a few years? During the recession, millions of students poured out of a weak labor market and into college to improve their skills. Historically, these students would have gone to community colleges. But with state tax revenues taking a nose-dive, community colleges were starved for funds and unable to expand capacity to absorb all of the new students. Students took their Pell Grants and loans to for-profit colleges. Enrollments at these schools spiked, and so did borrowing.

Behind the increase in for-profit college loan defaults is an underlying problem. How did these for-profit schools become so prominent so quickly? During the Great Recession, there was a spike in demand for schools where people could acquire marketable skills cheaply. This is exactly what economic theory told us would happen:

  1. With a larger pool of people looking for work (higher unemployment), employers could be more selective, requiring greater credentials for a given job than they otherwise would have been able to.
  2. As the labor market worsened, the “opportunity cost” of obtaining required skills (foregone wages) decreased.
  3. As people’s income decreased (both as a result of the recession, but also part of a long-term trend of stagnant median incomes versus increasing tuition costs), demand for the “inferior good” (in this case, for-profit and community colleges) increased.

Compounding the issue, many War on Terror veterans we’re returning home, with GI Bill tuition-assistance in hand but little idea of what to do with it.

At the same time, the recession resulted in lower tax receipts, and municipal and state budgetary restraints became more acute. Instead of increasing funding to deal with the predictable influx of students, community colleges faced budget cuts. The resulting surplus of students was readily snapped up by for-profit colleges.

For-profit colleges are, on average, four times more expensive than community colleges, and return poorer graduation rates and career outlooks. In other words, for every one student the federal government paid for to go to a for-profit school, it could have sent four students to community college. Furthermore, those four students would be more likely to graduate and have better career prospects.

People have different reasons for wanting to attend community college. Some people want to learn a specific marketable skill, with no intention of pursuing a bachelors degree (or beyond). Therefore, in order for community colleges to be eligible for new proposed federal subsidies, they should have to offer specialized vocational training programs.

For other people, community college is a stepping stone towards a more advanced degree. For these students, a free community college option would allow them to find out if “college is for them”, without taking out loans (I would argue that the absence of debt itself would lead to better academic outcomes). Another requirement for receiving expanded federal assistance should be making it easier to transfer community college credits to four-year college.

Of course, it is not solely up to community colleges whether four year institutions accept their credits. The Federal Government could, however, use the power of the purse and scale grant eligibility based on a four year school’s willingness to accept credits from community colleges. I bet community college credits would become more transferable if this were the case…

Perhaps some of these reforms are already baked into the Obama plan–if so, good. Either way the government, with the assistance of academic and private sector partners, should develop guidelines to help community colleges meet technical program and transfer-ease requirements.

With these requirements are met, community colleges could better serve their two target groups–returning adult-students looking for technical skills, and out-of-high-school prospective college students who think they want to pursue a bachelors degree, but do not have the conviction and/or financial resources to jump right into a four year college.

If properly tailored, a tuition-free community college plan would not greatly increase government spending. Rather it would be, in large part, a transfer of funding from for-profit (which rely almost exclusively–86% of revenue–on federal grant money to operate) to community colleges, in exchange for reforms that allow community colleges to better serve their students.

Some figures here might help put this “transfer” into context. Obama’s community college plan calls for $1.4 billion in funding in 2016 and $60 billion over the next decade. Compare this to the $32 billion the Department of Education spent on for-profit grants and loans from 2009-2010 alone

Isn’t better educating more people, for far less money (per person), exactly what student aid programs should strive for? Now, to be sure, pushing more people towards community college would increase the cost of the tuition-free plan. As many people have pointed out, to make the plan less costly tuition assistance could be reserved for less wealthy applicants with good academic records (high school grades and/or standardized test performance).


Leave a comment

Economic Outlook: Inelastic Demand, Imperfect Competition, and Price Regulation

Talk is cheap, which is why makes sense for business owners to claim prices will increase and / or mass layoffs will result if regulations are put in place. What this really means is that profits will fall, so it is worth it to talk (which, remember, is cheap), and hire lobbyists (which are relatively cheap for big business compared to the benefits they deliver) to support these claims.

In most cases, markets decide pricing. Increase prices, and people can substitute your good for a competitors. Lay people off to make a political statement, and you forego market-share that will be readily snapped up by competitors. In competitive markets, these problems tend to regulate themselves. While true Perfect Competition doesn’t exist in reality, some markets are closer to this ideal than others.

Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Also, consumers have many substitutes if the good or service they wish to buy becomes too expensive or its quality begins to fall short.

When a good is necessary for living (healthcare) or for social mobility (college), imperfect markets can price lower income people out.

bls data

Base Year 1978 (Prices = 100)

Healthcare:

ACA–companies justify price increases:

Rate Review helps protect you from unreasonable rate increases. Insurance companies must now publicly justify any rate increase of 10% or more before raising your premium.

Price controls imposed as part of the ACA are at least partially responsible for the dramatic slowdown in healthcare cost increases over the past few years (the Great Recession was another major factor).

But since health insurance is a composite of a number of inputs, including cost of being seen by a doctor and cost of prescription drugs, each of these inputs would need to be regulated to keep health insurance costs down.

The current approach used to try to keep prescription drug prices down–naming and shaming price gauging companies–does not work.

College:

While a college education is not a silver bullet, it is an important element of the social mobility puzzle. As the graph above shows, college costs have skyrocketed in recent decades, leading poorer students to take on increasing levels of debt to afford a degree.

Those who complete their degree still tend to realize a strong return on investment, but the high (and increasing) debt burden is a huge stressor, which likely contributes to poor graduation rates (especially among lower class students). The combination of non-completion (and related low earnings) and high debt can result in an inescapable debt cycle.

A good proxy for the “necessity” of a good or service is it’s elasticity of demand:

Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases.

The availability of substitutes…is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be.

