April 20, 2003

Future Consequences of High Wealth Inequality

Thomas Piketty thinks that the U.S. is headed down a destructive road that will rob it of many of its social and economic advantages: a road in which family- and inheritance-driven wealth inequality gives the relatively-feckless children of the rich advantages that mere merit cannot outweigh--a society with a true aristocracy. I don't think he is right, largely because I don't see current trends as continuing, but as highly likely to be reversed in the next generation.

On the other hand, America is a society where one-fifth believe their incomes are in the top 1%, and where another fifth believe their incomes will be in the top 1%. Perhaps American society will continue to move in a direction in which are institutions are tuned to suit the convenience of those at the very top of the pyramid.


Daniel Altman: ...The shares of income controlled by the highest-earning Americans are already higher than at any time since the 1920's, according to Thomas Piketty, a former professor of economics at M.I.T. who is now the director of studies at the École des Hautes Études en Sciences Sociales in Paris. In an e-mail message last week, he predicted severe effects from the further increase in inequality posed by the White House plan.

"These new high-income tax cuts, together with all the previous tax cuts (including the repeal of the estate tax), will eventually contribute to rebuild a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the U.S. economy and penniless, talented children simply can't compete," he wrote. "If such a tax policy is maintained, there is a decent probability that the U.S. will look like Old Europe prior to 1914 in a couple of generations."

Posted by DeLong at April 20, 2003 08:26 PM | TrackBack

Comments

I believe my income is in the top 5% of unemployment benefit recipients, and will be in the top 5% of disability benefit recipients.

Posted by: InMarin on April 20, 2003 09:42 PM

What's interesting about the 'top 1%' numbers is that it shows the extent to which the percentile statistics have been concealed: the top percentile starts at gross $200,000 p.a., but we're talking about a fiscal policy in the US that has been designed disproportionately to benefit the top 0.1% -- didn't the numbers on Dick Cheney's benefit from the dividend tax repeal say that he'd gain something equivalent to the median income?

I mean, I wish that the survey had asked these people who think they're in the top 1% (i.e. the top 3 million Americans) to say at what level that top percentile begins...

Posted by: nick sweeney on April 20, 2003 10:06 PM

A bit of Piketty's resume is provided, so we know enough to know that a high-flying math driven institution and a French (so I would guess an institution more favorable to a "talking therapy" form of economics) both hired him. However, when he is quoted talking about "penniless, talented children", I want to know a bit more about him before throwing my sympathies fully behind his views.

On the other hand, when Brad says he thinks an ugly trend in wealth (and after tax income) won't continue without saying why, I want to know a bit more, too. The familiar notion that if a trend is unsustainable, then it won't be sustained surely doesn't apply here. This is a very familiar trend, across time and location. Why won't the trend continue here, Brad?

Posted by: K Harris on April 21, 2003 04:53 AM

AFTER THE GOLDRUSH?

"Well, I dreamed I saw the knights
In armor coming,
Saying something about a queen.
There were peasants singing and
Drummers drumming
And the archer split the tree....


"Thomas Piketty thinks that the U.S. is headed down a destructive road that will rob it of many of its social and economic advantages: a road in which family- and inheritance-driven wealth inequality gives the relatively-feckless children of the rich advantages that mere merit cannot outweigh--a society with a true aristocracy..."

(Would THAT be the sort of society where a thoroughly undistinguished son of an "established" family could be appointed to the highest elective office in the land by a few friendly, if faithless, judges, proceed forthwith kick down the "wall" separating church and state, wage class war on that portion of the citizenry who constitute the OTHER 99 point something per cent of the country (AND loot the treasury in the process), plunge the nation (and the world) into one reckless (but profitable, for a VERY select few) military adventure after another ostensibly in "hot" pursuit of a band of outlaws who always seem, somehow, to elude them?

Is THAT the sort of society he's talking about?)


"...I don't think he is right, largely because I don't see current trends as continuing, but as highly likely to be reversed in the next generation."--Brad DeLong

The NEXT generation is "likely" to clean up the mess? Well, now. THAT'S convenient, isn't it?

Everything'll turn out all right after all. "The next generation" will clean up the mess. Right after whatever's left of baby-booming Clinton style "professional Democrats" have gotten "theirs"...

...All in a dream, all in a dream
The loading had begun.
They were flying Mother Nature's
Silver seed to a new home in the sun.
Flying Mother Nature's
Silver seed to a new home."
--Neil Young

That "place called Hope" really DOES spring eternal...

Posted by: Mike on April 21, 2003 05:15 AM

"That's CLASS WARFARE". My apologies for that quote, which really is a way fo trying to shut down real debate about the distributional implications of changes in fiscal policy. This is an important debate and I'll certainly make a point of reading more from Thomas Piketty. What might be also interesting is an explanation of how pretax income has become so distributed towards the upper percentiles. Has the anti-growth policies of low tax (spend and borrow) since 1981 contributed to this?

Posted by: Hal McClure on April 21, 2003 06:16 AM

"didn't the numbers on Dick Cheney's benefit from the dividend tax repeal say that he'd gain something equivalent to the median income?"

From what I've seen, Bush would gain approximaetly $45,000 and Cheney approximately $320,000 from the proposed tax cuts. Median income is somewhere in the $45,000 to $50,000 range.

Posted by: richard on April 21, 2003 06:48 AM

Brad, I need some good news. Please tell me why you "don't see current [inequality] trends as continuing, but as highly likely to be reversed in the next generation."

