Tag Archives: wealth

Wealth is dived deeply by race and gender

Years of discriminatory policies that favored white men at the expense of the common good have created stunning disparities that persist to this day.

Though many Americans favor an approach to equality that stands for “giving everyone an equal chance,” the realities of inheritance, neighborhood segregation and outright discrimination make such meritocratic ideals suspect. (This meritocracy myth is akin to insisting, as 19th century political economist Henry George once noted, “that each should swim for himself in crossing a river, ignoring the fact that some had been artificially provided with corks and other artificially loaded with lead.”) A new study by Mariko Chang shows just how deep those wealth gaps remain today.

Chang’s report, published by the Asset Funders Network and making use of Consumer Finance Survey data, suggests stark gaps. First the report shows gaps between married couples, single men and single women.

It’s worth noting the large disparities not just between men and women, but also between the median and mean. That suggests a deep inequality: the mean is being pulled higher by numerous rich people at the top. (Consider an instance in which Bill Gates walks into a bar full of working-class women and men. The mean wealth increases dramatically, while the median increases modestly.) As Matt Bruenig has noted, “The top 10% of families own 75.3% of the nation’s wealth. The bottom half of families own 1.1% of it.”

Adding a racial lens to the data (viewed in the chart above) also produces stark divergences: the median black woman has $200 in wealth, the median white man: $28,900. Age also matters: The data suggest millennial (18-34) women, of all races, have $0 in wealth. That leaves very little buffer from an unexpected job loss or medical emergency (made even more likely by the conservative war against access to healthcare, for instance their refusal to expand Medicaid, which primarily harms people of color).

Indeed, data show “the top 10% of white families own 65.1% of all the wealth in the nation.”

Although women are now more likely to complete college than men, this alone won’t close the wealth gap. The median single woman with a college degree has wealth of $18,710. The median single man: $31,400. Even pay equality won’t close the gaps. The highest-earning women, those earning more than $65,001, have median wealth of $166,000, while men in the same bracket have median wealth of $223,700.

As I’ve noted recently in Salon, policymakers are biased toward the policies of rich white men. Indeed, for a long time, all of the policymakers were rich white men. The gaps Chang exposes are not simply the product of neutral or natural forces; extensive research shows that government policy was there all along, benefiting some at the expense of the few.

What are the solutions? First, America needs a strong public sector. That means more money for infrastructure, childcare, higher education and universal pre-K. America needs to invest in its cities, and its communities, particularly low-income, black and Latino communities that have faced decades of disinvestment and neglect. Second, America needs full employment. That means active fiscal policy and guaranteed jobsfor all Americans who want to work. Third, America needs a financial sector thatworks for everyone. That means a modest financial transaction tax to limit excessive trading and a baby bond to give every American a shot at buying stock, starting a business or buying a house in a better neighborhood. To get there, America needs a true, participatory and equal democracy. That means ensuring policymakers pay attention to everyone, not just the wealthy donor class. Limits on, or at leastdisclosure of, lobbying and campaign contributions from the rich, combined withpublic financing to amplify the voices of women, people of color and workers would bring us closer to a vibrant democracy. Eliminating discriminatory barriers to voting will breathe life into our democracy.

Deep disparities in wealth belie the American myth that simply because we have a black president and Oprah is massively wealthy our problems are over. Chang’s report shows that single black and Hispanic women own less than a penny for every dollar owned by single white men. Once again: single black and Hispanic women own less than a penny for every dollar owned by single white men. That didn’t just happen.

This piece originally appeared on Salon

Three ways inequality is making life worse for everyone

As the 2016 election approaches, the debate among the intelligentsia appears like it will center around the question of inequality. While income is distributed unequally in the country, what few people know is how much more unequally wealth, financial assets and inheritances are distributed. As the chart below shows, income is only part of the problem.

A deeper problem is that the wealth of most Americans, and particularly those at the bottom, has decreased dramatically in the wake of the great recession. A 2013 study found that, while in absolute terms, the recession impacted the rich the most, in relative terms it fell on the “lower-income, less educated, and minority households.”

Here are three concrete ways that inequality makes America worse off.

Income and wealth inequality can have toxic effects on upward mobility, growth and democracy.

1) It reduces upward mobility

While much of the original research on inequality focused on how differences in income affected upward mobility (I covered that work extensively here), research has now also tackled the relationship between wealth and mobility. Gregory Clark, for example, findsthat wealth takes generations to dissipate. Meanwhile, W. Jean Yeung and Dalton Conleyfind that, “Liquid assets, particularly holdings in stocks or mutual funds, were positively associated with school-aged children’s test scores.” Another study, by Juan Rafael Morillas finds that the differences in earnings between black and white Americans “arises partly from the wealth inequality in assets ownership of blacks and whites.”

In a pioneering paper, Fabian Pfeffer and Martin Hallsten examine the effect of wealth on upward mobility in three countries (Germany, the United States and Sweden). They find that “parental wealth is also associated with both a reduced risk of intergenerational downward mobility and increased chances for upward mobility.” Michael Lovenheimfinds that families use household wealth to finance college, and that an increase in $10,000 in home equity boosts college enrollment by 0.7 of a percentage point on. The effect is even stronger for low-income families. The result of both high income inequality and high wealth inequality is more unequal opportunity.

