I love the NCAA tourneys. I grew up in Louisville at a time when basketball was synonymous with Kentucky, Ohio, and Indiana. I give the NCAA and the networks credit for building up the excitement, tension, and attention in this national event. This year, my interest was especially piqued because five family alma maters (including mine) made it to the Sweet Sixteen of the men’s tourney: Dayton, Wisconsin, Louisville, Kentucky, and Virginia.
My undergraduate school, Dayton, was among the elite in college basketball in the 1950s—and, to some extent, the 1960s. Dayton fell in status over time because, at least relative to some other schools, it started stressing academics more and athletics less. These experiences color the lessons on economic competition, both positive and negative, that I draw from the tournaments each year.
When competition flourishes, it’s hard to establish a monopoly.
Okay, Harvard did make it to the men’s tourney this year, but credentials don’t go very far when your accomplishments determine whether you get ahead. This stands in contrast to the politics of academia. High school seniors focus intensely on college admissions because they correctly sense that future success depends not simply on what they learn than but where they can make connections to get onto a faster career track. If you’re an economist, for instance, your odds of a top job in either a Democratic or Republican administration multiply one-thousand-fold if you have a Harvard connection at some point in your education as opposed to, say, a University of Connecticut one. It’s tough finding a job teaching history almost anywhere if your PhD is not from a ranked university, no matter the brilliance of your work. The NCAA appeals to the common person, I think, because we identify with any field where anyone with enough talent and effort can succeed.
Create a level playing field (court), and you’d be amazed at the amount of upward mobility.
Many of my fellow social scientists despair of the lack of upward mobility in American society, with young black men especially singled out as left behind. Yet notice their success in basketball, where there’s pretty much a level playing field from the time of birth. If you can run circles around me on the court, I can’t rise above you by turning to Daddy’s friends or the connections available only in higher-income communities. (Then again, maybe I can succeed in athletics by convincing the Olympic Committee to adopt some new sport played by an elite few. How many kids in inner-city Detroit have access to $100,000 bobsleds or a “playground” for luges?)
Money still matters—a lot.
As the tourney goes on and my position in the office bracket pool falls lower, I start turning to my cynical side and some negative lessons. Though there’s close to true competition among athletes, schools still compete on more than talent. Large state schools have done quite well in recent decades with the move toward big-money sports and huge TV rewards, perhaps even more so in football than basketball because of the expense involved. Multimillion-dollar coaching salaries, extraordinary facilities, the latest in physical therapy, and multiple support staff to develop statistics or simply run around as lackeys—you name it, each of these can add to the probability of success. Given this world, I shouldn’t admit that I’m still thankful to former Wisconsin chancellor Donna Shalala for bringing big-time sports success back to Wisconsin; it’s not surprising that Miami hired her away after her stint in the Clinton administration.
Those who take maximum advantage of the letter of the law often do well.
Consider the new Kentucky style of “one and done”: recruiting players who never intend to study or complete more than a year of school once they become eligible for the NBA draft. It works. It’s easy to cast Kentucky coaches in the same light as those traders on Wall Street who gain by faster computerized trading or better access to soon-to-be public information. Or multinationals that shift their profits with the flip of a switch to some low-tax country. It may all be legal (or almost legal), but dodges like these don’t generate growth in a capitalist economy or additional value for watching sporting events. In many ways, the relative advantage for these winners comes mainly from avoiding having to compete under the same rules as everyone else.
The working stiff still gets shafted.
Everyone knows that there’s big money to be made in major college sports. One way to get rich is to leverage the work of others, then claim a large share of the total rewards from the enterprise for yourself. Perhaps the few college basketball players who make it to the NBA might claim that their college training was a good investment. For many other big-time college sports athletes, the reward can be a 50+ hour workweek at almost no pay and a loss of other educational opportunities (see Joe Nocera’s take on unionization of players as employees).