Also, I wonder to what extent economists believe that the increase in income inequality hampers economic growth. Certainly, the failure of the median worker's income to increase much over the last 25 years despite significant GNP growth has significantly retarded the purchase of goods and services by the majority of Americans and exacerbated the consumer debt problem.

Posted by: Ben Brackley on April 21, 2003 07:13 AM

The ultra rich will not give up their political power without a fight. The Clinton administration that raised taxes on the ultra rich by bumping the top rate to over 39% was hammered, investigated and hounded for 8 years. Wealthy conservative individuals control foundations that have funded writers who support the policies of the wealthy, they funded the investigations into Whitewater, Paula Jones, etc. to the tune of millions of dollars spent on those non-scandals. Their minions in the media that is coporately owned run by GE, Viacom, Disney, Rupert Murdoch and conservative corporate magnates toe the line in a media echo chamber for the latest conservative spin. The attacks on Bill Clinton is a warning from the wealthy not to threaten their agenda.

Americans are so confused by the media messages that the majority think that Saddam Hussein was behind 9/11 that there were Iraqis (not Saudis) on those planes, they don't know that the Clintons were not guilty of any of the Whitewater charges, that Al Gore never claimed that he "invented the internet" and the list goes on and on.

The media, especially TV serves as a powerful force to focus Americas attention. They also allow those in power to set the agenda. Thus, the media lets Bush tell us uncritically that the dividend tax cut is an economic stimulus package when the majority of economic opinion is that the dividend tax cut will have little stimulus effect. Sound bites of George Bush promoting his tax cuts play hundreds of times to day while the opinions of economists are seldom mentioned.

It is very difficult to counter these messages when the wealthy have the money necessary to put the media behind them. I awoke today to another full page ad with a picture of Grandma beggin our senator not to tax away her dividend savings. If Grandma is poor, she probably is not paying much if any tax on the little dividends she does receive. If Grandma is wealthy, then why should the next generation have to supplement her? What are deficits but a tax on future generations? Grandma is not buying the newpaper ad. Some wealthy corporate buddies of Ken Lay are.

People probably thinks that the majority of the dividend tax is paid by poor Grandmas and not rich CEOs like Dick Cheney and Ken Lay. I saw a recent poll that asked about support for the estate tax. Most people were against the estate tax. Asked if they would be more likely to support the estate tax if it only applied to estate above $1 million, then many people changed their opinion. People don't even realize that only inheritance over $1 million is taxed. Maybe the pendulum will swing the other way, but it will require a correction in the way information is delivered so that people know the truth and don't believe dishonest spin. As far as I can tell, the internet creates as much or more misinformation as truth.

Posted by: bakho on April 21, 2003 07:21 AM

Piketty, unfortunately, seems to be on to something. I wish it were not so. If you know a reason why it won't happen that way, Brad, I'd like to hear it. So far as I can tell, nothing will change until and unless a major social upheaval (Depression, for example) occurs.

Posted by: Chuck Nolan on April 21, 2003 09:42 AM

Hal McClure writes:

"...This is an important debate and I'll certainly make a point of reading more from Thomas Piketty. What might be also interesting is an explanation of how pretax income has become so distributed towards the upper percentiles...."

This certainly IS an important debate, Hal.

And, in my opinion, the first thing we need to do is dispense with jargon like "distributional implications of changes in fiscal policy", look BEYOND ephemeral "horserace" issues like "income", and focus on the really important issue:

WEALTH

How IT'S accumulated, distributed, controlled, used and ABUSED in THIS and OTHER "banana" republics around the world.

Here's a jargon-free "birds eye view" of the problem:


The L-Curve

By David Chandler

"...Imagine the population of the United States stretched across a football field in order of income, from poorest to richest. Now imagine a stack of $100 bills representing each person's income. (A 1-inch stack of $100 bills is $25,000.) The red line represents the heights of those stacks compared to a football field. I call this graph the "L-Curve...

...The graph illustrated in these two pictures represents income, not wealth. The distribution of wealth is even more skewed. Quoting from a recently-published book by political philosopher David Schweickart,

'If we divided the income of the U.S. into thirds, we find that the top ten percent of the population gets a third, the next thirty percent gets another third, and the bottom sixty percent get the last third. If we divide the wealth of the U.S. into thirds, we find that the top one percent own a third, the next nine percent own another third, and the bottom ninety percent claim the rest.' (Actually, these percentages, true a decade ago, are now out of date. The top one percent are now estimated to own between forty and fifty percent of the nation's wealth, more than the combined wealth of the bottom 95%.)

What are the implications of this picture?..."

http://www.lcurve.org/


Here's something on ONE of the ways things recently got even worse:


ESTATE TAX REPEAL:
A Costly Windfall for the Wealthiest Americans

http://www.cbpp.org/5-25-00tax.htm


HERE'S something on ANOTHER way (of MANY) that our political (AND academic) "leaders" continue to willfully ignore threats to all of us for fear of discomfitting the "fortunate few" families who happen to be hiding behind this and/or that sleek TransNationalCorporate facade we all know and love:


Notes on the U.S. Trade and Balance of Payments Deficits

Wynne Godley

1. The United States has a balance of payments deficit worth nearly 4 percent of GDP and negative net foreign assets (or foreign debt) worth nearly 20 percent of GDP. If U.S. growth is sustained in the medium term, it is quite likely that the balance of trade in goods and services will not improve. The United States is the only major country, or country "bloc," to have a substantial trade deficit and this is proving of great advantage to the rest of the world.