Indeed, a 2013 World Bank study, Paolo Brunori, Francisco Ferreira and Vito Peragine find that, “an important portion of income inequality observed in the world today cannot be attributed to differences in individual efforts or responsibility.” Instead, “it can be directly ascribed to exogenous factors such as family background, gender, race, place of birth, etc.” They conclude, worryingly, that “[c]ountries with a higher degree of income inequality are also characterized by greater inequality of opportunity.”

 

2) It decreases economic growth

The implications of stalling upward mobility have implications for economic growth. When inequality presses down on opportunity, many low-income people can’t fully develop their capacities. As Stephen Jay Gould once noted, “I am, somehow, less interested in the weight and convolutions of Einstein’s brain than in the near certainty that people of equal talent have lived and died in cotton fields and sweatshops.” Today, even in a wealthy country like America, millions of bright young children have their cognitive development stunted by poverty. Wealthy parents invest heavily in their children, while low income families have less to spend. Further, as Miles Corak notes, the United States funds education at the local level, meaning that wealthier kids go to better schools than low-income kids.

We saw above that inequality reduces equality of opportunity. This is important because unequal opportunity has been linked to lower overall economic growth.

In one study, Gustavo Marrero and Juan Rodriguez examined inequality of opportunity in the 23 American states. They find that states with higher inequality of opportunity also had slower growth.

In a recent conference paper building on the Marrero and Rodriguez work, Katharine Bradbury and Robert Triest find confirmation that inequality of opportunity slows growth. They struggle to find a causal relationship between inequality of outcomes and upward mobility (citing Deirdre Bloome’s recent work on the subject), but do suggest that it can reduce inequality of opportunity. For his book, “Our Kids,” Robert Putnam asked them to examine two cities with dramatically different rates of upward mobility — Salt Lake City (high mobility) and Memphis, Tenn. (low mobility) – to see how these differences affected growth. They find that if Memphis had the same levels of intergenerational mobility as Salt Lake City, the 10 year growth rate of real per capita income would grow by 27 percentage points.

There are other causal mechanisms by which inequality could reduce growth, depending on the causes of inequality. After surveying the literature, Heather Boushey and Carter Price find that, “studies that look at the longer-term growth implications find that inequality adversely affects growth rates and the duration of periods of growth, while those that focus on short term growth find that inequality is not harmful and may be associated with faster growth.” Worryingly, though, inequality particularly affects those atthe bottom of the distribution, suggesting that the wealthy may have little incentive to boost opportunity.

3) It degrades democracy

Inequality also undermines democracy. As some individuals become increasingly powerful, they may use that influence to shift the political system. As Theodore Rooseveltonce noted, “The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase power.” As his cousin put it, “We know now that Government by organized money is just as dangerous as Government by organized mob.”

There is evidence that our growing inequality has eroded the foundations of democracy. In his seminal book, “Affluence and Influence,“ Martin Gilens suggests that, “the growth in income inequality might play some role in explaining increases in responsiveness to the affluent during the 1980s and beyond.” He notes, however, that this wouldn’t help explain changes in responsiveness between the 1960s and 1980s. It’s very difficult to tell across time how inequality affects democracy. However, we can see inequality affects democracy at the state level. In a recent paper, Patrick Flavin finds that, “states with lower levels of income inequality tend to weigh citizens opinions more equally than states with wider income differences.” That is, in states with less income inequality, policy is less biased in the favor of the rich. He tells me, “The effect of income inequality is stronger than just about any other state contextual factor that I’ve looked at. “

Some inequality is good. If inequality is the result of innovation and hard work, it can make society better. The problem is that most of our rising inequality isn’t due to hard work; it’s due to changing government policies that benefit the rich at the expense of the middle class. And the result can be deadly. Recent research suggests that “people in unequal communities were more likely to die before the age of 75 than people in more equal communities, even if the average incomes were the same.” In “The Spirit Level,” Richard G. Wilkinson and Kate Pickett lay out comprehensive evidence showing how equal societies perform better on a range of social indicators. To restore democracy, and opportunity, we need to clamp down on inequality.

This piece originally appeared on Salon

How America can fix the racial wealth gap

One of the most persistent but unaddressed problems in the United States is our massive racial wealth gap. Wealth provides an important cushion from the threat of unemployment, medical emergency or other unforeseen events. Wealth can also help pay for college, the start of a new business or the purchase of a first home. However, most Americans struggle with debt. A recent Federal Reserve Report finds that of Americans who had savings before 2008, 57 percent reported using up some or all of their savings in the aftermath of the recession. However, wealth and debt are not distributed equally (see chart).

The racial wealth gap is caused by the fact that wealth is passed from generation. As Gregory Clark notes in his recent book, “The Son Also Rises, the residual effects of wealth remain for 10-to-15 generations. Given that most Americans are only four generations removed from slavery and one generation away from segregated neighborhoods, restrictive covenants and all white colleges, the only truly surprising fact is that the racial wealth gap is not larger. America is also uniquely susceptible to persistent wealth gaps because of our low inheritance, estate and capital gains taxes and the fact that what minimal taxes exist our fraught with loopholes. In 2010, the richest 400 households took home 16 percent of all capital gains (a sweet $300 million each), but paid the same tax rate as a worker making $80,000. At the same time, a loophole in the tax code has allowed the wealthiest to avoid $100 billion  in estate and gift taxes since 2000. On the other side, our public school system is profoundly discriminatoryour neighborhoods deeply segregated and access to credit is racially discriminatory. As Thomas Piketty recently demonstrated, “In terms of total amounts involved, inheritance has thus nearly regained the importance it had for nineteenth century cohorts” (see chart).

