I apologize in advance for the length of this post, but I think it will be worth your time.
I have mentioned before that I am a huge fan of John Mauldin. Mauldin is an investment analyst/economist from Texas. (You can check out my review of his newest book, Code Red.) I think he’s one of the most brilliant guys I have ever read.
He publishes a free weekly newsletter called Thoughts from the Frontline. There are close to a million people that read it. It’s basically Mauldin’s attempt to explain the world as he sees it. No matter whether you care about investing or not, I think Mauldin does an exponentially better job of reporting what is really going on in the world today. He is incredibly well read, and has quite a knack for the written word. Much of his analysis is done through the lens of economics.
Recentlym he had a three part series on income inequality (“The Problem with Keynesianism“, March 9, 2014; “Inequality and Opportunity“, March 16, 2014; and “When Inequality Isn’t“, March 29, 2014). The whole series is worth your time, but I thought I’d dish out the stuff I found most interesting and appropriate for our purposes here. I’m going to underline the parts I found most important.
Equality of Opportunity
In one of the most far-reaching studies I’ve seen, a group of Harvard economists have compared upward mobility – the ability to rise from lower to higher income groups – among US metropolitan areas, as well as among developed nations. Their rather remarkable website and database can be found here. Their one-paragraph summary is:
In two recent studies, we find that: (1) Upward income mobility varies substantially within the U.S. [summary][paper] Areas with greater mobility tend to have five characteristics: less segregation, less income inequality, better schools, greater social capital, and more stable families. (2) Contrary to popular perception, economic mobility has not changed significantly over time; however, it is consistently lower in the U.S. than in most developed countries. [summary][paper].
Silence of the Left
Conveniently for the discussion of our topic, John Goodman posted a brief article on Townhall.com this week called “Silence of the Left”:
The topic du jour on the left these days is inequality. But why does the left care about inequality? Do they really want to lift those at the bottom of the income ladder? Or are they just looking for one more reason to increase the power of government? If you care about those at the bottom then you are wasting your time and everyone else’s time unless you focus on one and only one phenomenon: the inequality of educational opportunity. Poor kids are almost always enrolled in bad schools. Rich kids are almost always in good schools.
It turns out that homes cost roughly 20% more in areas with good schools. School choice is already in effect because people with more money buy homes in areas with better public schools. Children of families with less money on average tend to be stuck in lower-performing public schools.
Goodman cites a Brookings Institution study that investigated the same phenomenon nationwide:
- Across the 100 largest metropolitan areas, housing costs an average of 2.4 times as much, or nearly $11,000 more per year, near a high-scoring public school than near a low-scoring public school.
- This housing cost gap reflects that home values are $205,000 higher on average in the neighborhoods of high-scoring versus low-scoring schools. Near high-scoring schools, typical homes have 1.5 additional rooms and the share of housing units that are rented is roughly 30 percentage points lower than in neighborhoods near low-scoring schools.
You almost never see anything written by left-of-center folks on reforming the public schools. And I have noticed on TV talk shows that it’s almost impossible to get liberals to agree to the most modest of all reform ideas: getting rid of bad teachers and making sure we keep the good ones.
Here is the uncomfortable reality:
1. Our system of public education is one of the most regressive features of American society.
2. There is almost nothing we could do that would be more impactful in reducing inequality of educational opportunity and inequality overall than to do what Sweden has done: give every child a voucher and let them select a school of choice.
3. Yet on the left there is almost uniform resistance to this idea or any other idea that challenges the power of the teachers’ unions.
That “socialist” bastion of income equality and mobility – Sweden – uses vouchers for education.
Krugman argues against school vouchers because they might reduce support for public schools. And then he actually writes, “And – dare we say it? – we should in general oppose privatization plans if they are likely to destroy public sector unions.”
We have total academic, bureaucratic, and teachers’-union capture of public education. We are subjecting our children to an education system that that was designed for and that worked remarkably well during the first two industrial revolutions but that is now utterly inadequate for the coming Age of Transformation. The new New York City Mayor, Bill de Blasio, is working to shut down many of the best-performing schools in his city – charter schools – which are hated by teachers’ unions. Rather than ask what is good for the children, he and many others simply want to expand the power of the unions.
If we want to do something about income inequality, perhaps we should think about the data that shows the remarkable correlation between education, educational opportunity, and income.
A report from the American Enterprise Institute gives us a good summary. Notice in the chart below that while the income of the highest fifth of the US population is almost 18 times that of the lowest fifth, there is only a 3.5x differential when it comes to the average earnings of the people actually working and making money in the household. It is just that high-income households have more than four times as many wage earners (on average) as poor households.
And married and thus two-earner households make more than single-person households. That seems obvious, of course, but it is a significant factor in income inequality. That doesn’t make the plight of the single working mom any better or easier, but it does help explain the statistical difference. And it does make a difference in lifestyle. Marriage drops the probability of childhood poverty by 82%.
The AEI report ends on this positive note:
Bottom Line: Household demographics, including the average number of earners per household and the marital status, age, and education of householders are all very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in lower-income quintiles, and individuals in high income households are far more likely than individuals in low-income households to be well-educated, married, working full-time, and in their prime earning years. In contrast, individuals in lower-income households are far more likely than their counterparts in higher-income households to be less-educated, working part-time, either very young (under 35 years) or very old (over 65 years), and living in single-parent households.
Take a look at this chart below. It looks at spending by households on various items split out by quintile. It goes back to 1986 because that was when pretty significant changes to the tax law occurred. Noticed specifically the differences in spending on education and reading.
At the beginning of this letter I promised you a “solution” to income inequality. Let me offer this one tongue-in-cheek, as an argumentum ad absurdum.
We simply need to penalize the incomes of older people, take away any advantage there is from being married, reduce opportunities for education, penalize people for working more than 35 hours per week, and of course levy a significant tax on any accumulated savings. This will quickly reduce inequalities of income. It has the slight disadvantage that it will also destroy the economy and create a massive depression; but if the goal is equal outcomes for all, then communist Russia might be the model you are looking for. Except that even there the bureaucrats and other insiders did quite well.
If you’re really serious about dealing with income inequality, you need to worry about equality of opportunity in education, and specifically about making sure that the education system is radically reformed by taking it out of the hands of bureaucrats and unions. We need to make sure the economic and legal playing field is level by getting government favoritism and bureaucratic meddling out of the way and making the pie larger for everyone. However, as I demonstrated a few weeks ago, a natural outcome of doubling the size of the economic pie over the coming 15 years will be that there is an even greater differential between those who have next to nothing and those who have accumulated the most. The only way to prevent such an outcome is to keep the total economic pie from growing, and that doesn’t seem like a very good economic policy.
If we truly want to do something about income inequality, we must stop listening to the left talk about it. They are completely and utterly uniformed on the topic. And more then anything else, they probably are the most to blame. They have destroyed our families socially and culturally, and they have destroyed our schools through unionization and bureaucratization.
Andrew Palmer is co-founder and editor of Conservative Teachers of America. You may reach him at [email protected]