Imperfect markets result in a lack of substitutes, as barriers to entry result in little competition. Policymakers can start with a matrix of competitiveness and necessity (elasticity of demand); goods and services that are both necessities and exist in highly imperfect markets are primary candidates for price regulation. Two obvious tools for regulating these markets are:

  1. Price controls (making companies justify price increases over a certain threshold)
  2. Tying federal funding to price oversight

 

Price controls may seem like a blunt tool, but they can actually be quite nuanced. Take the ACA’s “Rate Review”. A company can has an opportunity to make its case that a price increase is justified; if it justified is, the government will allow it. It is in no ones interest to see businesses fail in the name of price control regulation. Such failures hurt the economy, and undermine support for the regulatory policies that lead to their failure.

What is the American dream? Is it meritocracy and social mobility, or is it the freedom to charge whatever the market will bear regardless of the social cost?

Admitting their are limits to what perfect competition market models can achieve in the real world does not make you a socialist. It makes you a good economist and policy analyst. There is room for these industries to remain private and profitable. That does not mean we cannot regulate them in ways that make them work for society as a whole (considering the social benefits when they are widely available, and the social costs when they are not).

It is the job of politicians to identify these markets and call owners on their bluffs. Failure to do so reinforces power asymmetries that stifle social mobility. The Commerce Department’s mandate should be expanded to help balance the power asymmetry that exists between consumers and producers of necessities in the most imperfect markets.


Leave a comment

Economic Outlook: The “Neighborhood Effect” on Social Mobility

New Bitmap Image

The 2014 Education Choice and Competition Index Map

The “Neighborhood Effect” on Personal Development:

In a recent blog, we examined Harvard economist Raj Chetty’s study on the “Neighborhood Effect” on social mobility–how where a child grows up impacts the life he or she comes to live. The neighborhood one grows up in affects ones prospects later in life primarily in two ways:

1) Experiences: The people one meets and interacts with outside of family (friends, role-models, mentors, etc.). I would like to highlight President Obama’s “My Brother’s Keeper” initiative–which matches underprivileged minority youths with positive role-models–as a powerful tool in promoting social mobility.

2) Quality of schools and other public services: These institutions enable children to pursue interests that keep them “off the streets”, and if cultivated can lead to very marketable skills. Good public schooling and extracurricular programs are important for everyone, but even more so for lower-income children, whose families otherwise likely could not provide such opportunities.

The neighborhood one grows up in can either mitigate or exacerbate the affect a person’s family has on their personal development; a “good” neighborhood will benefit a child, while a “bad” neighborhood (we will use median income as a proxy) can hinder them. The combination of “bad” parenting and a “bad” neighborhood can create a nearly inescapable poverty trap; just because there are one-in-a-million stories of rags-to-riches with no help doesn’t mean we should accept leaving the vast majority of poor minority youths behind.   

Unfortunately, the data shows that–even holding income constant–minority families tend to live in poorer neighborhoods than their white and Asian-American counterparts. The findings are especially notable because they come shortly after a separate research project, by two Harvard economists, that we’ve covered in detail at The Upshot. That project has tracked several million children since the 1980s to analyze how the area where they grew up affected their lives. Children who grew up in better neighborhoods — which tended to have less poverty, less crime, more two-parent families and schools with higher test scores — fared much better as adults than otherwise similar children from worse neighborhoods.

The new paper, being published in The Annals of the American Academy of Political and Social Science, suggests that these neighborhood effects are helping to widen racial disparities, including disparities in upward mobility.

Consider these numbers: A typical black child living in a household with $100,000 in annual income lives in a neighborhood with a median income of $54,400. And a black child in a household making $50,000 typically lives in a neighborhood with a median income of $42,200.

White and Asian children are much more likely to live in neighborhoods where median income is similar to — or higher than — that of their own family. Latino children fall in the middle, less likely than white and Asian children to live in middle-class or affluent neighborhoods but more likely than black children to do so.

Of course, the neighborhood gap arises in part from voluntary choices. Many Americans, of all races, prefer to live among people who are similar to them, note Mr. Reardon and his colleagues Lindsay Fox and Joseph Townsend. For African-Americans, such a choice often means living in lower-income areas, given the racial disparity in incomes.

Taken together, the research shows that neighborhoods matter enormously to a child’s life chances — and play a big role in the nation’s racial inequalities. Some of the gaps will persist as long as the white-black income gap does. But some of the problems are more easily addressed through housing policy.

Housing developments that allow low-income families to move into higher-income neighborhoods appear to be a cost-effective antipoverty strategy. Vouchers that help lower-income families move into better neighborhoods may be even more so.

The fact that the neighborhood gap arises partially from choice cannot be ignored. And as the article points out, incomes are not the only consideration when choosing where to live. Wealth also matters–in America White people’s median wealth is much greater than their Latino and Black counterparts.

Whatever the reason, financial or social, minority families tend to live in poorer neighborhoods, perpetuating racial economic disparities across generations.

Desegregating America: Rethinking The Fair Housing Act and Promoting School Choice

Lost in the mix of two landmark Supreme Court rulings on gay marriage and healthcare subsidies, the Supreme Court recently made an important ruling with regards to federal housing policy that could help chip away at racial isolation:

The Supreme Court on Thursday endorsed a broad interpretation of the Fair Housing Act of 1968, allowing suits under a legal theory that civil rights groups say is a crucial tool to fight housing discrimination. “Much progress remains to be made in our nation’s continuing struggle against racial isolation,” Justice Anthony M. Kennedy wrote for the majority in the 5-to-4 ruling. “The court acknowledges the Fair Housing Act’s continuing role in moving the nation toward a more integrated society.” The question in the case was whether plaintiffs suing under the housing law must prove intentional discrimination or merely that the challenged practice had produced a “disparate impact.” Drawing on decisions concerning other kinds of discrimination, Justice Kennedy said the housing law allowed suits relying on both kinds of evidence.

The first kind of proof can be hard to come by, as agencies and businesses seldom announce that they are engaging in purposeful discrimination. “Disparate impact,” on the other hand, can be proved using statistics.

The latest case, Texas Department of Housing and Community Affairs v. Inclusive Communities Project, No. 13-1371, was brought by a Texas group that favors integrated housing. The group helps its clients, who are mostly lower-income black families, find housing in the Dallas suburbs, which are mostly white.

The families use housing vouchers, but not all landlords accept them. Landlords receiving federal low-income tax credits, however, are required to accept the vouchers.

The fair housing group argued that state officials had violated the Fair Housing Act by giving a disproportionate share of the tax credits to landlords in minority neighborhoods.