2. If the balance of trade does not improve, there is a danger that over a period of time the United States will find itself in a "debt trap," with an accelerating deterioration both in its net foreign asset position and in its overall current balance of payments (as net income paid abroad starts to explode). Such a trap would call imperatively for corrective action if it is not at some stage to unravel chaotically..."

http://www.levy.org/docs/stratan/stratan.html

(I'm tempted to mention the "peace dividend" that wasn't, Zbig's "grand" little scheme for controlling the world, global warming, "star wars", the WTO and IMF, and several other old and new thorns in the side of everyone on earth as well. But I won't.)

Learn about those things too and weep, if that is your wont.

Then read this:


The Divine Right Of Capital: Dethroning the Corporate Aristocracy

Marjorie Kelly

"The Divine Right of Capital shows how the corporate mandate to maximize returns to shareholders is out of step with democratic and free-market ideals.

My aim is to start a dialogue about the core problem of capitalism. The symptoms range from bloated CEO pay, sweatshops, and speculative excess to stagnant wages, corporate welfare, and environmental indifference.

All spring from a single source: the mandate to maximize returns to shareholders. In major public corporations -- where there is little reason to so favor shareholders -- this mandate amounts to property bias, which is akin to racial or gender bias.

It arises from the unconscious belief that property owners, or wealth holders, matter more than others. The system upholding this belief I call economic aristocracy.

Civilization has crossed a great divide in history, from monarchy to democracy. But we have democratized only government, not economics. Property bias keeps our corporate worldview rooted in the predemocratic age. To change this, we begin by seeing it..."

http://www.divinerightofcapital.com/

Posted by: Mike on April 21, 2003 10:10 AM

I think interest rates have already spoken on this matter.

If you are wealthy then you may spend it or you may lose it. Unfortunately this also applies to poorer people who would like to save for their future.

I know what vision it is the president has when he imagines the extra investment he unleashes causing more growth, but it does not work the way he thinks. More investment has diminishing returns, so all you end up with is lower rates and temporary booms in certain asset classes.

Posted by: snsterling on April 21, 2003 10:14 AM

>I don't see current trends as continuing, but as highly likely to be reversed in the next generation.

Why?

Posted by: George Zachar on April 21, 2003 11:03 AM

"I don't think he is right, largely because I don't see current trends as continuing, but as highly likely to be reversed in the next generation."

Goodness it would be nice to see that, though sooner would be better.

My sense is that there are only two ways to reverse the trend. One is to create counter balancing forces to the preferential attachement behavior of money to wealth: transfer payments, regulatory drags on the big, a mess of inflation. The political will for such things seems to arise out of economic catastrophies, e.g. stuff like Enron, Japan etc. Tough way to get change.

The other way is a burst of economic growth that benefits huge tail of the L curve. That might happen but much of the growth we are are freeing up via electronics works by breaking down barriers (trade barriers, information barriers, capital barriers, etc.) and as those breakdown you get further reenforcing of the preferential advantages of the existing hubs.

Posted by: Ben Hyde on April 21, 2003 11:40 AM

"I don't see current trends as continuing, but as highly likely to be reversed in the next generation."

Why, indeed?

Posted by: anne on April 21, 2003 11:49 AM

In his book Wealth and Democracy, Kevin Phillips notes that the period of 1940-1970 was one in which the gap between rich and poor was abnormally low. If left alone, the income gap will widen over time. Maybe the US is returning to a more normal situation. Not that this would be good for the country over all.

Posted by: bakho on April 21, 2003 12:03 PM

"If left alone, the income gap will widen over time"

Karl Marx thought so too, so he proposed a very direct way of reducing it. When implemented, his method led to both a wide income gap and low standards of living.

I think people have become so used to the idea that accumulated wealth grows faster than the economy that they have forgotten this situation can only be temporary. Unfortunately for the wealthy investors, the return on their investments depends upon how much it is needed. Currently it is very difficult to make your money grow faster than the economy, especially after tax. If this keeps up workers will gain on savers. Or at least hold even.

Posted by: snsterling on April 21, 2003 01:17 PM

A "normal" situation for America and other developed democracies is not a situation in which the middle class is continually threatened.

We are a middle class democracy, and will be sorely threatened as the gulf betwwen the rich and middle class rapidly and continually grows.

Posted by: anne on April 21, 2003 01:39 PM

Mexico: Average number of hours worked yearly, 2001: 1863.1
America: Average number of hours worked yearly, 2001: 1979
Japan: Average number of hours worked yearly, 2001: 1842
Spain: Average number of hours worked yearly, 2001: 1815.8
Canada: Average number of hours worked yearly, 2001: 1779.5
Britain: Average number of hours worked yearly, 2001: 1711
Italy: Average number of hours worked yearly, 2001: 1606
Sweden: Average number of hours worked yearly, 2001: 1602
France: Average number of hours worked yearly, 2001: 1531.7
Germany: Average number of hours worked yearly, 2001: 1467.1

Bill Moyers - NOW
International Labor Organization

Posted by: jd on April 21, 2003 01:42 PM

Brad, the "top 1%" factoid is the result of a poorly posed survey question and ought to be discontinued. The original question explained a few things about a previous Bush tax plan (that it would only substantially benefit the top 1%) and then asked "Do you expect yourself and your family to benefit substantially?". I'm not sure where the unwarranted extrapolation came in, but it's an urban myth.

Posted by: dsquared on April 21, 2003 01:44 PM

Bakho: This is one of my pet ideas. Not really a criticism of your post. It may be a criticism of Phillips.

