How Our Inequality in Educational Policy Drives Inequality in Income

Our country's most elite are beneficiaries of extraordinary investments. Our poor and middle class, not so much. This huge difference in educational investment makes for huge difference in lifetime earnings.

If you are in the top 1% of households in this country, your annual income would translate into $18 million in lifetime earnings. If you are in the 25th percentile, your lifetime earnings will be about a million dollars. This difference of 18 to 1 in lifetime earnings begins with a difference of about 10 to 1 in early investment.

It starts with public schools.

In K-12, Connecticut invests an average of $18,000 per student whereas Mississippi invests $8,000. Wealthy school districts spend even more than the state average. One wealthy school district in New York invests $27,000 per student.

Private, elite schools will invest about $75,000 a year in students.

It's no wonder that by the eighth grade, students from rich families are four grades ahead of students from poor families. A gap of 4 years by year 8.

The investment gap continues at university. $92,000 per year is invested in students at the most selective universities compared to $12,000 a year at the least selective.

"A 2004 study of the most selective private universities found more freshmen whose fathers were medical doctors alone than whose fathers were hourly workers, teachers, clergy, farmers, and soldiers combined." "More distressingly still, across the Ivy League, the University of Chicago, Stanford, MIT, and Duke, more students come from families in the top 1 percent of the income distribution than from the entire bottom half."

In 1967, the ratio of subsidies at the most selective colleges to the subsidies at the least selective was 3 to 1. By 2007, that ratio had grown to 15 to 1. That is, even among the minority of citizens whose university education we subsidize, the disparity has become 5X greater in the last half century.

[All these stats on education are from Daniel Markovits' The Meritocracy Trap.]

What is the punchline? I think it won't be long before Americans insist on equal investments. For our brightest it may come in the form of education. For our most clever it might come in the form of capital equipment. For our most bold, it might come in the form of startup capital. For others it might simply come in the form of a bond or stock that pays an annual dividend or compounds during their working career. Narrowing the gap in investments could do a great deal to narrow the gap in income and wealth.

Income Inequality and Income Growth - Fairness and Progress

There are two dimensions to improving lives. The first has to do with income transfer from rich to poor, the second with raising real median wages. Those initiatives are not at odds with each other but they are separate.

There is so much talk about income inequality and stagnating median income in ways that suggest the speaker thinks they are the same thing. They are not.

Alleviating Poverty
Most people agree that the rich should help the poor. There can be arguments about who is rich, who is poor and how much help they should provide. Those are important arguments.

For instance, I believe it's absurd for someone in the top 49th percentile to help someone who is in the bottom 49th percentile. Someone making $60k shouldn't have to give $500 to someone making $55k. There has to be a middle ground of 30%, 50% or even 80% of people who are neither expected to help others or expect to be helped. (At least formally through income transfer in the form of taxation and welfare. Obviously everyone helps and needs help just to get through the day.)

Should only people making $200k help only those making less than $10k? Or should even households making $100k help households making less than $35k? The first choice would leave about 87% in the middle class who neither got nor gave help. Do you make more than $10k a year? Don't expect any help. Do you make less than $200k? Don't worry about being taxed to help the poor. The second (tax above $100k and subsidize below $35k) would leave about 43% in the middle class who neither got nor gave help.

In the last 100 years, the top marginal tax rate has ranged from a low of 28% to a high of 94%. Even within the same country, the consensus about what constitutes a fair rate of taxation varies over time. To illustrate how unsettling this change is, Starbucks founder Howard Schultz came out this week to say that he was running for president. One reason? He hate this absurd talk of a 90% marginal tax rate. Asked who is favorite Democratic president was, he said FDR. Under FDR, marginal tax rate was 94%.)

[You can find data on median income and what percentage of Americans make more or less than certain amounts here.]

You can argue about the cutoff point for who pays additional tax for the poor and who is poor enough to benefit from that tax. Ultimately, though, voters will decide what is fair. There is no magic formula for that.

By definition, though, you can never raise the average wage through income transfer. In theory you can raise the median wage through income redistribution but that strikes me as funky; it essentially means that you would tax enough people in the top 49th percentile at high enough rates to lift the income of everyone in the 50th percentile on down.

To define someone making the median income as poor is odd. It's like defining a 5'10" man as short. Income transfer is compassionate, practical and yet does nothing to raise median income. For that you need a completely different set of policies.


Raising Median Income
The usual suspects to raise median income? Investments in infrastructure and education, research and development, childcare and healthcare. These all help to raise incomes. These are essential. We're not doing enough of them or even doing them enough. That said, the biggest boost to an economy is moving into a new one.

