Wednesday, November 02, 2011

Not all inequality is created equal

Income gap a problem but bigger issue is divide between grads and non-grads

WE LIVE in a polarising society, so perhaps it's inevitable that our experience of inequality should be polarised, too. In the first place, there is what you might call Blue Inequality. This is the kind experienced in New York City, Los Angeles, Boston, San Francisco, Seattle, Dallas, Houston and the District of Columbia. In these places, you see the top 1 per cent of earners zooming upwards, amassing more income and wealth. The economists Jon Bakija, Adam Cole and Bradley Heim have done the most authoritative research on who these top 1 per cent are.
By David Brooks

Roughly 31 per cent started or manage non-financial businesses. About 16 per cent are doctors, 14 per cent are in finance, 8 per cent are lawyers, 5 per cent are engineers and about 2 per cent are in sports, entertainment or the media.

If you live in or around these big cities, you see stores and entire neighbourhoods catering to the top 1 per cent. You see a shift in social norms. Up until 1970 or so, a chief executive would have been embarrassed to take home more than US$20 million (S$25 million). But now there is no shame, and top compensation zooms upwards.

You also see the superstar effect that economists have noticed in the income data. Within each profession, the top performers are now paid much better than the merely good or average performers.

If you live in these big cities, you see people similar to yourself, who may have gone to the same college, who are earning much more while benefiting from low tax rates, wielding disproportionate political power, gaining in prestige and contributing seemingly little to the social good. That is the experience of Blue Inequality.

Then there is what you might call Red Inequality. This is the kind experienced in Scranton, Des Moines, Naperville, Macon, Fresno, and almost everywhere else. In these places, the crucial inequality is not between the top 1 per cent and the bottom 99 per cent. It's between those with a college degree and those without. Over the past several decades, the economic benefits of education have steadily risen. In 1979, the average college graduate made 38 per cent more than the average high school graduate, according to the Federal Reserve chairman, Ben Bernanke. Now the average college graduate makes more than 75 per cent more.

Moreover, college graduates have become good at passing down advantages to their children. If you are born with parents who are college graduates, your odds of getting through college are excellent. If you are born to high school grads, your odds are terrible.

In fact, the income differentials understate the chasm between college and high school grads. In the 1970s, high school and college grads had very similar family structures. Today, college grads are much more likely to get married, they are much less likely to get divorced and they are much, much less likely to have a child out of wedlock.

Today, college grads are much less likely to smoke than high school grads, they are less likely to be obese, they are more likely to be active in their communities, they have much more social trust, they speak many more words to their children at home.

Some research suggests that college grads have much bigger friendship networks than high school grads. The social divide is even starker than the income divide.

These two forms of inequality exist in modern America. They are related but different. Over the past few months, attention has shifted almost exclusively to Blue Inequality.

That's because the protesters and media people who cover them tend to live in or near the big cities, where the top 1 per cent is so evident. That's because the liberal arts majors like to express their disdain for the shallow business and finance majors who make all the money. That's because it is easier to talk about the inequality of stock options than it is to talk about inequalities of family structure, child-rearing patterns and educational attainment. That's because many people are wedded to the notion that our problems are caused by an oppressive privileged class that perpetually keeps its boot stomped on the neck of the common man.

But the fact is that Red Inequality is much more important. The zooming wealth of the top 1 per cent is a problem, but it's not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It's not nearly as big a problem as the 40 per cent of children who are born out of wedlock. It's not nearly as big a problem as the nation's stagnant human capital, its stagnant social mobility and the disorganised social fabric for the bottom 50 per cent.

If your ultimate goal is to reduce inequality, then you should be furious at the doctors, bankers and CEOs. If your goal is to expand opportunity, then you have a much bigger and different agenda.