The Supreme Court returned the case to the lower court for further proceedings, cautioning that allowing disparate-impact suits did not mean that they should always succeed. Indeed, Justice Kennedy expressed concern about “abusive disparate-impact claims” and suggested that the case before the court would face headwinds.

Not surprisingly, racially segregated neighborhoods have led to racially segregated schools, an issue brought up by presidential hopeful Hillary Clinton. While a broad interpretation of the Fair Housing Act enables communities to chip away at the neighborhood gap, all levels of government should also promote efforts to desegregate schools through policies that enable greater choice in schooling:

School districts across America are transitioning from the traditional model of assigning students to a school based on their residential address to a system that allows families a choice of schools. Depending on the district, families can choose public charter schools, affordable private schools, magnet schools, virtual schools, and regular public schools in which enrollment is based on parental preference rather than zip code.  Districts differ in which of these options is available, the ease with which parents can exercise the choices available to them, and the degree to which the choice system results in greater access to quality schools.

Like a child’s parents, the neighborhood he or she grows up in is outside his or her control. The purpose of social mobility policies should be to ensure that children that “lose” the “parenting / neighborhood lotteries” still realize some developmental floor, enabling them to realize their full potential.

Making children pay for the questionable choices of their parents is not only socially unjust, it is economically shortsighted. 

The First Step Towards Recovery is Admitting There is a Problem:

In the wake of the recent massacre at the Charleston S.C. Emanuel African Methodist Episcopal Church, there has been a lot of soul-searching amongst Americans. The question on many peoples minds’ being “is America a post-racial country?”–it would appear not. Taking down Confederate flags, while itself a positive step, can have at best a marginal impact on race relations.

The best way to overcome racial divisions is to have people of different races interact with one another. This puts a human face to stereotypes, and exposes the false anecdotes on which they are based (SPOILER: every culture and race has industrious, innovative, good people, as well as lazy, stupid, evil people–it is not a racial thing).

Integration efforts have their greatest impact at a young age, when people’s world views are being formed, another reason why primary school integration is such an important avenue for overcoming racial divides. I know this from first hand experience–attending public schools K-12 with classmates from diverse racial and socioeconomic backgrounds undoubtedly impacted my personal beliefs. This highlights another important point–desegregating neighborhoods and schools is not only beneficial to low income people, it benefits the children of current wealthier residents as well.

The ability to interact with people of diverse backgrounds will only become more important as globalization continues to make the world “smaller”. Children who are not exposed to different types of people will find themselves shut out of many opportunities in the global economy.

The SCOTUS Fair Housing Act decision and expanding school choice are important policy tools in the fight to promote equality of opportunity, meritocracy, and social mobility, while also addressing the very real remnants of America’s lingering racially charged history.

This multi-pronged approach, utilizing both affordable housing policy and school choice policies, are also the cornerstones of Raj Chetty’s policy mix for addressing social mobility–I fully support this prescribed policy mix as an important piece of the social mobility puzzle. “My Brother’s Keeper” type mentor programs are another important tool.

Of course there are other “poverty traps” (which tend to disproportionately affect racial minorities), many of which I have discussed in past blogs, such as the America’s current criminal justice system and predatory payday loans. Addressing each of these poverty traps requires its own nuanced policy mix.

Update (7/9): The Obama administration today announced stricter plans for holding localities accountable for how they dispense federal low income housing credits:

The Obama administration announced an aggressive effort on Wednesday to reduce the racial segregation of residential neighborhoods. It unveiled a new requirement that cities and localities account for how they will use federal housing funds to reduce racial disparities, or face penalties if they fail.

“This rule makes it clear that the fair housing obligation isn’t just being able to say, ‘I didn’t discriminate,’ ” Mr. Breymaier said. “It’s also saying, ‘I’m doing something proactively to promote an integrated or inclusive community.’ ”

Ed Gramlich, a senior adviser at the National Low Income Housing Coalition, cautioned that change was likely to come slowly. Local governments that receive federal funding are required to draw up plans once every five years. For some jurisdictions, the new rules may not need to be addressed until 2020.

Still, he described the new requirement as “tremendous.” Until now, he said, local governments have basically had the freedom to decide for themselves whether they were complying with the 1968 law.

“Jurisdictions would say, ‘We put up a fair housing poster during Fair Housing Month,’ and that was it,” he said. “The whole concept was unenforceable and therefore meaningless.”


3 Comments

Economic Outlook: Fiscal Policy, Equality of Opportunity, and Social Mobility

georgraphyofupwardmobility_chetty_Page_06

“Your chances of achieving the American Dream are almost two times higher … if you are growing up in Canada than in the United States,” said Harvard’s Raj Chetty at a Center on Children and Families (CCF) event held on Monday. Chetty, the Bloomberg Professor of Economics and a leading scholar on opportunity and intergenerational mobility, presented his latest research on how where one grows up has a huge impact on success later in life.

Chetty and colleagues calculated upward mobility for every metro and rural area in the United States. 

The heat map below shows the chances that a child born in the bottom fifth of the income distribution in that particular place will reach the top fifth later in life.

My more perceptive readers may be thinking, “Ben, you usually advocate for equality of opportunity, not outcomes, what gives?”

This is a fair observation. Generally speaking, I do believe more in equality of opportunity than equality in outcomes. But these two concepts cannot be fully separated. In fact, they intersect at what has become an important issue for politicians, academics, and social scientists alike–social mobility.

Observing social mobility outcomes at the macro level provides insight into opportunity (or lack thereof) at the micro level. At more macro levels (neighborhood, city, county, etc), the differences in individuals’ development experiences (wealth, culture, parental values, personal ability, luck, etc.) are naturally smoothed out. Taking into consideration every possible permutation of personal development, these forces offset one another. What we are left with is the “average” (for lack of a better word) personal development experience.  

This “average” experience leaves a common factor–public goods and services–as the variable explaining why certain areas recognize greater social mobility than others (as shown on Mr. Chetty’s map). The fact that the administration of many important public services is carried out at these same levels reinforces the idea that social mobility outcomes are the result of policy choice(s).