The word "abnormally" can mean almost anything. In chemistry it has a specific meaning, as in "0.9 normal saline". Elsewhere it either means something like "OK" (not neccessarily great, but not bad either) or "average" (according to some way of calculating average, median, mean, etc.). In still other cases it simply means good and not bad; nothing "abnormal" is good. No one is abnormally healthy, for example.

An "abnormal low gap between rich and poor" really means nothing more like "lower than most earlier periods". But there's an implication, if you express it that way, that there's something wrong with it, or that it's going to have to change. We don't yet speak of "abnormally low rates of rickets" during that period, for example, though if the Social Darwinists work at it for awhile they might comeup with something for us.

Politically, as we see, the anti-equality forces have been on the move since 1973 or so, whereas the pro-equality forces have been defensive and demoralized. So there is a reversion to the previous mean. To an extent it might be because of overreaching by the Great Society, but objectifying something people are making happen as a "trend toward normalization" is very misleading.

Posted by: zizka on April 21, 2003 02:06 PM

"Mexico: Average number of hours worked yearly, 2001: 1863.1
America: Average number of hours worked yearly, 2001: 1979
Japan: Average number of hours worked yearly, 2001: 1842"

Protestant work ethic. Another part of what makes America great! :-)


Posted by: Mark Bahner on April 21, 2003 02:12 PM

zizka-

I get your point. My thought is that it took an extraordinary effort on the part of the Unions, the Federal Government under FDR and a change in business attitude to produce a more equal distribution of wealth in America. During the Great Depression, there was a real threat of communism being adopted as an alternative to the collapse. This put a lot of pressure on business that is just lacking today. That era may have been special, one of the few times in the history of the US that the gap closed between the wealthy and the poor. Especially if the estate tax is eliminated, the accumulation of wealth by the wealthy will accelerate.

Posted by: bakho on April 21, 2003 02:24 PM

There seems to be some controversy about whether or not such wealth differences can be sustained.
Here are some thoughts.

• What sustains the US' debt right now is the willingness of other countries to invest. This will stop if they perceive that the US is an unreliable place in which to invest. This might occur if foreigners conclude that the fiscal system is unsustainable (either the tax cuts will ruin the country, or they will prompt inflation, both of which make 4% 10yr treasuries look unappealing).

• Social unrest will also make the country look unappealing to investors. In the past the US system, based on the New Deal, has co-opted serious social unrest by giving enough people a stake in the system that they feel it's not worth destroying. Will this change in future? This one I'm not sure about. On the one hand having a mortgage to pay off and some small amount of money in a 401k is a great incentive to stability. On the other hand if you are unemployed (or so terrified of becoming so that you're accepting anything at your job), if you cannot pay medical bills, and you have no confidence in your retirement (either your company pension, Social Security or your 401k [perhaps it's small, perhaps it was in Enron, perhaps you're just sick of how you were lied to about the stock market], then concerns about the mortgage may seem less pressing --- heck if you recently refinanced, screw it; you own so small a fraction of the house that who cares what happens to it.
I can imagine social unrest taking the form either of constant simmering low-level anger ala the 60's, and/or ever more extreme "law-and-order; blame the foreigners and anyone but us" type governments being elected ala Weimar Germany->Hitler.

• A third consequence of the country becoming less appealing to foreigners is the uprooting of at least half of the US' current science and engineering talent, and no further inflow from foreign countries. Perhaps Australia, perhaps Europe, perhaps Thailand, perhaps Russia, perhaps even Japan will decide (based on demographics or common sense) to make a serious play for these people and hasten the process along. (This is a more speculative possibility simply because I'm less than convinced that these countries are any less stupid than the US when it comes to facing the blatantly obvious.)

• Finally it is tempting in such situations to look at other countries (as I did in my point above) and conclude "they're even stupider, the US will do OK". I think this is mistaken. A stupid US and as stupid, or stupider, other countries, does not lead to a happy outcome; it leads to misery the best version of which is some sort of stagnation. It was aristocracies without oversight that took Europe into WW1---and it took WW1 to get Europe to change. Part of a culture of aristocracy is a general belief that the world (which then gets expanded to the world outside the US) owes you, and while Syria is a military paper tiger, in much the same league as Iraq, sooner or later the foe the US brushes up against is going to be a country with a serious military that is unwilling to just hand over what is demanded.

Posted by: Maynard Handley on April 21, 2003 03:07 PM

One argument for the relative increase in equality throughout Europe during the XX century was that the need for enormous amounts of military manpower in mass armies required that the common man be treated fairly decently. (Antonio Machado: "'The masses' were a revelation of the machine-guns".)

The new elite professional army bodes ill in this respect. I think this also explains part of the political role of the rural red states. The electoral college gives them disproportionate power; the Feds give them disproportionate benefits; military bases and plants are sited there; and they have a much higher rate of military participation than the blue states.

Victor David Hanson writes a lot about this kind of thing. He basically traces democracy back to the Greek phalanx, which was a sort of one-for-all all-for-one citizen bonding experience. He doesn't seem to realize that we've moved over to an entirely different system, in which war is fought by trained experts using expensive high-tech weaponry, and the average citizen sits and watches on TV. Vietnam was the death of the citizen army.

Posted by: zizka on April 21, 2003 04:08 PM

>> Protestant work ethic. Another part of what makes America great! :-)

Wage slavery. Another part of what makes American grrrreaaattt!!!!! ;-)

Posted by: nick sweeney on April 21, 2003 04:20 PM

I am not sure income and wealth inequality is all that important. I think measures of median income and wealth are far more important. I think the U.S. is probably doing fairly well by those measures particularly if they are adjusted for immigration.