The biggest myth of the racial wealth gap that must be demolished is that education or rising incomes can eradicate it. As Matt Bruenig has persuasively shown, this argument is laughably absurd.  College educated Blacks have less wealth than white college drop-outs (see chart).

Bruenig also shows that high income Blacks and Hispanics also have less wealth than whites (see chart).

Between 2007 and 2010, all racial groups lost large amounts of wealth. However, the wealth reduction fell disproportionately on Hispanics and blacks, who saw a 44 percent and 31 percent reduction in wealth (compared to an 11 percent drop for whites). This was due to blacks and Latinos disproportionately receiving subprime loans, both because of outright lending discrimination and housing segregation.A recent research brief by the Institution on Assets and Social Policy finds that the wealth gap between white families and African Americans has tripled between 1984 and 2009. They find five main factors responsible for driving the gap, which together explain 66 percent of the growth in inequality. The factors, in order of importance, are number of years of homeownership, household income, unemployment, college education and financial support or inheritance.

The most frustrating problem with the racial wealth gap is that it is not abating. While half of whites say that “a lot” of progress has been made towards Martin Luther King Jr.’s dream,  the data show that the racial wealth gap has only increasing since 1983 (see chart).

What is to be done?

There are several important public policy changes that can alleviate the racial wealth gap. The first is to prevent the further accumulation of debt. While debt is often seen as a problem attributable to individuals, the academic literature is clear that broader economic forces are at largely responsible for the run-up of debt. Credit card debt is particularly harmful for people of color who often face discriminatory lending practices. A recent study of credit card debt finds that people of color pay a far higher IPR on average than white borrowers. The CARD act has already been a boon to consumers, but underlying drivers of debt, such as rising inequalityretirement insecurity and lack of health insurance must also be addressed.

Higher education debt must also be addressed. Research from Demos finds that if “current borrowing patterns continue, student debt levels will reach $2 trillion sometime around 2022.” However, student debt is not distributed equally, but rather falling primarily on students of color and low-income students. That’s because in our age of austerity, governments are spending less money on higher education, shifting the burden of paying for college onto students. Federal and state governments need to step up and fund an investment in the next generation.

On the other side, however, we must also foster wealth-building initiatives. Historically, homeownership has been a pathway to the middle class, but deep residential segregation means that Blacks and Hispanics often own homes that are far less valuable than white homes (see Table 3). Further, in the wake of the crisis many banks are buying up foreclosed houses and renting them out. That means income for people of color is no longer becoming wealth for people of color, but rather wealth for rich bankers.  One solution would be a first-time homeowners tax credit that is weighted to benefit low and moderate income households, rather than the mortgage interest deduction, which favors the wealthy. FICO credit scores should replaced with more reliable credit measurements.  But the ideal way to reduce wealth inequality, not only between people of color and whites, but also between the richest .1 percent and the rest of us, is a baby bond.

A baby bond is an endowment given to Americans at birth and maintained by the federal government until they are 18. The bond functions in a similar way to Social Security and can be sued to pay for college, buy a house or start a business. Hillary Clinton, in fact,briefly floated the possibility of a baby bond during her 2008 campaign, although the modest $5,000 sum she proposed is certainly smaller than ideal. Britain brieflyexperimented with a baby bond proposal, although it later became the victim of Tory Austerity.  Dr. Darrick Hamilton and William Darity Jr., leading proponents of  a baby bond, propose a progressive bond that caps at $50,000 for the lowest wealth quartile bond could close the racial wealth gap in three generations.  Their proposal would be given to three-quarters of Americans (based on wealth eligibility). They estimate that such a program would cost $60 billion a year, about one-tenth of the 2014 defense budget.

The baby bond need not increase the deficit. A recent CBO report finds that right now, tax credits primarily benefit the wealthiest, at a cost of nearly $1 trillion a year. This money could easily fund an extensive baby bond program that would, over time, eliminate the racial wealth gap. Another option would be to restore progressivity to our tax system. Because the baby bond program would not be explicitly targeted at people of color but rather would benefit most Americans, it could easily win broad support (much as Social Security is currently untouchable). Any presidential candidate should make the baby bond a central plank of their 2016 if they want to seriously address the problem of wealth inequality. Without such a proposal, wealth, and therefore political power will become increasingly concentrated in the hands of a small elite. It may already be too late.

This piece originally appeared on Salon

The Case for a Financial Transaction Tax

The financial industry is a behemoth. Over the past 150 years, it has grown dramatically as a share of GDP. And entrance into its ranks has become a great way to enter into the top 1 percent of earners. (According to recent data, financial professionals have nearly doubled as a share of Americans in the top 1 percent.) At the same time, Wall Street is one of the most reviled institutions in the United States, with a recent study finding the lowest trust in finance recorded over 40 years.