Suppose society is willing to pay $1 billion to be entertained by the NCAA tournament. The players can’t get paid, though they might get some very nice meals or plush accommodations, so much of the $1 billion is up for grabs by coaches, athletic department personnel, and others—some of whom walk away with huge rewards at their athletes’ expense. The NBA also gets a free training ground and media promotion of its future players.
To be fair, the school receives some of the profits, and it divides the funds among money-losing athletics or (god forbid) academics. Still, the working stiff doesn’t have much say in the matter one way or the other.
The 50th anniversary of “the March on Washington”—so famous and, in many ways, so successful that “the” is sufficient to define it—brought forth a gusto of stories about what had been achieved since then, including some very interesting blog posts by my colleagues. Several turned to data on the distribution of wealth, including some studies in which I participated, noting the lack of gains—especially in the past few decades—in the wealth and income of blacks and Hispanics relative to whites.
Those aggregate, raw figures on wealth and income act as a form of performance test on one aspect of government policy. They state rather emphatically that, whatever its merits, such policy was not sufficient to move the needle on wealth mobility across and among racial and other classes. Some simply draw the conclusion that we must redouble our efforts on programs that they have favored for a long time. Spend more on Medicare or Medicaid or cut tax rates or whatever. But what if that focus is wrong? What if the dominant liberal and conservative agendas over the past 50 years, at least when it came to social policy and taxes, never really had much to with mobility? What if the data compel us to adopt more dynamic, yet realistic, policies that put mobility and opportunity more at the forefront of policy in the 21st century?
Over these past few decades, liberal agendas have focused largely on the positive effects of ensuring that people had adequate income, food, health care, and so on—that is, consumption. Conservative agendas have focused largely on the negative effects of high income tax rates, particularly at the top of the income distribution. Often raising legitimate concerns about poverty or incentives, respectively, in many ways, each side has won its battle. Redistributive and other social welfare policies now dominate the $55,000 in federal, state and local spending, including tax subsidies, now spent on average per household, while tax rates at the top tend to be about half what they were from World War II to the early 1960s.
Relative to 50 years ago, fewer people are without food or food assistance, people can now retire on Social Security for many more years, health care has become far more life-sustaining, more people go to college, and, while economic growth hasn’t been great lately, we’re still about three times richer than we were. So the record isn’t all that bad, despite current travails. But, once again, those successes largely did not carry over to mobility among and across classes.
Here are just a few examples of how policies have given limited attention to mobility:
- Current welfare policy helps feed and house people, but it often discourages work by imposing very high costs on moderate-income households with children, as they can lose hundreds of dollars of benefits for each $1,000 they earn.
- Even while single parenthood remains a major source of poverty for many, that same welfare policy now penalizes—on the order of hundreds of billions of dollars—low-income couples with children who decide to get or remain married.
- Although investing in quality early childhood education appears to have a high payoff, the means testing of Head Start and other programs re-segregates our schools, with poorer kids often clustered together in classrooms separate from middle-class kids.
- Housing rental subsidies help people live in decent housing, but they also discourage home-buying and paying off a mortgage along the way, keeping lower-income families away from that classic and, for large segments of the population, most important mechanism for saving.
- Our retirement policies help most Americans live their later years in some comfort. But by encouraging early retirement, Social Security and other programs lead to an increased wealth gap among the elderly as richer classes retire later—hence, work and save longer—than poorer classes.
- Low tax rates may encourage entrepreneurship, but when they don’t raise enough revenue to pay our bills, they add to interest costs on the debt, gradually eroding support for investments in people, education, and similar efforts.
It’s not that liberals and conservatives advocating these older agendas don’t care about mobility. They’ll tell you that people with more sustenance will be able to work and study harder and entrepreneurs facing lower tax rates will create more jobs. But they try to claim too much for agendas that, though successful on some fronts, did not improve mobility in recent decades. The proof is in the pudding.
Raising these issues threatens those who fear that acknowledging failure on any front merely empowers those who advocate for the opposing agenda. And in today’s chaos that passes for policymaking, that is probably true. I don’t even know in what galaxy to place debates over previously nonpartisan issues like extending the debt ceiling so Congress can pay off its bills.