Posted by: Joe Blog on April 21, 2003 04:38 PM

"A third consequence of the country becoming less appealing to foreigners is the uprooting of at least half of the US' current science and engineering talent."

Most of the US' current science and engineering talent is now unemployed, partially due to the transfer of work to lower-paid H1Bs and the outsourcing of work to third world countries.

Posted by: Jon Meltzer on April 21, 2003 04:47 PM

I'm a bit of a fan of campy sci-fi, so maybe my views are a bit skewed, but do you think technological advances might help alleviate some of the problems associated with growing inequality? For example, the pharmaceutical industry is making great progress in drugs that control human psychology: Prozac (depression), Ritalin (concentration; I used to take that stuff. It's great! I haven't taken it in years, and I can't concentrate worth a damn as a result.), Xanax (anxiety), etc. Perhaps there will be drugs to help alleviate discontentment with their position on the part of the working class? It could even be incorporated as an anti-crime measure to incorporate it regularly into drinking water or certain select condiments, much like flouride, chlorine, iodine etc.

Similarly, problems exacerbated by inequality, such as the tendency for hereditary heirs to wealth to be no more or less motivated than the next guy, thus not being able to sustain the leadership that depended on their entrepreneurial mother or father's ambition, could be limited through neural enhancement, childhood conditioning, and/or selective breeding so as to ensure that the sons and daughters of leaders are usually a bit more than human.

I realize that many view technological solutions to social problems with suspicion: technologies are all fine and dandy, but aren't the roots of both the causes and the solutions to these problems institutional? Yeah, well... point, but that's a thought for real economists/socialogists/whatever, not first-year college kids with a taste for campy sci-fi!

Posted by: Julian Elson on April 21, 2003 05:59 PM

One more piling on with- why? Why do you think the next generation will reverse these trends?

I suppose any discussion of why has to flow from "what do we believe is causing it?" I'm betting you're more in the Piketty, Saez, et al camp that the growth of inequality has been brought on by some sort of "social breakdown" (I think someone has used the term "outrage constraint") than in the technical factors camp (deindustrialization, technology and skills bias, trade, etc). If you're in the Piketty camp, what's the basis for your optimism? Seems to me, once the boundaries of acceptability have been trampled, reasserting that authority is not going to happen (well, with an addenda that this is taking the violent/ revolutionary/ bring us all down to the lowest common denominator type of solution off the table).

Piketty's quote does seem to be an exaggeration for effect, but his quote is spot on- a hollowing of the public spaces and institutions which would enable a solution to the inequality short of destruction.

So, like all the rest, I ask, where's the optimism coming from?

Posted by: Brendan on April 21, 2003 07:25 PM

My strongest reaction was to the word aristocracy.

I have worked at high-tech start-ups in the Boston area for the last 6 years. I will make no claim as to being an old hand, but I’d like to share a few observations. An inside joke at my current company is that we are more inbred than . Most employees have several connections (previous jobs, relatives, college roommates…) to the others. It is very rare for someone to have only a single connection. In short, networking is king. This is certainly not isolated to one company. Chances are that the founders of one company know the founders of another. If not, they are typically only a phone call or two removed. They sit on each other’s boards they attend the same parties. Getting funding from a V.C. is much easier if you have a track record. It is a classic case of positive feedback. This applies mainly to senior level positions but the effects are very real down to the junior engineers.

To some extent, this makes sense. Why take chances hiring a complete unknown (both in terms of abilities and personality) when you can easily find someone within the network to suit your needs? In today’s economy, it’s really nice to know that finding your next job is closer to a few phone calls than logging onto monster.com. As a V.C., if the start-up you funded crashes, being able to say ‘they’ve succeeded before’ is a good defense. (Obviously, the dot-com bubble was an aberration. – A flight to quantity rather than quality.) Call it networking, inbreeding or a screening-signaling mechanism.

That’s the good news. However, it also has a pernicious side. It is very difficult to break into this without an invite, regardless of ability. It ignores the fact that people change; they can burnout, or have messy divorces, become convinced that they’re infallible, etc… When a job or funding is easier to come by, the commitments aren’t taken as seriously. Looking back over the years, there were a number of business relationships that never should have existed or should have been terminated. They continued strictly because the principals involved were FoF – friends of founders.

Is this fair? No. Is it good business? I can’t really quantify that. However, I’m running on the theory that it wouldn’t exist if its members didn’t think it was valuable to them. The dot-com burnout didn’t kill it. The recession, if anything, has appeared to strengthen it. Granted the more egregious abuses are gone but it’s still prevalent.

It’s also pretty clear this is not isolated to start-ups or small companies. The board of directors of large public companies has the same inbreeding problems. I think I remember a study a while back that described a negative correlation between inbred boards (as measured by the number of board members who sat on other boards together) and performance. Again, I come back to the point that this wouldn’t exist if they didn’t find value in it. It just may be that the shareholders wouldn’t find value in it.

The knee-jerk response to this is that the market will eventually work these inefficiencies out. Given how long this has been going on and how entrenched it is in the presumably innovative startup community, I think its clear where the burden of proof lies.

Many of the people I work with now have children. I can’t help but wonder if they will understand or appreciate the bye they have been given in life. Will they appreciate the amount of work some of their co-workers have put in just to reach the point where they are starting out?

The networking/incest effects are a powerful positive feedback. Couple it with the positive correlation between income/wealth and admission to top tier colleges and suddenly the pre-WWI Europe scenario doesn’t look that far fetched.

Incest was one of the dirty little secrets of the aristocracy. It looks like it might be again.