Here are three good reasons to be distrustful of Wall Street, followed by one policy that would address all of them.

1. The Financial Industry Engages in Rent-Seeking

In economics, rent-seeking is the practice of making money simply by moving money around and collecting the resulting fees, rather than by facilitating profitable investment. The latter role is necessary for functioning markets; rent-seeking, however, is not.

There is now a strong literature suggesting that at some point, finance largely becomes extractive, while remaining at the same efficiency level. Thomas Philippon finds that the cost of financial intermediation has not fallen in 30 years. As Gautam Mukunda writes in a recent Harvard Business Review article, “Creative work increases a society’s wealth. Distributive work just moves wealth from one hand to another. Every industry contains both. But activity in the financial sector is primarily distributive.” Other studies come to the same conclusion:

  • Ozgur Orhangazi finds a negative relationship between real investment and financialization. The author proposes two channels to explain the relationship: “First, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment.”
  • Stephen Cecchetti and Enisse Kharroubi examine a sample of developed and emerging economies and find that financial development is good for emerging economies, but is detrimental to productivity growth for advanced economies.
  • Jean-Louis Arcand, Enrico Berkes and Ugo Panizza find that when private sector credit exceeds 110 percent of GDP finance begins to become a drag on growth, a situation the U.S. is currently in.

This rent-seeking has increasingly starved the public sector across the nation. The Financial Times reports that “public investment in the U.S. has hit its lowest level since demobilization” after World War II.

2. The Financial Industry Makes Inequality Worse

The International Labor Organization’s (ILO) Global Wage Report finds that the financialization of the economy has been the most important factor in the decline of income share accruing to labor in developed countries. This is because the financial industry primarily distributes wealth upward.

A 2011 study examining the U.S. finds that, “financialization accounts for more than half of the decline in labor’s share of income, 10 percent of the growth in officers’ share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.” In a paper published this year in the British Journal of Political Science, Christopher Witko finds, “financial deregulation was one policy translating the political power of these actors into economic outcomes.” That is, the rise of finance was a money grab by the 1 percent.

Because relatively few low-income and middle-income families own financial assets, they largely haven’t benefited from the rise of finance. Instead, it’s enriched the wealthy while saddling the middle class with debt. A recent study by Emmanuel Saez and Gabriel Zucman finds,

The key driver of the declining bottom 90%  share is the fall of middle-class saving, a fall which itself may partly owe to the low growth of middle-class income, to financial deregulation leading to some forms of predatory lending, or to growing behavioral biases in the saving decisions of middle-class households.

The charts below show how finance has enriched the top, whose wealth came from equities, while sucking money from the middle, whose wealth consisted of housing and pensions:

 

Those who had no assets at all saw their incomes shrink while wages remained stagnant for decades. As Matt Yglesias notes, in 2013, 25 hedge fund managers took home more twice as much as every kindergarten teacher in the country combined. This while hedge funds have failed to perform better than the market.

3. The Financial Sector Is Increasingly Engaged on High-Frequency Trading

One particularly negative form of trading that the STT could reduce is High-Frequency Trading (HFT). HFT is a useless and distortionary practice that allows investors to make money off of millisecond-quick trades. (HFT recently attracted attention in Michael Lewis’ book “Flash Boys.”) The practice has been derided by Nobel laureate Joseph Stiglitz as a sophisticated version of front-running (buying a stock shortly before a pending order to take advantage of the price increase).

The problem is that instead of channeling money toward profitable investment, HFT is a prime example of making money off of moving money around. A recent study finds that a one millisecond advantage can increase a firm’s earnings by $100 million a year. Ironically, while bridges are vulnerable to collapse across the country and infrastructure in general is sorely undercapitalized, high-speed traders spent $2 billion on infrastructure in 2010 — for high-speed cables to NYSE. HFT does nothing to benefit markets, but instead makes them more volatile. 

The solution: A Financial Transaction Tax

When an industry has negative impacts on the broader public, economists call these effects “externalities.” It doesn’t mean we should destroy the industry, but rather, limit the harmful behavior. In much the same way that we should tax carbon dioxide — and do tax cigarettes and alcohol — we should also tax financial transactions.

The idea for a financial transaction tax has been around since John Maynard Keynes’ “General Theory.“ However, the idea began to gain traction in the late ’70s and ’80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) hassupported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Sens. Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6, 2014, 10 European nations issued ajoint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commission estimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

Further, there was a Stock Transfer Tax (a type of FTT) in place in New York from 1905 to 1981; revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Because of a quirk in its phase-out, the STT remains technically legal in New York, though it is automatically rebated to the trader at a rate of 100 percent. Reducing this rebate would be a great way to boost revenues for New York and show the viability of a more expansive tax.

Finance is an important part of any economy. But the unprecedented rise of finance has harmed the real economy, propelled inequality and created opportunities for rent-seeking. To rein in Wall Street and prevent another financial crisis, and to give governments much needed money to invest, we should levy a modest tax on financial transactions. Right now, the financial industry subsists on monetizing privilege. It needs to shrink so we can grow.