For me, it isn’t about abandoning the past. It’s simply about moving on.
Worried about the stagnation of income among middle-income households? Or about the growth in health care costs? The two are not unrelated. In fact, middle-income families have witnessed far more growth than the change in their cash incomes suggest if we count the better health insurance most receive from employers or government. But is that all good news? Should ever-increasing shares of the income that Americans receive from government in retirement and other transfer payments go directly to hospitals and doctors as opposed to other needs of beneficiaries? Should workers receive ever-smaller shares of compensation in the form of cash?
The stagnation of cash incomes in the middle of the income distribution now goes back over three decades. Consider the period from 1980 to 2011. Cash income per member of a median income household, which includes items like wages and interest and cash payments from government like Social Security, only grew by about $4,300 or 27 percent over that period, when adjusted for inflation. From 2000 to 2010, it was even negative. Yet according to data from the Bureau of Economic Analysis, per capita personal income—our most comprehensive measure of individual income—grew 72 percent from 1980 to 2011.
How do we reconcile these statistics? By disentangling the many pieces that go into each measure.
Growing income inequality certainly plays a big part in this story: much of the growth in either cash or total personal income was garnered by those with very high incomes. So the growth in average income, no matter how measured, is substantially higher than the growth for a typical or median person who shared much less than proportionately in those gains. But personal income also includes many items that simply don’t show up in the cash income measures. Among them is the provision of noncash government benefits, such as various forms of food assistance.
Health care plays no small role. In fact, real national health care expenditures per person grew by 223 percent or $6,150 from 1980 to 2011, much more than the growth in median cash income. If we assume that the median-income household member got about the average amount of health care and insurance, then we can see how little their increased cash income tells them or us about their higher standard of living.
Getting a bit more technical, there’s a danger of over-counting and under-counting health care costs here. Some of the median or typical person’s additional cash income went to extra health care expenses, so the additional amount he/she had left for all other purposes was even less than $4,300. However, individuals pay only a small share of their health care expenses; the vast majority is covered by government, employer, or other third-party payments. So, roughly speaking, typical or median individuals still got well more than half of their income growth in the form of health benefits.
The implications stretch well beyond middle-class stagnation. Employers face rising pressures to drop insurance so they can provide higher cash wages. For instance, providing a decent health insurance package to a family can be equivalent roughly to a doubling of employer costs for a worker paid minimum wage. The government, in turn, faces a different squeeze: as it allocates ever-larger shares of its social welfare budget for health care, it grants smaller shares to education, wage subsidies, child tax credits, and most other efforts. Additionally, the more expensive the health care the government provides to those who don’t work, the greater the incentives for them to retire earlier or remain unemployed.
In the end, the health care juggernaut leaves us with good news (that our incomes indeed are growing moderately faster than most headlines would have us believe) as well as bad news (that health care remains unmerciful in what it increasingly takes out of our budget).
COAUTHORED WITH DOUG WISSOKER
A recent paper by Bayer, Ferreira, and Ross on mortgage delinquencies and foreclosures finds that people of color had greater problems once Recession hit than did many others in roughly equal circumstances, such as income and location, but with different racial backgrounds. We believe this is a useful, though not surprising, finding in ongoing studies of the impact of the Recession on different types of households. Yet we worry about how its results get extrapolated into policy recommendations.
The paper concludes that their research “raises concerns about homeownership as a vehicle for reducing racial wealth disparities”. We believe that one needs to be very careful in extrapolating lessons from the market of the mid-2000s to any market and to policies that would apply over time. Paying off mortgages is the primary means by which the majority of households, particularly low and moderate-income households, save over time. Discouraging such saving could easily add to already unequal distribution of wealth in society.
