Tuesday, July 4, 2017

Is it inequality of income we care about — or inequality of opportunity?

By Steven Pearlstein

July 1

The Washington Post

Inequality may well be the issue of our time. But is it inequality of income we care about, or inequality of opportunity? And what is opportunity — the opportunity to do better than our parents, or better than ourselves at an earlier age, or does it mean doing better relative to everyone else? Can some of us get wealthier without making others poorer? Would inequality recede if we just had more economic growth?

These questions animate two new books. One is “Dream Hoarders: How the American Upper Middle Class is Leaving Everyone Else in the Dust, Why That is a Problem and What To do About It,” by Richard Reeves, a British-born philosopher by training, politician by instinct and a Brookings Institution social scientist by trade. (Richard is also a friend). The other, “The Broken Ladder: How Inequality Affects the Way We Think, Live and Die,” is by Keith Payne, a professor of psychology at the University of North Carolina. Both books are authoritative, thought provoking, accessible and well worth a spot on your summer reading list.

Reeves starts from a simple factual observation — namely, that the rise of inequality in the United States isn’t just a story about the super-rich, the top 1 percent, but even more about a class of married, highly educated, influential and increasingly isolated professionals in the top 20 percent who have been pulling away, both literally and figuratively, from the rest of the country.

Or, as Reeves is quick to acknowledge, people like himself and his friends. While to the world, and to themselves, it appears that the members of the upper middle class have come out on top because of their talent and hard work, Reeves reminds us that it has just as much to do with the luck of being born to parents able devote time, money and influence to develop and nurture their talents and assure their success.

Now, in the new age of inequality, that meritocratic elite is using its increased wealth to perpetuate that advantage for their children by segregating them in the best communities, sending them to the best schools and securing for them the best internships. As a result, Reeves writes that what started as an income gap in one generation is turning into an opportunity gap in the next, creating an American class system that “is functioning more ruthlessly than the British one I escaped.”

As Reeves sees it, his own class has become “kind of selfish,” and he wishes they (we) would stop hoarding all the opportunity and sharing a bit of it with the middle class and the poor. By his calculation, the increasingly unequal distribution of income has given the upper middle class an extra $1.2 trillion in income each year — more than enough to be able to provide other children some of the same advantages that they now provide to their own.

While Reeves marshals the latest thinking and data to support his thesis of a new meritocratic aristocracy, there are blind spots in his analysis and holes in his logic.

He accepts too easily the economist’s assumption that competitive markets distribute rewards in rough proportion to talent and work effort. He focuses his criticism on how rich kids have a better opportunity to develop the necessary talents and discipline before the market competition begins. “America has a meritocratic market but an unfair society,” he writes.

But could it be that the market itself has become more unfair? One could observe that changes in laws, regulation and business norms since the 1980s have given businesses more leverage over employees, allowed some companies but not others to earn above-market profits and pay above-market wages, and showered inordinate compensation on a small number of financiers, chief executives and entertainment superstars. Surely such structural changes have had more of an effect on the uneven distribution of income and opportunity than persistent favoritism in the awarding of internships.

Reeves also is too ready to think of economic advancement is a zero-sum game. While it is true that, at any moment, there are a limited number of homes in the poshest communities and a limited number of freshmen admitted to the Ivy League, that doesn’t mean society can’t create more posh communities or create more high-quality universities. And while it is a mathematical certainty that for every person who rises into the ranks of the top 20 percent of households by income there must be another who falls back, it does not follow that there is a limit on the number of Americans who can enjoy an upper-middle-class existence.

Like many neoliberals, Reeve’s is conflicted. He can’t decide if the problem is that our meritocratic economy isn’t meritocratic enough, or if, because of the realities of both nature and nurture, meritocracy by its nature is doomed to evolve into self-perpetuating aristocracy. He is also reluctant to take sides on whether it is inequality of income that is the root problem, or inequality of opportunity, which sits better with defenders of free markets. Reeves sees the two as having become so mutually reinforcing that the only answer is all of the above.