This article originally appeared on Salon

Beyond Ferguson: 5 glaring signs that we’re not living in a post-racial society

In the wake of the Ferguson shooting, a recent Pew poll finds that 47 percent of whites believe that “race is getting more attention than it deserves,” with regards to the death of Michael Brown, while only 18 percent of African-Americans feel the same. Meanwhile, a similar Pew study found that whites are far less likely to see discrimination in the treatment blacks receive by the education system, the courts and hospitals. Such views are held by many Americans, who believe that “blacks are mostly responsible for their own condition.” Police killings of unarmed blacks are certainly the most visible manifestation of systemic racism, but data show that racism still manifests itself frequently in everyday life.

In America, race determines not just where someone lives and what school he or she attends, it affects the very air we breathe. Although many whites wish to believe we live in a “post-racial” society, race appears not just in overt discrimination but in subtle structural factors. It’s impossible to delineate every way race affects us every day, but a cursory examination of major structural racial problems can give us a feeling for how far we still have to go.

1) Education

Education is an important key to fostering upward mobility and alleviating inequality. However, schools today are becoming more segregated, rather than less segregated. At the peak of integration, 44 percent of black Southern students attended majority white schools. Today, only 23 percent do. This is particularly worrying because recent research by Rucker C. Johnson finds that school desegregation benefited black students, because it “significantly increased both educational and occupational attainments, college quality and adult earnings, reduced the probability of incarceration, and improved adult health status.”

Researchers have increasingly referred to a rise of “apartheid schools,” which are almost entirely non-white. In 2003, one-sixth of all black students were educated in such “apartheid schools.” These districts are underfunded and understaffed, and frequently referred to as “dropout factories.” So students of color are far less likely than their white peers to attend schools with a full range of advanced courses.

As ProPublica documents, more and more schools are squeezing out of court oversight. The result, according to Sam Reardon and his colleagues, is increased racial segregation.

(Source)

At the college level, the situation is little better. A recent report by Anthony Carnevale and Jeff Strohl finds that college education in America consists of “a dual system of racially separate and unequal institutions despite the growing access of minorities to the postsecondary system.” They find that students of color are less likely to end up in the most selective schools than white students with the same qualifications.

2) Wealth

There is a large racial wealth gap between blacks and whites in America, partially driven by income but exacerbated by racially biased housing policies (which will be examined below). A recent research brief by the Institution on Assets and Social Policy finds that the wealth gap between white families and African-Americans has tripled between 1984 and 2009. The recession has only exacerbated the gap, with whites losing 11 percent of their wealth between 2007 and 2010, while blacks lost 31 percent and Hispanics 44 percent.

(Source)

The housing crash disproportionately affected blacks and Hispanics, who were more likely to receive subprime loans even when compared to whites with similar credit scores. In one instance reported by the New York Timesa loan officer at Wells Fargo said the bank “saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania.” However, even before the recession, disparities inemployment, college education, homeownership and inheritance helped solidify racial wealth gaps. Instead of wealth, more and more Americans, particularly people of color, are burdened with debt.

3) Job Markets

Unemployment is particularly high among African-Americans, the result of both explicit discrimination and occupational segregation.

Occupational segregation, or the delegation of blacks to jobs with low upward mobility and wages, is rife. People of color are primarily affected by practices like just-in-time scheduling, which gives workers little warning before a shift.

Part of the problem is infrastructure and education. People of color are far more likely to rely on public infrastructure, and therefore suffer from cuts to public transportation. Decades of housing segregation have trapped African-Americans in jobless areas with badly understaffed schools. Social networks reinforce the patterns, since most Americans get their jobs through friends and family connections. Outright discrimination plays a role as well: Marianne Bertrand finds that applicants with white-sounding names are 50 percent more likely to receive a call-back than applicants with black-sounding names with the same credentials.

4) Upward Mobility

Possibly the defining American attribute is the dream of upward mobility. Sadly, this tends to be more farce that fact — America lags behind other developed countries in measures of upward mobility. But recent research by Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, shows that levels of upward mobility vary across the country — and is strongly predicted by income inequality and racial segregation. They write: “Income mobility is significantly lower in areas with large African-American populations.” (Whites in the areas also had lower levels of mobility.)

Specifically, they note the importance of segregation, “areas that are more residentially segregated by race and income have lower levels of mobility.”

(Source)

A recent Pew Research Center study shows that not only do blacks have lower levels of upward mobility; among those that do make it into the middle class, their children are more likely to slide back into poverty. In what may be the most depressing footnote I’ve ever seen in a chart, Pew notes that there are not enough observations of blacks in the fourth and fifth (read: highest) quintiles of income to make observations about upward mobility.

 

(Source)

In a recent study, Bhashkar Mazumber finds that out of all children born between the late 1950s and early 1980s, 50 percent of black children born into the bottom 20 percent of the income scale remained in the same position, while only 26 percent of white children born into the bottom 20 percent of the income scale remained in the same position. He also finds, like Pew, that African-Americans in the middle class are on far more precarious footing than whites: 60 percent of black children born in the top half of the income distribution fell to the bottom half later in life, but only 36 percent of white children born in the top half of the income distribution fell to the bottom half later in life.

Surprisingly, Mazumber finds that “[w]hile these results are provocative, they stand in contrast to other epochs in which blacks have made steady progress in reducing racial differentials.” While we like to believe we are constantly progressing, these data suggest we may be backsliding with regard to mobility and race.