First, a quick summary of the findings. Combining several sources of data to look at racial differences in delinquent payments and foreclosures for mortgages for purchases and refinances originated between 2004 and 2008, the authors find that black and Hispanic borrowers had substantially higher delinquency and foreclosure rates than whites and Asians, even controlling for differences in circumstances such as the borrower’s credit score, the size of the interest rate spread of the loan, and the identity of the lender. In addition, the authors conclude that the racial gap in delinquent payments and foreclosures peaked for loans originating in 2006. From this, they conclude that people of color entering the market at the peak of the housing boom were particularly vulnerable to adverse economic conditions.
The authors attribute the racial difference found for blacks and Hispanics, even after trying to control for income or other differences, to items they couldn’t measure, including lower wealth and an accompanying lack of a financial cushion. This seems crucial to us and is also consistent with studies that income an incomplete predictor of upward or downward mobility. Work from the Urban Institute (here) shows that wealth differentials by race are much greater than income differentials. These differentials can play out in multiple ways across generations. For instance, wealthier families provide more inheritances and intergenerational transfers that support homebuying and downpayment levels that reduce foreclosure risk.
However, the authors’ concern about homeownership as a vehicle for reducing racial wealth disparities does not follow logically. Evidence here is at best circumstantial. Among other sources of disparate outcomes, consumer groups would point out that these types of findings more than anything highlight the disparate impact of abusive lending at the height of the housing boom.
Portfolio theory requires looking across different types of assets and debts, along with their associated expected returns and risks. Homeownership has risks, but so does renting. In fact, rental rates at times rise faster than the costs of homeownership, and in many parts of the country it has become cheaper to own than rent for those likely to be in a home long enough that transactions costs do not eat away at the ownership returns. Similarly, a household often must choose among debt instruments. Mortgages tend to have lower interest charges than most other forms of debt.
Most vehicles for getting a decent return on investment involve some risk. Saving accounts now paying negative, after-inflation, returns only prove the point in spades. If saving were proportionate to income, for instance, but lower-income individuals invest only in low or negative return assets, then wealth inequality necessarily would grow to be much greater than implied by levels of saving, potentially compounding adverse outcomes over time. Conversely, without discounting lessons from the Great Recession, low-cost, well-structured mortgages continue to be supported by the government (whether through FHA or the GSEs) partly for the very purpose of diversifying risk and effectively spreading wealth ownership.
This study is based on patterns of delinquency and foreclosure rates observed during a limited time period with unusually high foreclosure rates. But, wealth accumulation occurs over a very long time. Thus, even on this paper’s own terms, it’s not clear that reduced rates of homeownership would make low-income households or people of color better off over extended periods. We have found that most homeowners buying a decade or so before the Great Recession came through the longer period in good shape. Our own work also tends to show that black homeownership rates, even after controlling for income, are disproportionately low in both good and bad markets, raising serious questions about whether they are missing out on opportunities available to others.
Regardless of the effect on the difference in wealth disparity by race, homeownership is an effective way for many, though certainly not all, low- and moderate-income households to save. Equity in a home is the primary asset owned by low- and middle-income households, including blacks and Hispanics, by the time of retirement. Paying off a mortgage is the primary mechanism by which these households save, with all the virtues of a more automatic and regular saving vehicle. Reductions in the already low homeownership of people of color would almost certainly exacerbate over time the unequal distribution of wealth.
While the income inequality among different racial and ethnic groups is significant, it is nothing compared to wealth inequality. In 2010, whites had six times more average wealth than blacks and Hispanics ($632,000 versus $103,000). The income gap, by comparison, was twofold ($89,000 versus $46,000).
In a recent study, several colleagues and I examine in more depth how these ratios are affected by wealth accumulation over a person’s lifetime. Early in wealth-building years (when adults are in their 30s), white families have 3.5 to 4 times the wealth of families of color. As adults age these initial racial differences grow both absolutely and relatively. Whites in the cohort we examined started with about three and a half times more wealth than blacks in their 30s but had seven times more wealth in their 60s. Compared with Hispanics, whites had four times more wealth in their 30s but nearly five times more wealth three decades later.
