Rising Inequality: why policy may not help all that much

Rising financial inequality is a concern, especially in America. Many studies show that when income disparity rises other social ills follow (everything from a higher murder rate to a lower life expectancy.) We've seen it in the revolutions in the Arab world recently. Societies without relative social mobility, who have a high income disparity cause social problems and can eventually breed revolutions. America over time has become more and more divided. Just take a look at Pres. Obama's '08 campaign. One of his most popular and supported mantras was 'wealth redistribution'. Admittedly, the verbage and sentiment behind that mantra made the free-market capitalist in me queasy. (I don't subscribe to the Robin Hood philosophy of take from the rich, give to the poor.) But it is a problem that needs to be addressed.

There was not a single year between 1952 and 1986 when the richest 1% of American households earned more than a tenth of the national income. After rising steadily since the 80s, in 2007 the richest 1% of Americans made 18.3% of all the national income. America's median income is now only half the mean. That's a large increase in disparity over a short time and it's only getting worse. But why has the disparity been rising so rapidly?

In the 80s technological progress caused an increased demand for skilled workers, and led to widening of the gap between the wages of skilled employees and the rest of the workforce. That trend has only been amplified as technological advances continue to sky rocket. It's not just the technology fields that have been transformed and are hungry for highly skilled workers. Because technology has has changed the way we store, process and utilize information, skilled, educated, brainy workers are at a premium in every field.

The huge premium on brains in this era leads to educated, skilled workers being compensated at a much higher level. In 1991 the average wage for a male American worker with a bachelor's degree was 2.5 times that of a high-school drop out, now the ratio is 3. Again education and cognitive skills are at a premium, but America has free public education, loads of government assistance available for higher education and is a land of opportunity (yes, I firmly believe that), so why the drastic increase in disparity? Because those highly valued cognitive skills are being unevenly distributed due some other outside factors, factors that are hard, if not impossible to address by tax code, government policy, welfare or public education overhaul.

In 1970 only 9% of those with bachelor's degrees in America were women. Now the numbers of men and women with bachelor's degrees are roughly equal. In 1970 most men married uneducated women, because their options were slim. In today's society clever well- educated men usually tend to marry clever well-educated women. Their children have the advantage of being predisposed to getting 'clever genes'. Parents with degrees are far more likely to raise children who earn degrees than non-graduates. Also educated parents typically earn more, use a larger vocabulary when they talk to their kids, prod them to do their homework and read to them more. Plus, they are more likely to be able to afford private schools or to live in a place with good public ones. 'In America, residential segregation is extreme. The best schools are filled with college hopefuls and the worst have metal detectors. Education reform would obviously help, but it can't completely level the playing field.'

Skilled, educated women have made immense strides in the workforce. 34% of all American lawyers today are women as compared to 5% in 1970. Our glass ceiling is much higher now and the fight for respect isn't nearly as tough, but with skilled smart women doing so much better in the work force (and being fairly compensated for it) it raises the opportunity cost of having kids. "The opportunity costs of child rearing are far more for a woman who earns $200,000 a year compared to one who greets customers at Walmart." (Disclaimer: The Economist's words not mine.) The lifetime fertility rate for American high school dropouts is 2.4, for women with advanced degrees it's only 1.6.

Plus, raising smart educated children is expensive. As a parent with a college education who hopes your child will have the same opportunity you have to think about funding. 'A lawyer couple can easily afford to put one child through Yale, but perhaps not four.'

Bottom line: Smart educated people usually earn more. They marry each other and are more likely to provide their children with the encouragement, education and funding to also be smart, educated high earners. But due to opportunity costs, there are fewer of these 'high earner' children. Kids with the benefits of good education and clever genes are fewer in number than their less advantaged counterparts, making the demand and the price the market is willing to pay for these brains much higher, leading to more people at the bottom and fewer making more at the top. A pretty tough situation to combat with any type of policy.

So what can we do to prevent a plutocracy and years down the road a potential revolution? Keep in mind that in America the rising disparity is not because the poor have done worse over the last decade or so (they've actually been doing better). It's just the rich are doing SO much better the disparity is more significant. The old philosophy of boosting growth and combating poverty is still a much better one than 'redistributing wealth'. The best option is to find ways to increase social mobility. Governments need to focus more on pushing up the bottom and middle than dragging down the top. Education investment and reform addressing the teacher's unions that have stopped poorer America from getting a good education is a starting point. A renewed commitment to reducing global trade barriers would also be helpful. 'Nothing boosts competition and loosens social barriers better than freer commerce.' In the global market place of today there's never been more opportunities for success . . .if citizens are educated and prepared to take advantage of them and governments have removed the the rigged rules and subsidies that favor specific industries or insiders.

Even if these measures were put in place, the social changes giving continued advantage to the clever and already well off would probably continue. So truly there's only one fail safe way to increase social mobility and that's from the inside out. I love this qoute. It's in a religious context, but could be applied secularly. "The world would take people out of the slums. Christ takes the slums out of people, and then they take themselves out of the slums. The world would mold men by changing their environment. Christ changes men, who then change their environment. The world would shape human behavior, but Christ can change human nature." - Ezra Taft Benson, LDS Church President 1989 and former US Secretary of Ag.

We've got to find a way to reach the disadvantaged and help them help themselves whether it's via faith or education or some other means. The barriers to social mobility have to be removed, but even removing those barriers does not automatically help people better themselves. They have to have a desire instilled, a belief in themselves, on top of the necessary skills, to really go out and make a difference for themselves and for society. That's something that can't be done with any sort of social reform or program. That's a one-on-one thing that each of us can help with by being positive, offering help, maybe being a mentor, and most of all expressing our belief to others that their current situations do NOT determine who they are or their worth as a person ( we truly are ALL children of God). Let's be mindful of those around us and how we can help them become their best.

Facts and quotes in this post are from a special report from the January 22-28, 2011 edition of The Economist, "The Rich and the Rest."