5) The War on Drugs

The socioeconomic realities discussed above cannot be divorced from the war on drugs: It is a war that is primarily fought against people of color in the country. One in 12 working-age African-American men is incarcerated; and while whites and blacks use and sell drugs at similar rates, African-Americans comprise 74 percent of those imprisoned for drug possession.

The U.S. prison population grew by 700 percent between 1970 and 2005, while the general population grew only 44 percent. According to the Bureau of Justice statistics, around half of federal prisoners’ most serious offense is drug-related. The war on drugs has undermined the legitimacy of law enforcement and eroded their esteem in the eyes of the public. Even before the Ferguson shooting, 70 percent of blacks agreed that, “blacks in their community are treated less fairly than whites” when dealing with the police.

Instead of housing those who have committed violent crimes, U.S. prisons are increasingly teeming with nonviolent offenders. Formerly incarcerated people struggle to find work, and are therefore more likely to turn to crime in the future, creating a vicious and counterproductive cycle. A Pew study finds that the costs of incarceration are often hundreds of thousands of dollars in lost wages. Even when they are no longer incarcerated, former inmates are often deprived of basic rights, including franchise. Around 13 percent of African-American men have been denied the right to vote.

This is to barely touch on the empirical literature on school punishmentaccess to healthcare, a history of racially biased federal policy and the other deep issues that we face. The most disturbing fact is that in almost all of these areas, we have actually seen previous progress eroded, even while we proclaim ourselves a post-racial society. It’s time to take an honest look at race in America. We probably won’t enjoy it. But we need it.

This piece originally appeared on Salon.

Why economists should try to measure happiness

hen discussing media, the philosopher Marshall McLuhan once said, “We shape our tools and thereafter our tools shape us.” Much the same principle applies to economic indicators; once they have been developed they begin to shape our experience and perceptions in ways we rarely realize. Most of us accept numbers as devoid of ideology, as accurate and unbiased descriptions of the world we inhabit — this is their allure.

In his new book The Leading Indicators, the economist Zachary Karabell takes the opposite tack, arguing that “the world these statistics say we are living in and the world we are actually living in often diverge.” Like Freud, Karabell investigates the unconscious assumptions that permeate our lives, in his case focusing on our dependence on statistics.

Freud, in fact, makes a few appearances in the book. The varied economists who developed national indicators (Fisher, Mitchell, Burns, Kuznets), Karabell explains, suffered from “physics envy.” But economics is not physics. Indicators, rather than representing some objective view of reality, are injected with controversial assumptions.

Karabell writes, “The leading indicators are the products of a particular phase of Western history.” In this phase, economics was seen as a mechanism, rather than a human endeavor subject to what Keynes called the “animal spirits.” The economists therefore “invented statistics to measure material output. And if economies became unstable and unbalanced, it was because the wrong tools were being used or because the data and the statistics were faulty.”

In the years following World War II, national statistics took on a “utopian” bent. Karabell reminds us, if we ever knew, that the U.N. Declaration of Human Rights also included economic rights, which were “characterized at the time as human rights on par with freedom of religion and the rule of law, included the right to sufficient food, shelter, clothes, leisure, health care, and a safety net for unemployment, disability, disease, and old age.”

To ensure these goals were met, the U.N. created a committee to develop “National Income Statistics.” The Consumer Price Index was devised to ensure that wages and benefits kept up with higher prices. Its various iterations were often met with vehement disdain from workers and union organizers who called the Core CPI (which excludes more volatile energy and food prices) “inflation minus whatever gets more expensive.” Unemployment numbers essentially created the idea of unemployment — after all, farmers could be destitute, but they were not considered “unemployed” in the sense we think of now, because they hadn’t previously been paid by an employer.

Karabell tells the story of statistics vividly, illuminating the forgotten characters who shaped our numbers. Ethelbert Stewart, “what Mark Twain would have been had Twain been a statistician,” once threatened to burn Bureau of Labor Statistics data when Congress wanted the agency to analyze individual car manufacturers. Frances Perkins, who pushed for the creation of the unemployment rate, was the first woman to serve in a Cabinet-level position (in FDR’s administration), and was therefore the first woman in American history to be in line for the presidency.

There are also many cocktail party-ready anecdotes. In 1992, when the White House Council of Economic Advisers announced that economic growth would be slower in the second quarter than the first, George H.W. Bush said, “This is the worst news I’ve ever heard” — and then promptly lost the election. When Warren Harding first attempted to discern the unemployment rate in 1920, “there were such divergent opinions about the numbers that the attendees put the question to a vote,” Karabell writes. If anything were to disprove Carroll Wright’s maxim — “Statistics are the fitting and never-changing symbols…to tell the story of our present state” — it is certainly this anecdote.

The Leading Indicators doesn’t just tell the stories of the people behind the statistics; Karabell also describes how the statistics are compiled and kept. For instance, travel expenditures “come from airport surveys of travelers and tour groups. This is not rocket science.” Anyone who has filled out such forms on a whim may find their trust in these statistics diminished by this factoid.