Or consider how ratios would vary if each family saved the same share of its income and earned the same rate of return on those savings. Ignoring inheritances, the wealth gap should resemble the income gap, not be three times as large.
While the Great Recession didn’t cause the wealth disparities between whites and minorities, it did exacerbate them. The 2007–09 economic slowdown brought about sharp declines in the wealth of white, black, and Hispanic families alike, but Hispanics experienced the largest decline. Lower net equity in homes accounts for much of Hispanics’ wealth loss, while retirement accounts are where blacks were hit hardest.
Something is definitely going on. Whatever other conclusions one may draw, I think our tax and social policies are doing a pretty poor job of helping individuals attain the types of protections that private wealth-holding offers. In fact, wealth disparities among races have expanded over the past 27 years, which should have liberals and conservatives alike questioning the unintended consequences of their policy victories, or at least their policy focus, over that period.
For more analysis of the wealth gap between whites and minorities, read the brief Less Than Equal: Racial Disparities in Wealth Accumulation or watch The Racial Wealth Gap in America. This work has been cited in the New York Times.
The young have been faring poorly in the job market for some time now, a condition only exacerbated by the Great Recession. Now comes disturbing news that they are also falling behind in their share of society’s wealth and their rate of wealth accumulation.
Signe Mary McKernan, Caroline Ratcliffe, Sisi Zhang, and I recently examined how different age groups have shared in the rising net wealth of the U.S. economy. Despite the recent recession, our economy in 2010 was about twice as rich both in terms of average incomes and net worth as it was 27 years earlier in 1983. But not everyone shared equally in that growth.
Younger generations have been particularly left behind. Roughly speaking, those under age 46 today, generally the Gen X and Gen Y cohorts, hadn’t accumulated any more wealth by the time they reached their 30s and 40s than their parents did over a quarter-century ago. By way of contrast, baby boomers and other older generations, or those over age 46, shared in the rising economy—they approximately doubled their net worth.
Older Generations Accumulate, Younger Generations Stagnate
Change in Average Net Worth by Age Group, 1983–2010
Source: Authors’ tabulations of the 1983, 1989, 1992, 1995, 1998, 2001, 2004, 2007, and 2010 Survey of Consumer Finances (SCF).
Notes: All dollar values are presented in 2010 dollars and data are weighted using SCF weights. The comparison is between people of the same age in 1983 and 2010.
Households usually add to their saving as they age, while income and wealth rise over time with economic growth. If these two patterns apply consistently and proportionately, then one might expect to see, say, a parent generation accumulate $100,000 by the time its members were in their 30s and $300,000 in their 60s, whereas their children might accumulate $200,000 by their 30s and $600,000 by their 60s.
This normal pattern no longer holds for the younger among us. However, this reversal didn’t just start with the Great Recession; it seems to have begun even before the turn of the century. The young increasingly have been left behind.
Potential causes are many. The Great Recession hit housing hard, but it particularly affected the young, who were more likely to have the largest balances on their loans and the least equity relative to their home values. If a house value fell 20 percent, a younger owner with 20 percent equity would lose 100 percent in housing net worth, whereas an older owner with the mortgage paid off would witness a drop of only 20 percent.
As for the stock market, it has provided very low returns over recent years, but those who hung on through the Great Recession had most of their net worth restored to pre-recession values. Bondholders usually came out ahead by the time the recession ended as interest rates fell and underlying bonds often increased in value. Also making out well were those with annuities from defined benefit pension plans and Social Security, whose values increase when interest rates fall (though the data noted above exclude those gains in asset values). Older generations hold a much higher percentage of their portfolios in assets that have recovered or appreciated since the Great Recession.