Once we get past the question of “if” government programs can impact people’s opportunities, we can focus on which programs are most effective in promoting social mobility. Data mapping serves an important role here, highlighting areas that may have a working policy mix (although since economic development is context sensitive, even the seemingly best policy mix must be adapted to local realities to be effective).

The question then becomes how to pay for the programs which enable equality of opportunity. Fiscal debates are always implicitly an often explicitly shaped by underlying budgetary positions. The unwillingness of governments around the world to engage in stimulus spending despite low interest rates and high un(der)employment (a liquidity trap) is case-in-point.

In order to pay for the services needed to enhance social mobility in poorer neighborhoods, significant investments are needed. This necessitates higher effective tax rates on the ultra-wealthy (which in turn requires a multi-faceted approach, closing loopholes in capital gains, income, and inheritance/gift taxes to name a few); people whose wealth is often unrelated to productivity.

The economic outcomes of the wealthiest ultimately must be impacted in order to finance programs that promote equality of opportunity. This fact, however, does not necessitate class warfare between the lower, middle, and upper-middle classes–the vast majority of the America’s citizenry.

The American economy must work for everybody who is willing to work hard to succeed, regardless of their socioeconomic background. Once this condition is met, inequality is not only defensible, it actually spurs hard work and innovation. Unfortunately, contemporary America is nowhere near this “good inequality”; our inequality is not the result of meritocracy, but primarily the result a political process / tax code beholden to wealthy interests and an outdated criminal justice system.


1 Comment

Transparency Report: Parenting, Emotional Development, and Social Mobility

SGM benchmarks

Benchmarks for Success from the Social Genome Model

According to the Brookings Institute’s Social Genome Model Benchmarks for Success, the route to a successful life begins with a child’s emotional and cognitive development. Whether it is due to a lack of financial resources, time, or parental ability (or some function of the three), success in life is strongly influenced by the one stage a person has absolutely no control over–family formation.

As Brooking Institute’s Hugh B Price concludes in his recent paper “Social and Emotional Development: The Next School Reform Frontier”:

Of course parents, churches and communities bear primary responsibility for socializing children, but if in reality they are not up to it, what then? Consigning these youngsters to academic purgatory or, worse still, the criminal justice system serves neither society’s interests nor, obviously, theirs. Research and real-world experience demonstrate convincingly that investing in the academic and social development of youngsters left way behind pays welcome dividends. SEL deserves, at long last, a prominent place in school reform policy and practice.”

It is impossible to determine what single element holds back social mobility efforts, whether it is time, money, “values”, or some other variable. This is because the missing element is dependent upon the strengths and weaknesses of parents, which vary from couple to couple.

A multi-dimensional approach to social mobility, including paid maternity leave, universal pre-K, and investing in K-12 social and emotional learning (SEL) is needed to mitigate the effects of inadequate parenting (regardless of its cause). A child born to a wealthy family with strong values will always be at an advantage; this reality does not mean we cannot or should not ensure there is a developmental “floor” that supports all children.

America cannot afford a future where only children born to the wealthiest parents receive the attention and resources that nurture both cognitive and emotional development. One of the key factors that has sustained American exceptionalism over the course of our history has been our talented, innovative, and hard working labor force.

America’s historic commitment to freedom and human rights manifests itself in a creative and innovative spirit that has made American inventions and culture dominant on the global stage (even as our “Superpower” status wanes in other respects). But maintaining a large, skilled labor pool–the workers needed to bring great visions to reality–requires investments that promote a meritocratic society, one in which true equality of opportunity results in broad based economic growth and social mobility.   

Innovation is the ultimate engine of sustainable growth–not financial engineering or mining finite resources in ways that do not even pay lip service to the public costs resulting from their production. We cannot know who the next great innovators are, the ones who’s inventions will create new industries that employ future generations, contribute to solving the global issues of the 21st century, and develop medical breakthroughs that change peoples lives. Every child must be enabled to reach these heights if they are talented enough to do so.

Investing in people pays dividends, particularly during the early developmental stages of life. Furthermore, we cannot just wish away societies most vulnerable (try as we might). When one considers the increased welfare and criminal justice costs, as well as the general insecurity associated with systematically underinvesting in societies most vulnerable groups, the arguments for greater investment in SEL programs are bolstered.

Considering how low long-term borrowing rates are for the U.S and many foreign governments, these are certainly investments we can afford to make (and I would argue cannot afford not to make). But what about poorer countries with less resources and higher borrowing costs? In these cases, SEL targeted Flexible Credit Lines (FCLs) should be extended to low and middle income countries that are willing to adhere to certain oversight mechanisms.

Unfortunately, it appears that national policymakers are leading their citizens in the wrong direction when it comes to funding programs that promote human development. Even in wealthy places like America and Europe, politicians claim we cannot afford to make these investments, despite their alignment with our purported values, high long-run returns on investment, and low long-term borrowing costs.

Investing adequately in childhood development is a question of both social justice and long-term economic growth. Governments around the world must stop viewing impoverished youth as a liability and start embracing them as the future asset they are.


1 Comment

Transparency Report: Stress–America’s Inter-Generational Poverty Trap

The High Costs of Being Poor in America: Stress, Pain, and Worry:

Reported stress levels are higher on average in the U.S. than in Latin America. Importantly, the gap between the levels of the rich and poor is also much greater, with the U.S. poor reporting the highest levels of stress of all cohorts.

Pain, worry, sadness, and anger (reported as experienced the day before or not) are also all significantly higher among low income cohorts than among wealthy ones, while reported satisfaction with life as a whole is significantly lower, according to our analysis of Gallup data:

The cost and pain of poverty in the U.S. less about basic goods like water and electricity than nonmaterial factors: insecurity, stress, lack of opportunity and discrimination.

Stress impacts cognitive ability. Not only do poorer people have less resources to invest in human capital, due to higher levels of stress they may benefit less from every dollar they do invest. This is the stress-based poverty trap.