Posted by: chris_a on April 21, 2003 10:12 PM

One factor that much income inequality study fails to take into account is that most people in economically free countries like the US progress from lower income brackets to higher ones over their lifetimes. (Perhaps the widening gap reflects in part that the rewards of opportunity are geometric and not linear.) I'd be more interested in knowing how Bracket A's real income of today compares with Bracket A's income of yesterday, not how its gap with Bracket B has changed over time.

Posted by: Alan K. Henderson on April 21, 2003 10:17 PM

Progressing from one bracket to another is relevant if you are studying quintiles. It is not relevant if you are studying the disproportionate control (economic, political and [via the media] cultural) of the top .1% which is what we are discussing here.

Posted by: Maynard Handley on April 21, 2003 11:37 PM

Joe Blog's post about looking at median income is a small step in the direction of the philosopher John Rawls. Rawls would have us look more at the income of the lowest percentile rather than the 50th percentile (to abuse the statistical terms for what really are people). Both are sensible enough to suggest that any rising tide that lifts all boats is a good thing. As I read the evidence, however, real income for the working poor has fallen over the past 25 years and the real income for the median worker has not increased. With mean income rising, the rising tide is lifting the yachts but not much else (with all due apologies to John Kennedy for what probably is a poor job of paraphrasing).

Posted by: Hal McClure on April 22, 2003 07:29 AM

Joe Blog's post about looking at median income is a small step in the direction of the philosopher John Rawls. Rawls would have us look more at the income of the lowest percentile rather than the 50th percentile (to abuse the statistical terms for what really are people). Both are sensible enough to suggest that any rising tide that lifts all boats is a good thing. As I read the evidence, however, real income for the working poor has fallen over the past 25 years and the real income for the median worker has not increased. With mean income rising, the rising tide is lifting the yachts but not much else (with all due apologies to John Kennedy for what probably is a poor job of paraphrasing).

Posted by: Hal McClure on April 22, 2003 07:29 AM

Mobility doesn't deflect the rising inequality fact. Rising inequality has been met by stagnant to declining mobility these past 30 years (If we include the mobility work with inequality, we can much more begin to see the roots of Piketty's aristocracy). However you slice it (age cohorts, etc) "progress" is paying out less and less for many over the past, say, 30 years. (BTW, I suspect rising income over a lifetime is common in economically unfree countries as well as economically free societies- after all, rising income conveys a sense of progress which keeps us contented, but anyway..)

Posted by: Brendan on April 22, 2003 08:31 AM

High tech start-ups and small companies are frequently touted as 'engines of wealth creation'. The point of my previous post was that *access* to this community is limited (or at least those in my experience): Some people get in for free while others face substantial barriers to entry.

Going from cashier to regional manager can satisfy the conditions for bracket mobility. To me, the issue is how easy is it to move to and from the *top* bracket. Given the positive feedback, it's easier to stay there once you are there and it is more difficult to get there if you are not.

This dovetails with Maynard Handley's 3rd consequence. Once those barriers get sufficiently high, it will be easier for foreign talent to create their own community in their own country.

Posted by: chris_a on April 22, 2003 08:34 AM

Somebody above wanted to factor out illegal immigrants. To the extent that our economy relies on the labor of illegals, they should be included in all calculations. Otherwise we could end up with fictitious statistics ignoring a significant part of the actual economy.

The second significance of illegals is that (along with the threat of exporting jobs and legal immigration), they serve to keep everyone's wages down (in areas in which they are able to compete).

My belief is that the secret behind "full employment without inflation" is turning the overseas threat (immigration and job export). And that it is essential identical to the reason why the lowest quintile is worse of, and the lower half no better off.

Free trade may be a good thing for Americans on the average and perhaps even for the median American. There are those for whom it was not a good thing, and that fact was deliberately obscured during the debates on the subject. The economists' answer is that it's bad for the econmoy for less productive people to be rewarded more than the minimum required, and that inequality and even poverty are good things (the threat of poverty motivates people and makes them humble: what used to be called "labor discipline"). This works for conservatives and libertarians, but it's a hard one for Democrats to sell.

Marx's "reserve army of the unemployed" is still out there. (Yeah, David -- Marx, Stalin and I killed over a hundred million people). And as long as employers can jump from Mexico to Thailand to Bangla Desh, the improvement in wages in the the third world will be limited too. When western employers move into a new labor pool, there's an immediate flood of money but not necessarily a steady improvement from there; employers who left the U.S. can also leave Mexico).

Posted by: zizka on April 22, 2003 09:29 AM

Quite an interesting discussion.

The one point that should not go unexplored is this: Income inequality is the highest it has been since the twenties.

The global debt load is also double what it was in the mid to late twenties.

hmmm...

Posted by: Lorenzo on April 22, 2003 10:29 AM

The reason I would like to see immigrant incomes factored out is that I think they may obscure whether the average person is really doing better over time. It is possible to have a situation where the median income of U.S. born workers is rising and the median income of immigrant workers is higher than what they would have received in their native country while the overall U.S. median income shows little progress over time.

Posted by: Joe Blog on April 22, 2003 10:34 AM

For some purposes, factoring out immigrant incomes would be valid. I was expressing concern about the possible creation of a permanent semi-legal shadow economy manned by workers (whether illegal or green card) who would never get the rights of Americans, citizen status, or hope of the good life the way all previous immigrant groups did.

Posted by: zizka on April 22, 2003 06:12 PM

There is a lot of data on the income, but is there any data on how much the top .1% actually spend on themselves?

