Monday, January 02, 2012

Class and Income Rigidity in the United States

I don't want to pick on Megan McArdle, as I think her heart's in the right place on this one, but.... In an effort to explore inequality, some time back, Megan McArdle argued,
The old aristocracy was, I think, at least dimly aware that it wasn't quite fair for them to have what they had by mere virtue of being born to the right parents. But in the new aristocracy, it is rarely enough to just get born to the right parents; you also have to work very hard. (Higher earning men are now more likely to work more than 50 hours a week than are men in lower earnings quintiles.)
Has McArdle ever worked at a job that paid by the hour?

When Eric Erickson made a fool of himself by arguing that he worked three jobs, it wasn't just his white T-shirt that was intended to send the message, "I'm just a working guy". It's typically those who work in hourly jobs who can legitimately claim to be working multiple jobs. Why? Because their employers have only so many hours of work to offer, and when the schedule fills up you can only get more hours by changing jobs or moonlighting. If your a non-exempt employee, such that you're entitled to overtime, your employer also has a strong incentive to cap your work week at 40 hours, leaving you with more time to find and work a second job - not that you would find that to be an ideal use of your time, were you in that position, but if you need the income that's how you'll get it.

When the economy is booming, a lot of the workers that McArdle suggests aren't "work[ing] very hard" in fact put in ridiculous hours. I know some people in the construction trades who were working seventy or more hours per week during the boom. Some now have difficulty finding full-time employment, and an even harder time finding employers who are willing to pay overtime. They didn't get lazy - the economy changed.

As for those hard-working white collar types, one of the big reasons why they work more than forty hours is that they are exempt and thus their employers can require them to work more hours without paying them any additional money. Yes, some people who are chained to their desks do work very hard. Others put in a lot of face time. Others do work that's pretty mundane and could easily be distributed to other workers, but for the fact that hiring additional help would increase the employer's costs. (Perhaps McArdle has forgotten the Bush Administrations expansion of jobs that could be classified as exempt, and has overlooked the frequency with which employers are accused of cheating workers out of overtime pay - it's a big deal.)

In speaking of poverty and income inequality, McArdle argues,
I don't care about income inequality. I care about the absolute condition of the poor -- whether they are hungry, cold, and sick. But I do not care about the gap between their incomes, and those of Warren Buffett and Bill Gates. Nor the ratio of Gates and Buffett's incomes to mine. And I'm not sure why anyone should.
McArdle's examples seem a bit odd. I can't recall hearing anybody argue that either Gates and Buffett are undeserving of their wealth. On the one hand, McArdle seems to recognize that the two issues are unrelated - and in fact that inequality of income and wealth is what allows some entrepreneurs and investors to come out on top. But on the other she appears to be suggesting that if you're concerned about anything beyond absolute poverty, you're engaging in some form of class resentment whereby you want to strip wealth away from people like Gates and Buffett. The disconnect is highlighted by the fact that McArdle wants people to have equal economic opportunity, independent of their economic status. If McArdle's statement is meant to be, "As long as there's a reasonable path from poverty to wealth, I don't care about income inequality," fair enough. But if her statement is taken literally, surely she is aware that there is a tipping point at which income inequality will pretty much lock the class structure in place.

Despite her implication that professionals work harder than hourly workers, McArdle does recognize that there's a lot more to the picture than that. She suggests, in my opinion quite rightly, that higher wage earners are apt to give their children better education and better opportunities, and in many cases "the actual skills required to earn more money than everyone else". I read a comment a while back, I believe from one of Donald Trump's children, describing how he had proposed attending a college that would have allowed him more time to pursue sports or hobbies. He was told to go to the best college he could get into. Did he necessarily get a better education there? Perhaps, but probably not. But "The Donald" has a very clear understanding of the value of branding. Trump provides an example of how somebody can benefit not just from family money, but from entering the same business as their parent. Trump's father was a successful real estate developer in New York City, so it's far from a surprise that Trump became a real estate developer in New York City. And with some hard work, luck, no small amount of ego and force of personality, along with dad's money and connections, Trump succeeded (and failed) on a much larger scale than his father. The lesson to be inferred is less that Trump received an unfair advantage, and more that children will often follow a career path consistent with that modeled for them by their parents. And yes, if you learn the ins and outs of any job from somebody who already holds it, you're more apt to succeed in that job.