Furthermore, evidence suggests that this stress-based poverty trap may be inter-generational:

Stressful experiences for expectant mothers can have detrimental effects on their unborn children:

  1. “Prenatal insults,” such as harassment and discrimination, to pregnant Californian women with Arabic names after 9/11 resulted in higher rates of low birth weight babies, according to research by epidemiologist Diane Lauderdale. Babies who gestated in the weeks after 9/11 and who were given distinctive, Arabic names experienced a two-fold increase in underweight births compared to those who gestated before. Babies born to mothers with non-Arabic names experienced no such effect.
  2. Children in utero during a 40-day ice storm crisis in Québec  had lower scores on tests of vocabulary and psychological measures at age 5.
  3. Using the timing of Ramadan as a natural experiment, economists Douglas Almond and Bhashkar Mazumder find persistent effects of prenatal fasting on disability outcomes as an adult.


Why? One strong possibility is that mothers send biological signals to their fetuses, providing information about the outside world and thereby helping prioritize different aspects of fetal development. Some scientists now believe this process actually alters which genes get “switched on” in newborns.


Are We All “Born Equal”?

Ideally, people would only have children when they are financially secure and emotionally ready. In reality this is not the case, and I for one cannot think of a way of achieving this ideal without grossly invading peoples privacy. Given this reality, how can we reduce stress levels in pregnant women?

One obvious past-due reform is legislating paid maternity leave. The U.S. is the only developed country in the world that does not mandate paid maternity leave. Considering the potential link between maternal and fetal stress levels, perhaps maternity leave should begin earlier in pregnancy. This is not only a women’s rights issue, it is a social mobility issue as well.

Other avenues for progress could be informational. Poorer women are less likely to use contraception or have abortions. Abortions are also less common among poorer women, reflecting both the cost and perhaps the percieved stigma surrounding the practice (a source of stress itself). In  “Freakonomics” Steve Dubner and Steve Levner attribute dropping crime rates in the 90s primarily to the legalization of abortions in the 70s (Roe v. Wade). While abortion may be controvertial, the effects of having unwanted children are far more costly to society.   

When considering intentional pregnancy, it is common knowledge that women take great care concerning what they ingest during pregnancy. However, notably less attention is paid to stress levels. Should doctors be informing women about the impact of stress on their unborn children? Should they be promoting stress reducing activities like prenatal yoga / meditation?

Promoting equality of opportunity and social mobility requires support at all points in life. Some people need support from birth throughout young-adulthood, others need retraining later in life, while others at certain intervals in-between. This is why we see so many different programs and proposals targeting different age cohorts: universal pre-K, subsidized meals / greater school choice in primary and secondary schools, free community college / Pell Grants / “student bill of rights“.

While it may be ideal to promote policies that reduce everyone’s insecurity, early intervention is less politically contentious. A growing body of evidence suggests the earlier the intervention, the greater the “return on investment”. Furthermore, one cannot reasonably appeal to the  “personal accountability” argument when opposing welfare programs targeting unborn / young children.

Promoting equality of opportunity and social mobility are undoubtedly difficult and expensive, but they are at the root of the American Dream. Furthermore, enabling everyone to realize their full potential spurs innovation and economic growth, and would save money later in life on welfare and criminal justice spending.

As the natural and social sciences advance and become more cooperative, insights such as this will continue to present themselves. As Americans, it is up to us to reject anti-intellectualism and false budgetary restraints, and elect leaders who will turn these insights into effective public policies.


3 Comments

Economic Outlook: Business Tax Reform is a Social Justice Issue

Since President Obama’s SOTU address, the term “middle class economics” has penetrated mainstream political discourse. These were not all new ideas, but rather a catchy phrase to sum up the priorities of the Obama administration and provide direction for the Democratic party going forward.

Of course, in a functioning democracy, broad based growth is not (or should not be) a partisan position. A recent NYT news analysis article highlighted how the G.O.P. has, in recent years, attempted to re-brand itself to be more appealing to low and middle class Americans (i.e. engage in “middle class economics”).

One potential avenue for such re-branding is compromising on a long overdue overhaul of the American tax system (the last major overhaul was in 1986). According to a recent Al Jazeera America poll, a majority of self-proclaimed Democrats (79%) and Republicans (68%) are “somewhat” or “very” willing to have their congressional leaders compromise on taxes.

Fortunately, bipartisan support for tax reform is not limited to the general public. Both the Democratic party and the G.O.P. have powerful voices in the Federal Executive and Legislative branches (respectively) advocating for compromise on tax reform:

G.O.P Stance:

“Though there are disagreements on the details, there is bipartisan support for tax reform in Congress,” said Orrin Hatch, Republican chairman of the Senate Finance Committee, at a conference for tax lawyers, analysts and economists.

“Members of both parties have expressed their support for a tax overhaul. And, I believe there is real momentum to get something done on tax reform this year, if we remain committed. And, believe me, I’m committed,” he said.

The U.S. tax code has not been overhauled thoroughly in 28 years. In that time it has become riddled with loopholes. As a result, tax avoidance is a growing problem.

At the same time, tax experts also generally agree that the system is so complex and often contradictory that compliance costs are excessive and economic productivity is harmed.

Hatch has laid out basic principles for reform. At the conference, he said he has the impression that Democratic President Barack Obama might be willing to do a deal on business tax reform alone, setting aside individual income tax issues.

“We need to lower corporate tax rates and transition toward a territorial tax system,” Hatch said. A territorial system is one that would exempt all or most of the foreign profits of U.S. corporations from the corporate income tax.

Democratic Party Stance:

Let me (Secretary of Treasury Jacob Lew) say at the outset that our entire federal tax code needs to be overhauled.  It has been almost 30 years since we last rewrote it, and since then, the tax system has become heavily burdened by loopholes and inefficiencies

I continue to believe that the best way to achieve reform today is to start with pro-growth business tax reform that protects and strengthens the middle class, lowers rates, simplifies the system, levels the playing field, and eliminates unfair and inefficient loopholes.

The fact is, there is a growing bipartisan consensus in Washington on how to achieve business tax reform, and we have a unique opportunity now to get this done.

On paper, we have one of the highest corporate income tax rates in the world, but in practice, there is a wide disparity in effective corporate tax rates.  Some corporations pay little or no income tax at all, while others pay the highest rate in the developed world.

Moreover, our business tax system is far too complicated — particularly for small businessesOne estimate suggests that a small business, on average, devotes hundreds of hours plus spends thousands of dollars, to comply with the tax code.  We can and must reduce this burden.