Obviously there are many areas of life in which Bill Gates cannot outspend me 1 million to 1. No question he can do many things which I can't, and he certainly controls a large sum of money, but he can only consume so much food, medical care, transportation, housing, etc. He could try to waste it Saddam style, but like most other super wealthy most of this wealth ends up being donated taxed or diffused through generations (keeping the estate tax would greatly speed this up, a good idea in my opinion).

Yeah even if Bill gives only 1 Bil to each of his kids as he claims he will then it will be many generations before someone needs to work out of necessity, but most will probably take a job anyway. If most of the wealth ends up being donated or invested and then taxed before it can be spent then I don't see what is so outrageous about it (well, the fact he was allowed to amass wealth by way of monopoly might be considered outrageous).

To look at it another way, given that most of the wealth of the top .1% does not actually get spent on the .1%, how much would it really benefit everyone else if the wealth of the top .1% were confiscated and distributed proportionally (by income) to everyone else. Would I get 10,000 bucks? 20,000? 30K? If everyone tried to spend their part of it then interest rates would go up and investment down, taxes might go up, and maybe charity recipients would be hurt.

Posted by: snsterling on April 22, 2003 08:52 PM

From what I've read, the super-rich tend to spend their money on status and control rather than consumption. Past some arbitrary amount (100 million?) you can take care of your needs and desires and your kids' needs and desires indefinitely. So after that you spend your money on a racing yacht or a sports team or an art collection, or else you just try to keep expanding your empire.

I think that most of the stres sin this thread, certainly for me, has been the danger of producing a dispossessed class, rather than the problems with too much wealth. But to me, to much concentrated control can be a bad thing in itself.

Posted by: zizka on April 22, 2003 09:03 PM

Just a small point above, but K Harris wrote:

>>institution and a French (so I would guess an institution more favorable to a "talking therapy" form of economics)

Which speaks volumes (it's monumentally, massively, untrue, btw, Sciences Politiques is an extremely mathematical school and Francosphere economists in general tend to be very mathematical; check out Jean Tirole or the Louvain faculty if you don't believe me). Why the assumption that French people can't do mathematics? I can only explain it in terms of a strange Anglo belief that French men are effeminate, therefore they're a bit like women, therefore they can't do maths. Which makes it rather hard to explain the existence of the French precision-engineering firms which dominate all sorts of obscure industries.

Posted by: dsquared on April 23, 2003 03:00 AM

Couple of things. Zizka's comment about machine guns hasn't drawn a nibble, but may be among the more important distinctions between the present situation in the US and the period of social change in the early and mid-20th century. The willingness of elites to send the common man up out of the trenches over and over again to near certain death from machinegun fire in WWI, generally go no good purpose on the battlefield, had a profound effect on the relationship between the classes in Europe. One result, as I understand it, was that that the aristocracy had to give considerable ground. The inability of elites around the world to prevent or end the Great Depression worked to close the gap in political power, too. Absent massive evidence of immorality and ineffectiveness on the part of economic "winners" in the US, what will motivate a shift back toward equality?

Dsquared,

Maybe you were reading some of your own concerns into my post. From a guess that a French institution of higher economic learning might have a less mathematically driven approach than MIT, you suspect that I suspect all French men of being effeminate. Hmmm. That's a little like my taking your reference to French engineering firms and posting a response that accuses you of owning lots of stock in a French engineering firm engaged in some obscure industry. Easy there, lad.

Posted by: K Harris on April 23, 2003 05:38 AM

France, or rather French people, has a strong tradition in maths. In reckon that French mathematicians awarded with the Fields medal are 8 or 9, and the USA 18 or 19.

DSW

Posted by: Antoni Jaume on April 23, 2003 06:01 AM

Hi K Harris,
Do Enron, Health South etc qualify? The economy seems to be doing its part. The Islamic world may see some of the military parallels too.
BTW the French lost 1.5 million in WWI but had dealt with their aristocracy somewhat earlier.

Posted by: Jack on April 23, 2003 06:24 AM

>>From a guess that a French institution of higher economic learning might have a less mathematically driven approach than MIT, you suspect that I suspect all French men of being effeminate.

Well alright, why did you make that guess then?

And your riposte, I'm afraid, misses its mark. The French precision engineering industry is in general composed of companies which are privately owned and not quoted on a stock exchange. Presumably because they are run by homosexuals.

Posted by: dsquared on April 23, 2003 07:07 AM

One thing that concerns me, that has been touched on in this thread, is the number of information jobs leaving the country. Business Week had a story, I wrote a post with some links to others who are talking about the phenomena.

http://www.therant.info/archives/000994.html#000994

What will people who have given up a whole section for their working life to switch to an industry that will be largely off shore in the next 5 years?

Posted by: Rick DeMent on April 23, 2003 07:50 AM

Dsquared,

Why did I make the guess? I might ask why you made the wild stretch from my guess (clearly marked as a guess, I might add) to an assertion (not even a guess - "It speaks volumes" when in fact my guess had nothing to do with the volumes you assumed it spoke) about the nature of my guess and a whole cockamamie cultural context to go with it. My point was that, despite evidence that the guy has won an impressive place in the world (having something to say about economics both in a math and, I guessed, a not-so-math form of expression), his "penniless" comment made me want to know more about him before, well you read it. The real context of my guess, not the one that grew in the fertile soil of your imagination, was what I understand to be a less thoroughgoing reliance on math in writing economics in the rest of the world than in the US, France included. The particular institution in question is an exception? OK by me.

