Fault Lines: How Hidden Fractures Still Threaten the World Economy (5 page)

Many have lost faith in the narrative of America as the land of unbounded opportunity, which in the past created the public support that made the United States a bastion of economic freedom. Politicians, always sensitive to their constituents, have responded to these worrisome developments with an attempt at a panacea: facilitating the flow of easy credit to those left behind by growth and technological progress. And so America’s failings in education and, more generally, the growing anxiety of its citizenry about access to opportunity have led in indirect ways to unsustainable household debt, which is at the center of this crisis. That most observers have not noted these links suggests this fault line is well hidden and therefore particularly dangerous.

Incomes in the United States, of which wages constitute the most important component, have been growing more unequal. The wages of a 90th-percentile earner—that is, a person earning more than 90 percent of the general population—increased by about 65 percent more over the period 1975–2005 than the wages of a 10th-percentile earner. (This difference is known as the 90/10 differential.) In 1975, the 90th percentile earned, on average, about three times more than the 10th percentile; by 2005 they earned five times more.
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All of this growth was concentrated at the top: the wages of those in the middle relative to those at the 10th percentile have not gone up anywhere near as much as the wages of the 90th percentile have grown relative to those in the middle.

Many commentators, both in academia and in the popular press, have focused on the income gains made by the top 1 percent or even the top 0.01 percent of earners, perhaps because it is more customary to look up than down. I believe the more troublesome trend for the United States is the 90/10 or 90/50 differential, which reflects the changes most Americans experience.

Much of the 90/10 differential can be attributed to what economists call the “college premium.” The ratio of the wages of those who have only a bachelor’s degree to those who only have a high school degree has risen steadily since 1980. The 2008 Current Population Survey by the Census Bureau indicated that the median wage of a high school graduate was $27,963, while the median wage of someone with an undergraduate degree was $48,097—about 72 percent more. Those with professional degrees (like an MD or MBA) earn even more, with a median wage of $87,775.
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That the 90/10 differential is largely due to the college premium also explains why the 50/10 differential has not moved as much—neither the 50th percentile earner nor the 10th percentile earner has been to college. In fact, the 50th percentile typically consists of white-collar workers like Jane and her colleagues, who have been most squeezed by the technological change.

Why has the college premium increased? One view is that it is because technology has become even more demanding of skills, reflecting what economists term “skill-biased technical change.” But Goldin and Katz argue that the pace of technological change and its demand for greater skills has been relatively steady: the automobile and the airplane were as disruptive to lifestyles in the beginning of the twentieth century as the Internet and organizational change were at the end. Rather, what has changed is the supply of the educated. Between 1930 and 1980, the average years of schooling among Americans age 30 or older increased by about one year every decade. Americans in 1980 had 4.7 years more schooling on average than Americans in 1930. But between 1980 and 2005, the pace of increase in educational attainments was truly glacial—only 0.8 years over the entire quarter century.
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In part, the reason for the slower increase in supply has been the relative stagnation of high school graduation rates. Although the United States has led historically in the fraction of the population with high school degrees, that fraction has not increased since 1980, and other countries have caught up and surpassed the United States. Moreover, while more and more Americans in the 20–24 age group are going to college (61 percent in 2003, up from 44 percent in 1980), no doubt in part attracted by the potential boost to wages, college graduation rates have not kept pace: too many students like Jane are dropping out of college despite an increasing college premium over time. College graduation rates for young men born in the 1970s are no higher than for men born in the 1940s—a shocking fact when one considers how much greater demand there is now for workers with college degrees.
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One possible explanation of the relative stagnation in education is that there might be a natural limit to how much education a population can absorb. After all, not everyone has the aptitude or inclination to write a PhD thesis. If that is the case in the United States, however, the rest of the world does not seem to sense such a limit. Despite leading the world in the past, the United States has fallen behind twelve other rich countries in four-year-college graduation rates.
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When we also note that its high school graduation rates put it in the bottom third among rich countries, we can see why the United States is falling behind both its own historical record and its competitors.

Finally, wages are not the only component of income. Income from property such as stocks and bonds also adds to overall income, while taxes subtract from it. Interestingly, even for the richest 0.01 percent of Americans toward the end of the twentieth century, 80 percent of income consisted of wages and income from self-owned businesses, and only 20 percent consisted of income from arm’s-length financial investments.
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This ratio is in stark contrast to the pattern in the early part of the century, when the richest derived most of their income from property. The rich are now the working rich—whether they are entrepreneurs like Bill Gates or bankers like Lloyd Blankfein of Goldman Sachs—instead of the idle rich. At a time when wealth seems to be within the grasp of anyone who can get a good job, it is all the more unfortunate that so many Americans, by dint of their poor education, are locked out of the productive jobs that would make them better off.

I have used the term
education
so far, even when I refer to employability, but a better term is
human capital,
which refers to the broad set of capabilities, including health, knowledge and intelligence, attitude, social aptitude, and empathy that make a person a productive member of society. Formal education plays perhaps the most important role in forming an individual’s human capital, but family, community, and employers also play important parts. In what follows, I focus on education, but I also refer to these other elements, especially in
Chapter 9
when I turn to remedies.

Education plays a far greater role than simply improving an individual’s income and career prospects: it has intrinsic worth of its own, allowing us to make use of our finer faculties. In addition, studies show that the educated typically take better care of their own health, are less prone to indulging in criminal activities, and are more likely to participate in civic and political activities. Moreover, they influence their children to do the same, so that their education has beneficial effects on future generations also. So as it falls behind in education, America is diminishing the quality of its society.