Our business tax system actually skews business decisions in ways that make it harder for the economy to grow.  Too many investment decisions are shaped by tax considerations when they should be driven by what will best enhance productivity and growth.  Our tax code should favor the best businesses that create the most economic value — not those that are best at taking advantage of tax deductions.

The international tax system is often looked at in terms of either what is known as a territorial system, in which a company located in a particular country only pays taxes on income earned in that country, or a system like that of the United States, in which that company must pay tax on worldwide income, regardless of the country where it is earned.  The President’s proposal strikes a sensible balance, and would move us towards a more hybrid system.  What that means is we would create a new minimum tax on foreign earnings and make it simpler for a business to bring income back to the United States.  It would also tighten the rules so that companies cannot use accounting techniques to avoid paying taxes, such as shifting profits to low-tax countries (inversions).

Of course, there are tax expenditures that make sense and that need to be protected — like the New Markets Tax Credit, expensing for small businesses, and the Research and Experimentation Tax Credit.  But these tax incentives cost money and need to be paid for to maintain adequate revenue levels.  And we cannot apply a double standard, as some have proposed, where we permanently extend business provisions without paying for them, without permanently extending critical improvements to the EITC, child tax credit, and college credits that help working families at the same time.

Secretary Lew laid out the five pillars of the administration’s proposal for a new business tax system:

1. Lower rates and close wasteful loopholes.
2. Build on the resurgence of manufacturing in the United States.
3. Reform the international tax rules that encourage companies to shift income and investment overseas.
4. Simplify and reduce taxes for small businesses.
5. Fix “our broken tax code and increase investment in a way that maintains current revenues.”

Sounds like both parties want many of the same things.

However, “revenue neutral” business tax reform does not go far enough. Looking at the Federal OMBs Historic Tables (p34-35) tells the story. Since 1934, individual income taxes have consistently made up 40+% of government receipts, while corporate income taxes have varied from as high as 30% to around 10% of receipts in recent years.

True this declining share is partially due to rising Social Security taxes, but since those are split evenly between employers and employees, it is clear that the burden of financing our government has shifted from corporations to people and small businesses. Looking at contributions as a % of GDP (p36-37) further supports this narrative.

These meager contributions by corporations are symptoms of an outdated and unfair tax code, and should not be enshrined in a new one.

Lower tax receipts skew the debate over how to invest in America and her people. Operating from a position of high debt and primary deficit, it is easy to drum up fears that accommodative economic policies will result in rising borrowing costs, ballooning deficits, and [hyper]inflation (despite the fact that America is facing the opposite–historically low borrowing costs, a shrinking deficit, and a very strong dollar).

Implementing business tax reforms would help push America into primary surplus, changing the context of this national debate.

I do not claim to know the exact amount or proper allocation of resources between public goods (education, infrastructure) and welfare programs needed to achieve greater “equality of opportunity” / social mobility. But I can say with confidence that more resources need to go to these causes, as the status-quo has long failed the vast majority of Americans.

The sooner we can have a clear-eyed debate on what policies are needed to promote broad based, sustainable American growth, the better. Holding back this debate, aside from uncompromising politicians, is a failure to overhaul our tax code.

In the interest of balance, work also needs to be done on individual tax reform, to fix high marginal tax rates affecting people who benefit from welfare programs. However, the importance of this issue has been, in my opinion, overblown by those on the political right.

Lastly, the Congressional Budget Office’s use of “dynamic scoring”, as it as been pushed through by the G.O.P. dominated congress (using it for tax proposals but not for spending bills) is another impediment to achieving social justice through tax reform and fiscal policy. 

Van Hollen (D-MD) added that while the bill requires the CBO to run dynamic analyses on major bills, it specifically excludes appropriations bills. He said that exemption shows that Republicans want to downplay how federal spending on education, infrastructure and other areas can also help the economy.

Ryan replied by saying that exemption is there because subjecting all spending bills to dynamic scoring would create significantly more work for the budget office. Rep. Gerry Connolly (D-Va.) proposed an amendment to include major spending bills, but the House rejected it 182-214.

Ryan’s argument is unfounded and offensive to the talented people employed by the CBO. It is a weak attempt to defend wealthy interests, while downplaying the awesome potential of the American people.

Ideally, this method would be implemented for both tax and spending proposals. If that is not possible, dynamic scoring should not be used at all.


1 Comment

Economic Outlook: Of Minimum Wages and Employment (Revisited)

Another hot button topic during the 2014 midterm election season are candidates stances on increasing the federal minimum wage.

This past February, the CBO released its analysis of the effects of a federal minimum wage increase on economic growth, employment, and poverty. Those on the political right seized on the reports projection that raising the minimum wage could result in 1 million fewer jobs in America.

I found Jared Bernstein’s Economix blog on the subject pretty even-handed (click here to see my previous blog on the topic):

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.” (Jared Bernstein, Economix blog)

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget.

The CBO report was a projection. What have minimum wage “experiments”, carried out in America’s “laboratories of democracy” (states and municipalities), revealed?

The White House told us they were referring to the seasonally adjusted growth of non-farm jobs since December 2013. So we crunched the numbers for state-level employment data, which is collected by the Bureau of Labor Statistics.

The comparison involved nine states that increased their minimum wage automatically early in the year to keep pace with inflation (Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington) plus four more states that passed new laws to hike the wage (Connecticut, New Jersey, New York and Rhode Island). The other side consisted of 37 states that didn’t boost their minimum wage at all.

Using the second method — the one that gives greater weight to high-population states — we found that job growth over that eight-month period averaged 1.092 percent in the wage-raising states, compared to 1.090 percent in the non-wage-raising states. That’s a higher rate of job growth in the minimum-wage-raising states — but by the almost comically narrow margin of 2/1,000ths of one percent.

From this 8-month comparative analysis, we can see that minimum wage changes have had essentially no impact on employment levels. The meta-analysis seems to have been vindicated–I guess economists are good for something after-all.

What does this mean? Which stance on minimum wage increases has been vindicated? I would say it has to be the pro-minimum-wage-increase side of the debate.