The indicators have become so deeply embedded in the public consciousness that they influence markets, which means they must be closely protected. In an enlightening paragraph, Karabell describes the process:

Within the BLS, procedures are just as stringent. The staff members responsible for compiling the numbers encrypt their computers and store the data into secure locations every time they get up to use the bathroom. The janitors and custodial workers don’t even empty the trash in the week leading up to the release. Only the White House receives an early copy of the report, in a locked and guarded suitcase, Thursday evening, 12 hours before the report is issued to the public the following morning. [The Leading Indicators]

Although Karabell’s diagnosis is correct, his cure for the failure of statistics is ultimately unsatisfying. Betraying a truly 21st-century mindset, his solution is “tailored” indicators. He argues not for a broad measure of society, but rather “bespoke” indicators that “empower” individuals: “Our reliance on 20th-century leading indicators to craft a common narrative of ‘the economy’ is an obstacle.” One such “bespoke” indicator is the Office of Financial Research, established in 2011 to develop statistics that “might identify critical problems before they again threaten to bring down the global financial system.”

Such statistics are welcome, but they will still run into the same problems the old statistics did — simply identifying and measuring a problem will not solve it. Karabell’s palliative still faces the conundrum Freud observed in Civilization and Its Discontents, “It is impossible to escape the impression that people commonly use false standards of measurement — that they seek power, success, and wealth for themselves and admire them in others, and that they underestimate what is of true value in life.”

A better path is not to seek precise, fitted, individualistic metrics, but rather a more holistic vision of society. The small kingdom of Bhutan, squeezed between India and China, used to try to quantify Gross National Happiness (GNH). Its former prime minister explained in 2008, “We distinguish between the happiness in GNH from the fleeting, pleasurable feel-good moods so often associated with that term. We know that true happiness cannot exist while other suffer, and comes only from serving others, living in harmony with nature, and realizing our innate wisdom and the true and brilliant nature of our own minds.”

This is not just happy talk, and the recognition that indicators are failing is not limited to small, mountainous kingdoms. In France, then-President Nicolas Sarkozy asked Joseph E. Stiglitz, Amartya Sen, Jean-Paul Fitoussi to investigate the limits of GDP. In 2010 they produced a short book, Mismeasuring Our Lives, in which Sarkozy notes in the foreword, “Our world, our society, and our economy have changed, and the measures have not kept pace.” As a result of his efforts, Insee, the French statistics agency, has begun incorporating new measures into its accounting process, and released numerous reports on inequalityquality of life, and sustainability. The European Union, the Organization for Economic Cooperation and Development, and the U.N. have all been developing new measures based on the Stiglitz commission’s recommendations.

In Britain, Prime Minister David Cameron, a Tory, launched a similar well-being inquiry with the intention of supplementing GDP with General Well-Being (GWB). So far, the Office of National Statistics has released two national reports (based on interviews with some 150,000 British citizens) that have generated many insights and much discussion.

In the United States, Daniel Kahneman and Alan Krueger have developed the “U-Index,” a “numerical representation of how much time people spend doing things they find unpleasing, such as commuting to work in heavy traffic, doing the laundry, shopping for food, or taking care of young children.” Across the country, states like Vermont, Maryland, and Oregon are implementing the Genuine Progress Indicator, which takes into account 26 indicators of progress, to better measure the environmental and social impacts of growth, as well as its distribution.

Still, in an era when governments pursued massive austerity programs on little more than an Excel spreadsheet error, Karabell’s investigation into the motives and misuses of statistics is all the more important. Ultimately, the shift from national statistics that measure production to those that measure well-being will be a shift toward a humanistic economy.

Originally published at The Week.

Debunking right-wing talking points with charts

Republicans didn’t just respond to the State of the Union, they responded four times. The problem is that a lot of their talking points don’t stack up with reality.

1) Taxes Are Too High on The Rich

In fact, taxes have become less progressive since 1960:

Since 2004 there has been a modest increase in income taxes for the wealthiest one percent, but we are nowhere near the 1960s.

2) The Government is Too Big

In fact, government revenues as a percentage of GDP has remained flat in the U.S. while it has increased in other developed countries.

3) We Need to Worry About Opportunity, not Inequality

Research by Miles Corak shows that countries with high levels of inequality have lower levels of upward mobility. Raj Chetty and his colleagues found a similar trend in census zones within the U.S.

4) We Don’t Need a Higher Minimum Wage

According to John Schmitt f the minimum wage had kept rising with productivity, it would be more than double what it is now.

minimum wage and productivity

5) The Deficit! The Deficit!

The deficit is falling:

It’s awful to have to keep pointing these things out, but the right still relies on the same stale talking points.

Careers and jobs

James Surowiecki is very worried. He is worried that a large group of Americans are overworked and overtired. They are often called in at odd hours, which makes it harder for them to get a good night’s sleep and perform at high cognitive levels. These Americans are… Wall Street bankers. Surowiecki writes, “For decades, junior bankers and Wall Street firms had an unspoken pact: in exchange for reasonably high-paying jobs and a shot at obscene wealth, young analysts agreed to work fifteen hours a day, and forgo anything resembling a normal life.” Here’s David Brooks citing a similar, albeit broader, phenomenon in 2006,

Today’s super-wealthy no longer go off on four-month grand tours of Europe, play gin-soaked Gatsbyesque croquet tournaments or spend hours doing needlepoint while thinking in full paragraphs like the heroines of Jane Austen novels. Instead, their lives are marked by sleep deprivation and conference calls, and their idea of leisure is jetting off to Aspen to hear Zbigniew Brzezinski lead panels titled ”Beyond Unipolarity.” Meanwhile, down the income ladder, the percentage of middle-age men who have dropped out of the labor force has doubled over the past 40 years, to over 12 percent.

