Commentary

The New Myths About Inequality

The Left is gearing up for 2008 with major proposals for government intervention to “fix” the distribution of income. For example, the Center for American Progress, a liberal think tank, recently proposed raising the minimum wage, giving unions more advantages in the workplace, expanding government’s role in child care, and other policies that will be harmful to economic growth, which is the one proven way to raise our standard of living.

In order to build support for this statist agenda, policy wonks and pundits are spreading a set of myths about inequality. We are hearing that incomes are stagnating in middle America, that class mobility is disappearing, and that the political process favors the wealthy. But we should not believe the myths.

The Mid–Range Worker

By a mid–range worker, I mean someone whose annual income is roughly between $30,000 and $50,000, assuming full–time work. Location makes a difference. The $30,000 figure may be fine for Topeka, not so good for Manhattan.

Mid–range workers have more skills than a typical high school graduate, but they are not heavily–credentialed professionals. They usually do not have supervisory responsibilities.

When you go to the doctor, the receptionist is probably a low–range worker. The tech who takes your blood pressure might be a mid–range worker. When you go to the bank, the guard standing in the lobby is probably a low–range worker. The teller is probably a mid–range worker.

Fifty years ago, many of America’s mid–range workers toiled on assembly lines. Today, more of them work in service industries.

How does the standard of living of today’s mid–range workers compare to that of their counterparts in America thirty years ago or their counterparts in other advanced nations today? Here are some generalizations:

— In terms of food, clothing, shelter, and durable goods, mid–range workers are doing rather well. Their living spaces are notably larger. They almost all have air conditioning and central heating, while some of their foreign counterparts do not. They have plenty of television sets, telephones, and household appliances.

— In health care, they consume more premium medicine (services provided by specialists and advanced equipment). They are more likely to overcome cancer, heart disease, depression, or an at–risk pregnancy; however, much of their additional health care spending produces benefits that are at best difficult to measure and at worst nonexistent. And a relatively large share of their compensation consists of employer–provided health benefits, even though they might instead prefer more take–home pay.

— Today’s mid–range worker probably has a more difficult time affording a home in a highly–desirable location. Those with a taste for urban amenities, beaches, or spectacular mountain scenery are likely to be priced out of the market. The supply of amenity–rich locations has not kept up with demand, and affluent Americans have bid up the cost of living along the ocean in San Diego or near the ski slopes of Aspen or in the classy sections of San Francisco.

— Speaking of classy locations, do not expect the mid–range worker’s children to go to the schools favored by the affluent. Private school tuition has gone up faster than the mid–range worker’s income, as has the cost of housing in the neighborhoods with deluxe public schools. College choice, too, will be very constrained by the determination of the affluent to bid up the price of the prestige spots.

Aristocracy or Meritocracy?

In a stereotypical aristocracy, one’s social opportunities and income prospects are determined by the accident of birth. In a stereotypical meritocracy, anyone can grow up to be rich and successful.

An aristocracy was more likely to exist in earlier centuries, when economic change was slow and much of society’s wealth was embedded in land or physical objects. Today, knowledge is a major source of wealth. In addition, the faster pace of economic growth means that inherited wealth has declined relative to recently–produced wealth. Both of these latter factors make inherited tangible wealth less important than in the past.

Today, the most valuable inheritance is likely to be genetic. Children with strong natural cognitive abilities are likely to have high earnings potential.

The distribution of rewards in America today is still relatively merit–based. However, the extent of economic and social mobility is difficult to assess. One optimistic indicator of mobility is that wealth differences across siblings remain fairly high. Another optimistic indicator is that educational attainment continues to rise with each generation, particularly among immigrants. On the pessimistic side, the trend toward smaller families tends to reduce sibling variation, and my guess is that it reduces the deviation of children’s social standing relative to their parents.

Another pessimistic trend would be more stratified marital habits. Fifty years ago, a college–educated male was much more likely to meet and to marry a female with average or below–average cognitive ability than is the case today. Stratified marriages will produce stratified children. As cognitive skills become increasingly important determinants of wealth, we may see a reduction in intergenerational mobility across income classes.

Overall, we are unlikely to see the sort of society in which the children of the affluent and the children of the poor have relatively equal chances of ending up in the top income quintiles. The best we can hope is that, for a given level of inherited abilities, the chances of poor children are at least as good as those of the affluent.

It could be worse. America is reasonably well insulated from the most insidious form of aristocracy — one which is based on inherited wealth, with little regard to merit. And what we have is preferable to a European–style welfare state, which under–rewards work, thrift, and especially entrepreneurship.

Political Power

Inequality of economic outcomes raises the issue of potential inequality of political power. A frightening scenario would be one in which political power becomes highly concentrated and the wealthy are able to control the levers of power.

Some indicators suggest that concentration of political power is not a threat. Elections are fair, and neither party holds a monopoly on power. Freedom of assembly remains high. Freedom of the press remains high. The media, particularly the Internet, seem much more diffuse and diverse than was the case a generation ago.

Other indicators are more troubling. The re–election rate of incumbents is high. Political dynasties (Bush, Kennedy, Daley, etc.) flourish, suggesting a less–than–open system.

A factor that reduces the accountability of politicians is the large size of voting districts. There are as many eligible voters in elections for my local school board as there were in the entire United States when our nation was founded. This makes trying to influence local government a daunting task for the individual citizen.

The share of government in our economy moves steadily upward. The fastest–growing sector of our economy, health care, is headed for government domination, either with health care “reform” or without it, due to the demographics of Medicare.

Many politicians campaign as if they believe that concentration of political power is a good thing — as long as they have the power. Populists promise to use that power to fight against the wealthy and the privileged.

In reality, major corporations and entrenched interests are systemically favored by greater concentration of political power. Unregulated competition, not big government, is the friend of the little guy. Political leaders who campaign on the issue of economic inequality are almost certain to tighten the relationship between political and economic power. It is more important to understand the consequences of political aggrandizement than it is to argue over the interpretation of statistics that measure economic inequality.

Arnold Kling is an adjunct scholar with the Cato Institute and the author of Crisis of Abundance: Rethinking How We Pay for Health Care. Along with Bryan Caplan, he writes EconLog, which can be found at econlog.econlib.org.