Increasing the federal minimum wage is not meant to be a “job-creating” policy; its primary purpose is to redistribute income from the top of the economic pyramid (wage payers) to the bottom (wage earners). It is a “market” solution that does not require taxation and welfare spending, so money would not go to those “lazy welfare recipients” (this is not my view, however a significant proportion of Americans do view welfare recipients this way, and it is necessary to consider alternative perspectives when trying to pass legislation in a democracy).

One may think such an inequality / poverty reducing solution would be agreeable to proponents of “small government”, and one would be wrong. Since opponents of increasing the minimum wage cannot assail deficit spending going to undeserving recipients, they have relied on the “jobs lost” argument. Fortunately, this argument becomes less and less viable the more it is challenged and disproven.

Raising the minimum wage does not just address the “symptoms” of inequality / poverty–there are important long term / inter-generational implications of minimum wage increases. Having more money enables people to build their skills, take more entrepreneurial risks, and provide better upbringings for their children (which obviously affects their earning capacity later in life).

“Meta-analysis” of the effects of minimum wage increases on employment clustered around zero, and these findings have been backed up by the non-partisan statistics produced by the Bureau of Labor Statistics (in the interest of full disclosure, I should mention that I work for the BLS, although my job has nothing to do with employment statistics).

The mechanism by which minimum wage increases raises poorer peoples income is straightforward. How people would choose to use their new-found income is less straightforward–some will predominately invest in into their and their families futures, while others will use the majority for instant gratification. While not as targeted as a welfare program, raising the minimum wage is the most politically viable solution to America’s inequality problems.

Contemporary American political discourse is dominated by the related themes of “equality of opportunity” and “social mobility”. Raising the federal minimum wage would bring immediate relief to America’s poorest workers, while moving closer to the utopian goal of “equality of opportunity”. Furthermore, it would accomplish these goals without any meaningful impact on employment rates or the federal budget.

Some redistribution of income in necessary; inequality is a drag on economic growth, and poverty is a root cause of many other societal ills. History has proven over and over again that “trickle-down” economics does not work. Minimum wages should also be linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), periodically (once per year?) increasing to reflect changes in cost of living.

If our federal government continues to fail in this regard, leaders at the state and municipal level must step-up–this is a matter of both present and future socioeconomic justice.

 


2 Comments

Economic Outlook: The Relationship Between Wages, Productivity, and Economic Inequality In America

Source: The Employment Policy Network (Huffington Post)

Note: Hourly compensation is of production/nonsupervisory workers in the private sector and productivity is for the total economy.

Source: Author’s analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series

THE BOTTOM (high school graduates):

This graph highlights the growing disparity between wages paid and productivity for different educational levels (which we will use as proxies for societal classes). There are a number of explanations for this decoupling. One explanation is the decline of labor union participation due to regulatory changes and pressure from globalization. Another explanation is that as technology has advanced, it has become and increasingly important factor of production; businesses are opting to spend a larger portion of their revenues on machinery as opposed to workers.

This Monday I observed a roundtable at the U.N.– “The Threat of Growing Inequalities”–where one of the speakers raised this point. Taking home a “smaller piece of the pie”, those at the bottom are able to buy less political influence, which leads to weakened labor rights and neglected falling real minimum wages. Economic forces enable those at the top to rig to laws in their favor, further exacerbating inequality–this is the political economy explanation of rising inequality. This explanation hits on another divisive element of contemporary American society, the different legal system experienced based on ones wealth.

Whatever the reason (or as is often the case in real-world economic analysis, combination of reasons), this phenomenon obviously contributes to increasing inequality. How bad is inequality today? The Stanford Center for the Study of Poverty and Inequality has 20 graphs which tell much of the story, while Politifact has compiled a number of inequality related “fact-checks”.

It is heartening to see grassroots minimum-wage movements emerge, spanning many industries (and worldwide, many countries), led by people who are willing to take a stand through collective action. These people are willing to risk the wrath of vengeful corporate executives for economic justice. However, it will take a concerted effort by well intended politicians, independent media outlets (I try to do my part), and progressive judges / competent public defenders to capitalize on this grassroots activism if meaningful progress is to be made on the inequality front.

THE TOP (“the .1%” is not represented in the graph above):

What is going on at the bottom of the economic pyramid is only part of the inequality story. The meteoric rise of top earners incomes increases inequality; economic growth is important, but how evenly it is distributed also matters. Again here we see a decoupling of wages and productivity in the other direction  (much greater compensation than productivity; in fact, one could argue short-sighted investments result in negative productivity for the economy as a whole, while at the sane time lead to huge rewards for those carrying them out). A micro-example of this adverse relationship, described by former derivatives trader Sam Polk, as “wealth addiction”, is highlighted in a recent NYT opinion piece:

IN my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted.

I’d always looked enviously at the people who earned more than I did; now, for the first time, I was embarrassed for them, and for me. I made in a single year more than my mom made her whole life. I knew that wasn’t fair; that wasn’t right. Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist. Not so nurse practitioners. What had seemed normal now seemed deeply distorted.

DESPITE my realizations, it was incredibly difficult to leave. I was terrified of running out of money and of forgoing future bonuses. More than anything, I was afraid that five or 10 years down the road, I’d feel like an idiot for walking away from my one chance to be really important. What made it harder was that people thought I was crazy for thinking about leaving. In 2010, in a final paroxysm of my withering addiction, I demanded $8 million instead of $3.6 million. My bosses said they’d raise my bonus if I agreed to stay several more years. Instead, I walked away.

The first year was really hard. I went through what I can only describe as withdrawal — waking up at nights panicked about running out of money, scouring the headlines to see which of my old co-workers had gotten promoted. Over time it got easier — I started to realize that I had enough money, and if I needed to make more, I could. But my wealth addiction still hasn’t gone completely away. Sometimes I still buy lottery tickets.