Children of the wealthy are also more likely to get a level of support unavailable to the rest of us - a job at their parent's firm to help establish them in their parent's profession. Yes, about forty percent of sons at some point work for one of their father's past employers, but it should go without saying that at the bottom end of the labor pool that is more likely to establish you as a lower-end wage earner than to help propel you to the top 1% (where the number of sons working at dad's current or old employer approaches 70%).1

Also, it's not like the top 1% through the remaining 32% of their children to the wolves. A couple of "sons of bankers" come to mind, one of whom was sharp as a tack but uninterested in banking. His father put him through law school and funded his founding of a law firm. Another was not very bright or motivated. His father bought him a commercial janitorial services company. It's much easier to enter into a profession, or to succeed as an entrepreneur, when your path to success is greased with family money.

The benefits of having wealthy parents can't be avoided and, even if you believe it should be, it's difficult to impinge a cure that would not be worse than the disease. But let's recognize that if Donald Trump's dad were a shift manager at a restaurant, Trump would be a success if he became a general manager. He would be a phenomenal success if he became a successful restauranteur - but probably still somebody we wouldn't have heard of. Trump moved from third base to home plate - but unlike most of the rest of us, he started on third.

While McArdle professes some level of surprise that although "Ivy League colleges threw open their doors to the bourgeois masses, and cut back on the Saint Grottlesex crowd," inequality persists, perhaps she should consider both that the Ivy Leagues have not eliminated preferences for the children of alumni, and that the number of people who can attend Ivy League schools remains insignificant - even though the signal drawn from attendance is massive. Using McArdle's own anecdote from another piece, quoting Bryan Caplan's finding that "Super-elite credentials matter much more than your academic record",
You see this in Washington all the time -- a friend who went to a lesser-known state school said he could always tell the people he wasn't going to like when he met them at cocktail parties, because the minute he told them where he'd gone to school, they became extremely interested in going to get another drink or find the cheese dip. This is one of the smartest, most consistently interesting and original, most talented writers I know. Having actually attended one of those elite schools that apparently make you fascinating, I can attest firsthand that statistically, the elitists were vanishingly unlikely to be as interesting as the person they abandoned because he'd gone to a state college.
The first question that comes to mind: Why do McArdle and her friend keep going to those parties? (The answer, of course, is obvious: They're hobnobbing with rich, powerful people and it benefits them to "see and be seen".) The second question is, why does her friend keep dropping the name of his undergraduate institution into discussions? It's truly difficult for me to believe that, as a matter of course, the people at these parties are changing the subject from his scintillating conversation and saying, "This is a nice conversation and all, but unless you went to Harvard or Yale I have to move on to more important people or, if you went to a state college, the cheese dip."2

When McArdle observes that middle class parents would be horrified if their children, like those of the bottom quintile, had only a 17% chance of achieving a household income of $90,000 or more, she's correct. But that also highlights how she misses the boat on income inequality. The more education your parents have, the more wealth they have, the more business and political connections they have, the more they can do for you - even if simply by example3 - to land you among the nation's highest wage earners. If you truly don't care about income inequality, and truly don't care if the bottom drops out on the middle class, you cannot credibly claim to be concerned about the associated collapse of opportunity to rise.
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1. Admittedly the figures are from Canada, but I expect that the experience is about the same in the U.S. and U.K.

2. Unless, perhaps, these conversations involved his lobbying various political insiders for a nomination to the Supreme Court, but that's another story.

3. Most will do much more than act as role models.

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