In the century after the US was founded, median wages rose as we created an industrial economy that gradually supplanted the agricultural economy. Last century, median wages rose as we created an information economy and workers moved from factories into cubicles. This century, median wages will rise as we create an entrepreneurial economy. The median wage in Santa Clara County - home to companies like Google, Intel, HP, and Apple - is $107k, nearly double the $58k for the US. This will become a norm as more regions adopt and adapt the entrepreneurial culture that defines Silicon Valley. And there is so much more we can do to popularize entrepreneurship. Redefining work to become more entrepreneurial will do as much to raise productivity and wages as any previous change.

The question of how to alleviate poverty through income transfer is an important one and needs to be defined in a way that voters think is fair. The question of how we move into a new economy to create more for everyone is even more important. How a community answers the first one defines how they pursue fairness. How a community answers the second one defines how they will pursue progress.

The Terribly Boring Headline That Won't Generate Any Outrage or Clicks: Income Mobility in the US is Not So Bad

The economist Raj Chetty of Stanford was in San Diego 27 February talking about income mobility. He's exploring a really important topic with fascinating data.

He used two measures of income mobility. The first measured what percentage of children made more than their parents had at the same age. The other was a measure of what percentage of children born in the bottom 20% made it to the top 20%. Those seem to me like very different measures.

Doing Better Than Your Parents

 90% of the people born in 1940 were making more at age 30 than their parents had at age 30. That is a really clear measure of progress: the next generation is more affluent than the last. But as you can see in this graph, that percentage drops sharply until about 1960 and then continued to drop, albeit more slowly, up to the point of people born in the 1980s. Roughly 90% of 30 year olds in 1970 were doing better than their parents had at 30, but by 2010 only about 50% were. That seems alarming but I don't think it's as bad as this first graph looks.

First, there are adjustments that Chetty himself makes. 

Adjusting for inflation across generations is not trivial. How do you properly adjust for the price of a mid-sized sedan in 1970 and 2018? The first might reach 100,000 miles and the second might reach 200,000; the first has seat belts and the second has air bags. A TV in 1970 might have been 15" and offered 3 channels; a TV in 2018 might be 50" and offer 300 channels. We could contrast a list of products like this, nearly all of them showing a similar uptick in quality that makes price adjustments tough.

Even assuming that inflation adjustments let you accurately compare incomes from 1970 and 2010, families are smaller. If you make $28,000 with a family of four in 1970 or $27,000 with a family of three in 2010, is your family income really lower? In this example, family income has dropped by $1,000 but income per family member has actually gone up from $7,000 to $9,000.

If you adjust for inflation and family size, the downward trend is less severe. About 95% of 30 year olds in 1970 were making more than their parents at the same age and that dropped to roughly 70% by the 1980s (not a mere 50% as suggested before making these adjustments). 

A drop from 95% to 70% of the next generation doing better is not great but even that is arguable. The average person in 2010 had a library of on-demand articles, books, songs, movies and TV shows that dwarfed the choices of even the richest people of 1970. House prices have gone up but so has the average square footage of homes and the quality of appliances within them. We have a wealth of choices at the grocery store and in 1970 not only did you have just a couple of tomato sauces to choose from in the store but it was tough to find good sushi, ramen or falafales in most of the country. People in 2010 had more choices about how to live their lives than people in 1970 and not all of that can be properly captured in income statistics.

One last thing? The Great Recession was awful. Between 2000 and 2009, the economy destroyed a million jobs. In the 1980s (and 1990s and probably 2010s), the economy created roughly 20 million jobs. Any comparison of how people in 2010 are doing with people in 1990 has to account for the terrible shock that was the Great Recession. All else being equal, we would expect to see a downturn in the percentage of people in 2010 who are doing better than their parents did at 30. Millennials - like the rest of us - had to learn how to swim. Unlike us older folks, they had to learn how to swim in a tsunami and because of that careers were slower to take off and that could not help but be reflected in these numbers. I suspect that as we get further from the recession, this measure of what percentage of 30 or 40 year olds are doing better than their parents will rise.

Doing Better Than Your Peers

What about Chetty's other - very different - measure of income mobility? What percentage of people born in the bottom 20% make it to the top 20%? 

Let's explore this number a little. If parents made zero difference, we would expect that any kid born in any part of the distribution could land in any other part of the distribution by the time she's an adult. Maximum mobility means that there is no correlation between where you start and where you land. 20% of the kids born in the bottom 20% would make it to the top 20%. 20% of the kids born in the bottom would land in the middle. And 20% of the kids born in the bottom 20% would end in the bottom 20%.