As I mentioned earlier, however, the tendency for lesser wealth accumulation among the younger generations has been occurring for some time, so the special hit they took in the Great Recession leaves out much of the story. Here we must search for other answers to the question of why the young have been falling behind. Likely candidates for their relatively worse status, many of which are correlated, include
- a lower rate of employment when in the workforce;
- delayed entry into the workforce and into periods of accumulating saving;
reduced relative pay, partly due to their first-time-ever lack of any higher educational achievement relative to past generations;
- their delayed family formation, usually a harbinger and motivator of thrift and homebuilding;
- lower relative minimum wages; and
- higher shares of compensation taken out to pay for Social Security and health care, with less left over to save.
When it comes to conventional wisdom and media attention to distributional issues, there’s a tendency simply to attribute any particular disparity, such as the young falling behind in wealth holdings, to the growth in wealth inequality in society. But the two need not be correlated. Disparities can grow within both younger and older generations, without the young necessarily falling behind as a group.
Whatever the causes, we should also remember that public policy now places increased burdens on the young, whether in ever-higher interest payments on federal debts they will be left or the political exemption of older generations from paying for their underfunded retirement and health benefits. At the same time, state and local governments have given education lower priority in their budgets; pension plans for government workers now grant reduced and sometimes zero net benefits to new, younger hires; and homeownership subsidies post-recession increasingly favor the haves over the more risky have-nots.
Maybe, more than just maybe, it’s time to think about investing in the young.
When the design of safety net programs is considered alongside that of our tax code, it is easy to see that our tax and transfer systems need to focus less on increasing consumption and more on promoting opportunity, work, saving, and education.
The government doesn’t affect work incentives just through direct taxes. Implicit taxes—that is, penalties for earning additional income—are everywhere, whether in TANF or SNAP, Medicaid or the new health exchange subsidy, PEP or Pease (reductions in tax allowances for personal exemptions and itemized deductions), Pell grants or student loans, child tax credits or earned income tax credits, unemployment compensation or workers compensation, or dozens of other programs. These implicit taxes combine with explicit taxes to create inefficient and often inequitable, certainly strange and anomalous, incentives for many households.
At some income levels, families face prohibitively high penalties for moving off assistance. Accepting a higher paying job could mean a steep cut in child care assistance for a single worker with children, for instance. For some, the rapid phaseout of benefits can offset or even more than offset additional take-home pay. Asset tests in means-tested programs create similar barriers to saving.
Not getting married is one way that people avoid some of these penalties or taxes and is the major tax shelter for low- and moderate-income households with children. Our tax and welfare system thus favors those who consider marriage an option—to be avoided when there are penalties and engaged when there are bonuses. The losers tend to be those who consider marriage a social or religious necessity.
The high rates and marriage penalties arising in these systems occur partly because of the piecemeal fashion in which they are considered. Efforts to design benefit packages more comprehensively could greatly improve both the incentives families face and the quality and choice of benefits they receive.
For more details, see my congressional testimony for today’s hearing on “Unintended Consequences: Is Government Effectively Addressing the Unemployment Crisis?” before the Committee on Oversight and Government Reform.
Henry Ford, the American Experience, and Why and How the Distribution of Income Affects Growth in the Modern EconomyPosted: January 29, 2013
One hundred years ago Henry Ford dropped the price of his Model T to $550. Having adopted new and successful engineering and assembly techniques, the company’s sales expanded exponentially, approximately tripling between 1911 and 1914 alone. Henry Ford bragged that his car would be “so low in price that no man making a good salary will be unable to own one.”
On the American Experience (January 29, 2013) PBS covers the biography of Henry Ford. That story has application to our own time in explaining how the distribution of income affects economic growth.
Ever since the Industrial Revolution, economies of scale—mass production with lower cost for the last items produced than for the first—have been the primary engine of income growth for nations and workers. Ford’s talent at mass production not only made him extraordinarily rich, it helped increase the effective incomes of workers throughout the country since their earnings could go farther. While massive rewards did accrue to entrepreneurs, inventors, and those gaining temporary monopolies, the rising tide lifted all boats; it even leveled out the gains as the forces of competition limited how much leading capitalists could garner for their efforts of yesteryear.