Why is the educational system failing the United States? With a university system that is still considered the best in the world, and which attracts students from every corner of the globe, the failure clearly does not lie in the quality of university education. Instead, there are three obvious problems that my earlier discussion suggests. First, the quality of the learning experience in schools is so poor that far too many students drop out before completing high school. Second, in a related vein, even among those who graduate from high school, many are unprepared for the rigors of university education. Finally, as the college premium increases, the cost of higher education also increases: it is a service that is provided by the well-educated with very small increases in productivity over the years (college class sizes have not increased dramatically at my university despite all the improvements in communications technology, though the learning experience has probably improved). Despite attempts to expand financial aid, a quality education at a private university is passing beyond the reach of even middle-class families. And with tight state budgets, even state schools are raising fees significantly.

Of course, learning does not take place only in the classroom. Differences in aptitude for education emerge in early childhood as a result of varying nutrition, learning environments, and behavioral expectations. The family matters immensely, as do the kind of role models children want to emulate and the attitudes their friends have. At my daughter’s university-affiliated school, the smartest kid in class is pushed to excel and is secretly admired even if she does not belong to the popular set. Advanced students take university courses in high school and even sign up for research projects with professors. However, in too many schools in America, being smart can be positively dangerous, as children resent and set upon those who dare to try to escape the trap of low expectations. Here again, advantage breeds more advantage. The rich can afford to live in better neighborhoods, can give their children the health care and nutrition that allow them to grow up healthy, and can hire tutors and learning aides if their children fall behind. Even dysfunctionality hurts children less if their parents are rich. As the political analysts Ross Douthat and Reihan Salam put it: “The kids in Connecticut prep schools smoked pot and went on to college like their parents; kids in rural Indiana smoked meth and dropped out; kids in the South Bronx smoked crack and died in gang wars.”
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Family instability, too, is harder on poor children. Poor, less well-educated couples are more likely to break up, and when that happens the economic consequences are more severe than for the well-off: the cost of maintaining two establishments, shuttling children between the two parents, and child care eat up a much bigger fraction of the poor parents’ income, leaving less for other basic necessities, let alone counseling and remedial tuition to help devastated children cope with the breakup. Divorce therefore affects the children’s health and schooling far more in a poor family than in a rich family. Inequality tends to further perpetuate itself through the social environment.

We do not need to get into the moral issues surrounding extreme inequality to understand that it is a thoroughly undesirable state of affairs. To the extent that it is caused by a significant part of the population’s not being able to improve themselves because of lack of access to quality education, it signifies tremendous inefficiency. A mind is a terrible thing to waste, and the United States is wasting too many of them.

Differences in educational attainment in the face of rising technological demand for skills are, of course, only one reason for the growing inequality. There are other reasons why measured inequality might rise.
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Rising inequality in the United States in the past three decades coincides with a period of deregulation. Increasing competition does increase the demand for talented employees, thus increasing the dispersion of wages within any segment of the population. In general, this would increase inequality, although by increasing the costs of discriminating against the poor but talented, it could reduce inequality. Deregulation can also lead to more entry and exit of firms, which increases the volatility of each worker’s earnings: an entrepreneur who earns nothing for a few years and then makes millions adds to both the bottom and the top of the distribution curve in different years. (So does a penurious graduate student before becoming a well-paid professor!) These effects may account for up to one-third of the increase in measured inequality.
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Greater immigration and trade have also played a part because immigrants, competing directly for unskilled jobs, and unskilled workers far away, competing through trade, have both served to hold down wages of unskilled U.S. workers. Most studies see the magnitude of these effects as small.
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Unskilled immigrants have, however, contributed to inequality in a different way. They typically occupy the bottom of the income distribution and thus contribute to measured inequality.
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Paradoxically, although their incomes are often higher than their incomes in the home country, they swell the ranks of those who appear down and out in America.

The reduction in the punitive postwar marginal tax on high incomes (from a top rate of 91 percent through much of the 1950s and the 1960s, through a number of ups and downs, to 35 percent at the time of writing) has increased incentives to earn higher incomes and may thus have contributed to the growing entrepreneurship and inequality.
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The weakness of unions may also have reduced moderately educated workers’ bargaining power, though the loss of high-paying unionized jobs probably has more to do with increased competition and entry as a result of deregulation, as well as competition from imports. A relatively stagnant minimum wage has certainly allowed the lowest real wages to fall (thereby also ensuring that some people who would otherwise be unemployed do have a job), though only a small percentage of American workers are paid the minimum wage. Finally, the entry of women into the workforce has also affected inequality. Because the well-connected and the highly educated tend to mate more often with each other, “assortative” mating has also helped increase household income inequality.

The reasons for growing income inequality are, undoubtedly, a matter of heated debate. To my mind, the evidence is most persuasive that the growing inequality I think the most worrisome, the increasing 90/10 differential, stems primarily from the gap between the demand for the highly educated and their supply. Progressives, no doubt, attribute substantial weight to the antilabor policies followed by Republican governments since Ronald Reagan, whereas conservatives attribute much of the earlier wage compression to anticompetitive policies followed since Franklin Roosevelt. Neither side would, however, deny the importance of differential educational attainments in fostering inequality.