This measure is zero sum, though. Every one percent of the kids who move out of the bottom 20% displace someone else. No matter how much your economy grows or stagnates, there will never be more (or less) than 20% in the top (or bottom) 20%. 

It is true that perfect income mobility by this measure means that a kid born in the bottom 20% is just as likely to end up in the top 20% (or middle 20%) as she is the bottom 20%. It is also true that any kid born in the top 20% of income distribution is just as likely to end up in the top (or middle) 20% as he is to end up in the bottom 20%. Perfect mobility means that parents make no difference. That's certainly not the case now. Chetty shared a remarkable statistic: kids born into the top 1% of households (those with incomes of $650,000 or more), were 80X more likely to be admitted to Stanford than kids born into median income households. 

What I find curious about this measure of income mobility is that if Chetty could convince CEOs, mayors, senators and tenured professors to pursue policies that would lead to perfect mobility, it means that the children of those policy makers would be just as likely to end up in the bottom 20% as in the top 20% where they started. I find it hard to imagine many of these leaders willing to adopt policies that allow for perfect income mobility by this measure. By both absolute and relative measures, affluent parents like the idea of their children doing well.

That said, it does seem like a healthy community would allow for children born in poverty to rise to the top and for children born rich to fall into the middle or bottom based on their own - and not their parents' - merit.

There are very real differences in a communities' ability to raise a child born in the bottom 20% up to the top 20%, from poor to affluent. Segregation is one big reason for this. Atlanta and Sacramento have the same percentage of blacks, whites, and Hispanics but Atlanta is much more segregated. (Whites live in one part of town, blacks another, etc.) A kid born in the bottom 20% has a 10% chance of reaching the top 20% in Sacramento; in Atlanta that kid's chances are just 4% and this seems illustrative of what Chetty sees across cities in the US. Segregating people by any grouping - education, race, income - seems to result in less income mobility. (And, as seen in other research, this ability of a community to expose its kids to a variety of other people seems to raise income and wealth for everyone.)

Entrepreneurship and innovation also seems to matter. If your community is creating new jobs and wealth, your kids have a better chance to rise. San Jose, San Francisco and Seattle are among the best communities for giving kids a chance to rise to the top; Cleveland, Detroit and Atlanta among the worst. (See one comparison of communities here.)

Finally, one of the most fascinating points Chetty made was merely implied. Some communities do a much better job of creating opportunities than others. A poor kid growing up in such an area has double or triple the odds of becoming affluent. I don't know enough about the data to conclude this but the impression I was left with is that spending money to get your kid into an innovative, integrated, affluent neighborhood will do more for her prospects than using those same dollars to get her into a better university. Geography is culture, and culture matters.

I'd be fascinated to know more about the differences in communities that are more effective at letting you do better than your parents but curiously, most of Chetty's research focused instead on the differences in communities that raised the probability of poor kids becoming rich. Given there will only ever be 20% of the population in the top 20% but 100% of us could be doing better than our parents, the latter seems like a goal that is easier to align around and more effective.

Minimum Wage

I believe in a minimum wage. Companies adapt to regulation in the same way that they adapt to market competition. If a community insists that companies have to pay at $7.50, a company has two choices: figure out how to create a profitable business even while paying this much or go out of business. A community has no obligation to keep in business a management team that can't figure out how to design a business to be profitable while paying people something approximating a living wage.

That said, there are at least two things that need to be considered in setting a minimum wage.

The first is the current distribution of wages. A third of Americans make an annual salary that equates to less than $10 an hour. Half make less than $15 an hour. If you - as Seattle has recently done - decide that the minimum wage should be $15 an hour, you have to explain yourself. I completely agree that laggards who can't, say, pay at least $7 an hour should be forced to change their business model or close shop. I like the idea of a legislative sheep dog nipping at the heels of the businesses that are in the bottom 10 to 30%, forcing them to move faster. It's a different thing, though, to suggest - as a $15 an hour wage does - that all the jobs should be above average. They won't be.

And that takes us to the next problem with the minimum wage. Whether it is set to $1 an hour or $25 an hour, there will be some people who aren't productive enough to cover that wage. It makes sense to tell businesses that they have to pay a certain minimum; regardless of what it is, though, some people are not productive enough to merit hiring. Those people need subsidies of some kind; not all needs will be addressed with a living wage.