Henry Ford’s fight with unions to the side, he did recognize from the start that workers needed to earn enough to buy his products. I’m not suggesting that the cart of workers’ incomes leads the horse of profits, but rather that they move forward together. Ford at least knew that he and some of the other rich people he tended to detest could use only so many cars themselves; if the everyday citizen couldn’t buy them, he could never get rich.
So how did we move toward a society where today profits seem to be rising but workers’ incomes remain stagnant? The main answer, I believe, is that while economies of scale have expanded extraordinarily since Ford’s day, the necessary purchasers of the new products lie within a global economy. The growth of U.S. workers’ incomes is less necessary for the producers of new goods and services to become wealthy.
Consider how many modern-day Henry Fords produce goods and services with limited physical content: pharmaceutical drugs, electronic software, technology, movies, and other forms of entertainment and information. These “industries” provide much of the growth of the modern U.S. economy.
Many products within these growth industries can be produced at almost no cost for the next or marginal purchaser. How much does it cost Hollywood producers to let one more person watch a movie? For the drug manufacturers to produce one more pill? For Microsoft or Apple to make software available to one more person? Almost nothing in many cases, other than marketing. As economies of scale expanded as we moved through the 20th to the 21st century, so, too, have the possibilities for growth when more people have enough money to buy these new products. If the costs of a pill or movie can be shared among 10 million people, rather than 1 million, then the world economy can expand quickly when 9 million more people can afford to buy the product.
These economies extend beyond production to transportation, storage, and similar costs. It doesn’t cost much to “transport” a movie to Monaco, a pill to Paris, or software to Sofia.
Modern capitalists seek their buyers within a world population of 7 billion, not a U.S. population of 300 million. When creating products with extraordinary economies of scale that are easily transportable, at low weight or even with the click of a mouse button, the new American entrepreneur still wants purchasers whose incomes rise enough to buy these new goods and services. It’s just less necessary that those purchasers reside in the United States.
Does this mean that income becomes increasingly unequal? It depends partly upon whom you count and what type of measure you use. Almost no one could have guessed even a few decades ago the rise of hundreds of millions of middle-class people in China and India. At the same time, it’s also possible that incomes will rise initially for U.S. and Indian entrepreneurs and for workers in Bangalore, but not for large portions of the population in either the United States or India.
I am not arguing that all the consequences of this world order are sanguine. But only by defining its characteristics can we identify our opportunities.
First, consider how substantial economies of scale make higher growth rates possible when incomes rise across the board. Productivity just doesn’t rise as quickly when we build and subsidize McMansions for the few rather than employ workers to provide goods and services with greater economies of scale for the many.
Similar calculations can affect welfare policy. It may not cost us very much directly to give lower-income people the ability to buy goods and services with large economies of scale. For instance, if we give a household $1,000 that it uses to buy a television subscription that at the margin costs a cable company only an additional $100 to provide, then the net cost to the non-welfare part of society may also be only $100 despite the transfer of $1,000. At the same time, if the $1,000 subsidy at a $100 marginal cost of production results in plus $900 to a monopoly cable company and minus $1,000 to the taxpayer, then both the welfare recipient and the taxpayer may have reduced incentive to work. Private income (before welfare) also becomes more unequal.
Or consider antitrust policy. Tying it to its 19th century moorings may be inadequate for a 21st century economy. International competition may lessen any concern over having only four major American automobile manufacturers, but what about the concentration of accounting practices among the Big Four? Did the breakup of Arthur Andersen for its accounting indiscretions promote or reduce competition?
What about our current multi-tiered pricing of drugs, higher at home and lower abroad? Without any compensating mechanism, does this increase net output from the United States but at an unfair cost to U.S. consumers?
To answer all these questions, we need to concentrate correctly on causes, not inveigh interminably on impressions. One conclusion from Henry Ford’s day still stands out in my mind: promoting greater growth means both a favorable climate for entrepreneurship and a sharing of its rewards broadly with workers.