We’ll talk about labor force participation later, but let’s start with the assertion that the richest Americans are overworked. The first problem with this analysis is a distinction madepotently by Chris Rock [language] between a “job” and a “career.” He cites the difference his time at at Red Lobster, constantly scraping food into the garbage with his stand-up comedy and concludes, “There ain’t enough time when you got a career, when you’ve got a job, there’s too much time.”  Investment bankers, wealthy businessmen and thought leaders aren’t spending their long-weeks waiting tables and picking up trash, they’re doing intellectually fulfilling work, and being highly compensated for it. For instance, I’m sure most of us would you rather excited to jet off to Aspen to hear a lecture on “Beyond Unipolarity,” and would enjoy it far more than waiting tables for 8 hours in an uncomfortable uniform.

If Brooks and Suroweicki stepped out of their bubble, they would find many people working two jobs while raising children, or two jobs while attending college or one job with insane and inflexible hours with little way out. Some of them are lucky enough to work a job they like, others struggle through hours upon hours of drudgery for little or no pay and have virtually no control over the hours they work. Their privacy is routinely invaded, their time is not their own and their wages are stagnant. Research shows that this takes a significant toll on physical and emotional well-being (see page 75).

But even were we to pretend this distinction did not exist, there are still reasons to doubt the “hard-working rich” vs. “lazy poor” narrative. For one, the data don’t show it. Contra Brooks, a 2005 study by the Dallas Federal Reserve Bank finds that,

[labor force] participation rates are pro-cyclical—positively correlated with economic output—and that the strongest correlation for males and females is between GDP today and participation two and three quarters from today. This supports the contention above that labor force participation decisions respond to changes in economic output with a slight lag.

The decline in labor force participation is not due to the working class being lazy, but is rather, connected to economic growth. Worse, Brooks isn’t only wrong, he’s diametrically wrong. The report finds that the decline in labor force participation between 1994 and 2004 was actually more pronounced among those more with higher educational attainment:

In fact, labor force participation rates have risen among individuals ages 25 to 64 who lack a high school diploma—from 58.3 percent in 1994 to 63.2 percent in 2004. All other education groups have experienced declines, and the higher the education level, the greater the decline.

That is, the low level of labor force participation of the working class is more often due to the fact that they can’t find jobs than their unwillingness to work.

Before the Great Recession created a vast army of unemployed workers, working class Americans were taking on more hours (see blue bar) while making less in hourly wages (see black line).

Source: Larry Mishel, “Vast Majority of Wage Earners Are Working Harder, And for Not Much More,” January 2013

Among the one percent, wage growth was even more obscene, 156.2% between 1979 and 2007.  Although the change has been for the rich to work fewer hours, they were working more hours in 1970, so the working class and middle class have been playing catch-up. They’ve taken more hours, but have lttle to show for it in terms of higher wages. It’s hard to square this data with the idea that the rich are working more and more and the poor are working less. In reality, the gap between hours worked by the rich and poor is closing (see line, right axis).

Source: Larry Mishel, “Vast Majority of Wage Earners Are Working Harder, And for Not Much More,” January 2013

The rich are working slightly more hours, but the real story is the dramatic increase in the hours by the poor and middle-class that are not corresponding with higher wages. And these hours are not of the same quality; they are more satisfying and less stressful.

So why this hard-working narrative? In the old days of a class, obscene inequality of wealth needn’t be justified. The rich were rich because they are born that way. Now that we live in a “meritocracy,” the rich often justify their wealth by citing their virtues and contrast it with the feckless poor. It helps them feel that the distribution of wealth is “just.” The other explanation is simply that Brooks and Surowiecki don’t know the working poor. They are wealthy guys with wealthy friends, and they see how “hard” their friends work and write about it. I’ve noted before how increasing inequality separates the experiences of the rich and poor. I’m lucky enough to know lots of poor and working class people as well as many wealthy people, which I suppose puts me in a unique place to call out this sort of bunk. It might make sense for The New Yorker or The New York Times to hire a few people who actually know what poverty looks like. Until then, we’re stuck with these “wealth-porn” narratives.

In conclusion, it seems hard, especially after The Wolf of Wall Street, to feel much sympathy for over-worked Wall Street bankers. They may well work insane hours, but they pay-off in terms of leisure, economic security, fulfillment and control of their work hours seems more than compensatory. They are the primary beneficiaries of the inequality that has robbed the middle class of $19,000 between 1970 and 2007. Wolf may be an exaggeration, but acquaintances who work in the field assure me that the apartments are lavish and the parties rancorous. The people who need attention, and help, are the millions of silent, working poor struggling to put food on the table. But you’re unlikely to find their story in a Brooks column.

Thanks to Mark Price for tweeting the Mishel brief.