The deeper need is for study of how jobs are evolving and a search for ways to move median productivity and wages. Individual success moves you from the bottom of a bell curve to the top; community success recognizes that there will always be one person at the bottom and one at the top of the distribution and will focus instead on moving the whole curve.

Poverty in the Former Confederacy

The US Conference of Mayors just released a report that includes this table:

Richard Florida uses this as another example of the increasing wage gap in the US. People in the bottom of the list are twice as likely to be getting by with incomes of less than $35,000 than people at the top of the list.  That makes a huge difference to a community. I think it's just further example of how policies that have their roots in the Civil War continue to cost us. Every single metropolitan area in the top ten in this list - from the ones in Texas to Georgia to Louisiana to Arkansas to West Virginia - is in the former confederacy. Every single metropolitan area on the bottom of this list - from Manchester, NH, to Washington, DC - is outside of it.

There are really just two ways to explain why some people are poor and some are not. One is to look for differences in their situation, using something like a pareto chart to understand the impact of parents' income, community investments in education and private investments in capital, etc. In this approach, generational wealth and income are subject to forces that can be manipulated and changed through policy and private action. Another is to say, "Well, some people are just like that." Under this umbrella lies belief in aristocracy, celebrity-worship, racism, and a shrug of the shoulders about differences, a weird sort of acceptance of life's inevitability (or even God's will). It's no coincidence that the former Confederacy is - to this day - a place where poverty and poor education is more rampant than in any other in this country. Racism is, of course, the ultimate belief in one's helplessness to change realities like income disparity.This region has been very reluctant to let go of its racists beliefs.  (It wasn't until February of 2013 that Mississippi officially abolished slavery.) It's still a place that rejects policies that would change incomes as the intrusion of "big government." A goodly portion of the south is still accepting of poverty and shrugs its shoulders about why some people are poor. In their minds, little can be done and so little is done. 

I think it would be worth tracking two economies as we seek to understand what's happening in the US. I suspect that tracking the former confederacy and the rest of the country separately would yield some interesting data that would help to make policies on both sides of this (still big) cultural divide. 

Huck Finn and a New American Aristocracy

Huck Finn, the son of a drunken father, is himself described as idle and lawless. But he tries to flee this fate with Jim, a runaway slave. In these two characters, Twain foreshadows the struggle out of poverty in the 20th century, the both of them attempting to escape their own destiny, whether the consequence of racism or childhood poverty. In the mid-19th century, this was such a big country that such an escape seemed plausible - almost inevitable. The US offered the possibility of freedom from the past.

America was the country that was first to throw off a belief in aristocracy, which had defined Europe for centuries. In its place the founding fathers put in place things like elections and meritocracy, creating a country where a hairdresser's son could grow up to become president. de Tocqueville visited the US about the time the (fictional) Huck Finn was dashing about, and he found a great deal about this country that amazed him. 

Now, visitors from Western Europe would find a different reason to be amazed. Compared to them, the US has become a land of aristocracy more than meritocracy. In the US, the children of the rich are likely to become rich adults and the children of the poor are likely to become poor adults. Americans don't decide how they do in life. Their parents do.

In a paper on inter-generational mobility, Miles Corak includes this graph he has dubbed "The Great Gatsby Curve." 

Finland finishes best on the measure of income mobility and income equality and the US finishes worst. Not only do we have more income inequality but we don't let the children of the poor forget their place (or the children of the rich lose it). It seems to me that one obvious way to remedy this would be policies that support poor mothers. 

It is also possible that Finland's much praised education system could teach us something about how to give each generation the opportunity to rise. Here are a couple of lines describing what they have done in recent decades. 

Beginning in the 1970s, Finland launched reforms to equalize educational opportunity by first eliminating the practice of separating students into very different tracks based on their test scores, and then by eliminating the examinations themselves. This occurred in two stages between 1972 and 1982, and a common curriculum, through the end of high school, was developed throughout the entire system. These changes were intended to equalize educational outcomes and provide more open access to higher education. During this time, social supports for children and families were also enacted, including health and dental care, special education services, and transportation to schools.

There are no external standardized tests used to rank students or schools in Finland, and most teacher feedback to students is in narrative form, emphasizing descriptions of their learning progress and areas for growth. 

I find it rather charming to think that treating students as individuals - rather than as a percentile - is a step towards letting individuals - rather than families - define a life. Whatever mix of policies they're pursuing, the Finns are now doing what we started - making it possible for each generation to define themselves anew.

Now if Huck wanted to escape the destiny of his past, he'd have better luck heading back to Finland than down the Mississippi.