Wealth addiction was described by the late sociologist and playwright Philip Slater in a 1980 book, but addiction researchers have paid the concept little attention. Like alcoholics driving drunk, wealth addiction imperils everyone. Wealth addicts are, more than anybody, specifically responsible for the ever widening rift that is tearing apart our once great country. Wealth addicts are responsible for the vast and toxic disparity between the rich and the poor and the annihilation of the middle class. Only a wealth addict would feel justified in receiving $14 million in compensation — including an $8.5 million bonus — as the McDonald’s C.E.O., Don Thompson, did in 2012, while his company then published a brochure for its work force on how to survive on their low wages. Only a wealth addict would earn hundreds of millions as a hedge-fund manager, and then lobby to maintain a tax loophole that gave him a lower tax rate than his secretary.

I see Wall Street’s mantra — “We’re smarter and work harder than everyone else, so we deserve all this money” — for what it is: the rationalization of addicts. From a distance I can see what I couldn’t see then — that Wall Street is a toxic culture that encourages the grandiosity of people who are desperately trying to feel powerful.

I was lucky. My experience with drugs and alcohol allowed me to recognize my pursuit of wealth as an addiction. The years of work I did with my counselor helped me heal the parts of myself that felt damaged and inadequate, so that I had enough of a core sense of self to walk away.

Dozens of different types of 12-step support groups — including Clutterers Anonymous and On-Line Gamers Anonymous — exist to help addicts of various types, yet there is no Wealth Addicts Anonymous. Why not? Because our culture supports and even lauds the addiction. Look at the magazine covers in any newsstand, plastered with the faces of celebrities and C.E.O.’s; the super-rich are our cultural gods. I hope we all confront our part in enabling wealth addicts to exert so much influence over our country.

This is a powerful piece, an inside voice admitting that derivatives traders “don’t really do anything”, and that an insatiable “wealth addiction” (and the political clout it buys) drives a widening income gap in this country. The idea that much investment “doesn’t really do anything”, that it is speculative rather than true investment, is not a new concept. In fact, the concept was laid out eloquently by John Maynard Keynes in “The General Theory of Employment, Interest, and Money“:

It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.” 

This was written in 1936 in the context of post-Great Depression financial regulation, long before technological changes such as the internet and mass-deregulation created a risk-seeking “too-big-to-fail” financial sector which nearly destroyed the global economy in 2008. One can imagine what Keynes would have to say about the financial sector–and the inadequate regulatory response to the Great Recession–we experience today!

The top his risen due with the help of financial deregulation, enabling a “wealth addiction” by canonizing those selfish (or at best ignorant) enough to pursue such ends. This, coupled with the bottoming out of the lower end of the economic pyramid, leads to gross inequality. Inequality distorts our legal and political system, which leads to self-perpetuating social immobility; those at the top stay at the top (and continue rising), while those at the bottom stay at the bottom (an inter-generational poverty trap).

But how could we let this happen to America, once a “beacon of hope”? Wouldn’t our democratic system have stopped this from happening?

THE MIDDLE (bachelors and graduate degree earners):

It is indeed perplexing how we got into this mess, given America’s democratic system. Part of the explanation is that we canonize the rich–we want to be them, we don’t want to regulate them. We also vilify the poor–they are lazy, undeserving, and are responsible for the majority of anti-social behavior (crime, drug use, etc.). “We” here is the middle class, the last faction of American society where social mobility and meritocracy exists (to a certain extent).

Middle class families can afford the necessities needed for “equality of opportunity”, even if they cannot afford great luxuries. They earn college degrees and go on to make living wages. These workers still see a connection between productivity and compensation. An income of $50,000/yr is probably related to the amount you produce. Perform well and there is a promotion in it for you; you may even “make it to the top”!

To paraphrase John Steinbeck: “Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires”

Those at the top receive more than they produce, so why complain (however they do get defensive anytime someone proposes a common sense regulation)? Those in the middle earn roughly what they produce, and have a reasonable belief they will make it to the top; you don’t want to regulate what you one day aspire to be! Those at the bottom–well fuck em’ they’re lazy drug users!

How have those at the top succeeded at winning the PR war on income inequality? The best explanation I have heard comes from Matt Taibbi’s book “Griftopia”. In this book, he tells a story of local level governance which is overrun by regulations (he uses an example of a bureaucracy ramming affordable housing down a communities throat). Knowing that middle-class people experience over-regulation at the local level, those at the top seize on this “big-government” narrative to drum up support for financial deregulation; they create a narrative of “the poor banker trying to earn a buck”.

This narrative resonates with the middle-class worker who experiences the aforementioned local government over-regulation. It is reinforced by media commentary, which is often a pawn of those at the top (another tool, like political clout, enabled by surplus wealth).  Furthermore, this narrative also vilifies financial regulation as a something which stifles economic growth / cost jobs / lead to higher consumer finance costs (and in this economy, we simply cant afford it!), even though economic theory and common sense suggest that inequality stifles consumption, job creation, and economic growth.

Of course this is a false equality; federal (and international) financial sector regulation and local / state government regulation are unrelated (local governance may well be over-regulated in some instances, but the financial sector is undeniably under-regulated). But unless you have studied the way the government works (which most people haven’t), you have no idea you are being fed horseshit; you hear the word “regulation” and cry bloody murder. Because local governance is often intervening on behalf of lower class citizens, this creates a rift between the middle and lower class, while the real culprits are laughing all the way to the bank (quite literally–they tend to work at banks).

If this sounds like class warfare, that’s because America is experiencing class warfare.

This post relied heavily on generalizations, there are undoubtedly people in each class of society who do not fit into these generalizations. But in general these descriptions hold (that’s why they’re called generalizations).

This post focused on America; globally the inequality problem is much worse. According to a just-released Oxfam report, the richest 85 people in the world control the same amount of wealth as the bottom 3.5 billion (that’s nearly half the global population!). Recently, UNDP chief Helen Clark spoke about the link between inequality, poverty, and standard of living. Least developed countries experience different problems (extreme poverty, authoritarian / incompetent governance, lack of access to credit, armed conflict, etc.), but these problems manifest themselves in similar ways (poverty, inequality, power imbalances).

The whole world must confront and stop enabling “wealth addiction”, if we hope to realize sustainable human development in the 21st century. We must try, through regulation, taxation, and incentives, to restore the productivity-to-earnings relationship. As inequality becomes more of a “mainstream” issue (it has recently been emphasized by, among others, Barack Obama and Pope John Francis), we can expect to see a larger portion of society begin to champion pro-poor causes.