In “Broken Ladder,” by contrast, psychologist Payne embraces the egalitarian view that inequality of income is problem in and of itself — economically, morally, politically. He begins with the observation that humans are hard-wired by evolution to care not just about their absolute level of material comfort but also their relative standing in the economic and social hierarchy.

Our tendency, he explains, is to believe that each of us is above average in terms of character, talent and performance, and when an unequal reward structure fails to reflect that belief, we become anxious, resentful and pessimistic about the future. Those negative feelings, in turn, lead people to make to bad decisions — taking on too much risk, underinvesting in the future, indulging in too much food, drink, sex — which only further undermines their economic prospects.

Social psychologists have long identified this vicious cycle to explain the poverty trap — the persistence of poverty in certain families and communities. But Payne’s point is that because of the dramatic rise in income inequality, the same status anxiety has now come to afflict the middle class, creating a similar self-defeating dynamic.

“Our intrinsic appetite for high status crashes against the towering inequality we see around us, with enormous consequences for . . . not just the poor, but the middle class as well,” he writes. “Inequality is not simply a matter of how much money we have; it’s about where we stand compared to other people.” In other words, it's not just being poor that matters; feeling poor has a similar effect.

People who feel left out and powerless are also prone to become distrustful and gravitate to conspiracy theories to explain their fate. And as we now observe in the Trump era, if enough people feel that way, it can undermine public faith in institutions and polarize our politics.

Payne draws on numerous experiments he and other psychologists have conducted to demonstrate the importance we attach to relative position. He also reprises sometimes controversial studies showing a high correlation between income inequality and crime, chronic disease, shorter life spans, less happiness, political polarization and slower economic growth. I say controversial because it is not always clear from this data whether income inequality is cause or effect, or whether a high rate of inequality is merely a statistical proxy for the real problem, which is the higher poverty rate in most unequal societies. But none of that detracts from Payne’s main point that it is the unevenness in the distribution of income, not the overall level of income, that is the more relevant factor.

Payne, however, pushes his theory of relativity a step too far when he asserts that faster economic growth is no solution to the problem of inequality, as many economists have long argued. Even if we were to double the income of every American, he writes, we’d feel worse, not better, because the gap between rich and poor would actually increase.

I seriously doubt that is true. While relative standing matters, it is not the only thing that matters. In the past, when incomes and income inequality have both been growing fast, as during the 1920s, people have felt those to be good times, not bad. Our current age of inequality is that it has come at a time when the income growth for the average household has slowed to a crawl. Americans wouldn’t be so resentful about billionaire hedge-fund managers and millionaire chief executives if they themselves were getting a raise every year.

A similar tension is at work in discussions about mobility, and whether it is absolute or relative mobility that we should care about. We think of the period from 1880 to 1980 as a golden era because the vast majority of Americans were able to earn higher incomes than their parents (that’s absolute mobility), even though their relative place in the economic pecking order remained largely unchanged.

Contrast that with the period 1980 to 2010, when millions of poor immigrants flooded across the border, raising the relative standing of America’s blue-collar workers. Have those blue-collar workers celebrated their higher relative status, or are they grumpy that immigration has put downward pressure on their (absolute) wages.

The point here is that context matters. It’s too simplistic to say that we should care only about inequality of opportunity and that concerns about inequality of income are merely class envy, just as it is too simplistic to say that all that matters is relative mobility rather than absolute or that economic growth either is irrelevant or is the silver bullet.

Whatever their shortcomings, books like “Dream Hoarders” and “The Broken Ladder” demonstrate how much more interesting and enlightening the inequality debate has become since those early days when it was mostly labor economists debating how much inequality had increased and whether we should blame technology or trade. The addition of philosophers, psychologists, evolutionary biologists, political scientists and sociologists has made for a much richer and more satisfying conversation about the nature and consequences of inequality.

And while we have come to understand that a society can suffer from having either too much inequality or too little, the challenge now is identifying and getting to that sweet spot in between.

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