So what is this overwhelming need to score point, you poor thing? You went on to the French engineering firm thing, doing your utmost to correct me about the nature of such firms, when the nature of such firms is entirely beside the point. My point was that your math/French male thing as silly and misguided as my assertion about your stock holdings. My statement, as an example of how silly yours was, doesn't need to to reflect the true nature of French engineering firms to make its point. Willfully missing that point doesn't contribute much to the conversation, but if you feel the need to give yourself a high five and declare a "Miller Time", be my guest.

Posted by: K Harris on April 23, 2003 08:43 AM

Merely that you are not alone in this; many other Anglos seem to be of the same opinion regarding the French and mathematics, and, like any other systematic mistake, it's interesting because it tells us something about how people perceive the world. An alternative explanation would be that it's just too much for American egos to bear that France is not only their superior in terms of literary theory but also at least their equal in terms of mathematical prowess, but it wasn't as interesting.

Anyone else have any theories about why Anglo-Saxons (particularly Anglo-Saxon economists; I seem to remember Krugman making this mistake in the past) believe that the French are no good at maths?

Posted by: dsquared on April 23, 2003 10:23 AM

What should be of interest, and our focus, should be our institutions of upward mobility, like the public school system. How healthy are these institutions? If they are healthy, then why should we worry so much about inequality? If they are not, why the obsession with current tax policy, which in the long run surely counts for less?

Posted by: Jim Harris on April 23, 2003 10:44 AM

Or there could be alternative explanations for (what you assert is) a systematic error about French economic writing that do not require reference to some ego weakness among Americans. Those might actually be more interesting than theories that require bashing some group or other. Meanwhile, do we detect a systematic bias in Dsquared's thinking? That any reference to or belief about the French (oh heck, why limit it to them?) that doesn't precisely reflect his own views, or even opens the possibility that it doesn't relfect his views, has to be based on some benighted, homophobic, and otherwise unworthy view of the world? Or maybe you were just having a bad day.

Posted by: K Harris on April 23, 2003 11:38 AM

If it isn't possible to reverse the increase in inequality, perhaps we need to find out how to ensure that the children of the very wealthy are intelligent, ambitious, and entrepreneurial, as a fall-back solution? After all, intelligence, ambition, etc. are not entirely innate, and are learned to a fairly large extent, I would guess. If we can find some way of ensuring that the ruling aristocracy is talented, then that could be almost as efficient as a merit based society. The question is, how to do that? The thing is, it isn't enough that the heir-children be smart or ambitious: after all, many smart, ambitious people fail at business. They need a special "knack" for doing business that their mothers or fathers had, yet no one knows, as far as I can tell, what that knack is, let alone how to teach it.

Perplexing...

Posted by: Julian Elson on April 23, 2003 12:44 PM

K Harris, dsquared: Calm. You may be both right. The French are indeed extremely strong in mathematics. E.g. Serre was just the winner of the first "Nobel" (Abel) Prize in mathematics.

But this does not mean that French *economists* have to be well versed in mathematics! Students who are strong in mathematics tend to go the grandes ecoles route, and the study of economics tends to be of financial mathematics, hence the good representation of the French in investment banks on the options side. But I think that those who study economics out-and-out go through the French university system, where mathematics is less necessary and political economics is well represented.

Posted by: Andrew Boucher on April 23, 2003 01:01 PM

Andrew Boucher,

Thank you. That is a highly civilized way of making conversation, and also pretty enlightening, about the educational paths and all. I don't really have a dog in the fight over the French ability to do math (which leaves one dog chasing his tail, as far as I can tell). In fact, I had understood that one of the originators of the calculus was French, but that's a story for another century.

Regards,

K

Posted by: K Harris on April 23, 2003 01:35 PM

Julian, methinks you miss the point. Piketty's aristocracy could be brilliant innovators, managers, etc and the root concern remains- that a talented underclass (although I'd maintain the talent level of the underclass is a side point) will only have opportunities which suck. That the entire concept of freedom- in a meaningful sense- would cease to exist for the vast majority of the population. While the concern that a feckless elite would ruin the economy (long term, such a situation would seem to bring about Prof. Delong's increasing equality expectation- though not nicely) is worth worrying about, it is not the really the point.

Also, can a talented aristocracy ever be as efficient as a meritocracy? Sure, those at the top could be plenty skilled, but what about that 95% or more who are never given a chance to truly develop their skills (if I were to treat people as strictly economic inputs, such a scenario would have to be classified as a drastic underutilization of resources).

Posted by: Brendan on April 23, 2003 02:05 PM

I have read that a third (25%) of French economists think that 2 + 2 = 5. I have no idea why Bush hasn't hired any of them yet. He could call them "Freedom Economists".

Posted by: zizka on April 23, 2003 02:18 PM

I think that there's a distinction to be made between wealth and access. I am much more concerned about restriction of access than I am about concentration of wealth. With that said, it is clear that wealth certainly has an effect on access.

To pick on three 'institutions of upward mobility':

-private sector employment: See the positive feedback / networking effects rant in my first post.

-secondary education: Legacy admissions not to mention ability to pay tuition. (For further insult to injury, tuition has consistently outpaced inflation for quite a while)

- primary education: Private school vs. public schools funded by fiscally strapped states.

Arguably, a persistent bias in any one of these areas would be an issue. When you put all three together...

Posted by: chris_a on April 23, 2003 03:21 PM

THe Anglo delusion about the French that dsquared referred to is real (though I think his reaction to a throwaway line was a bit over the top). Its simply because France has such an obnoxious chattering class and all we can hear is their chatter; just as the French think all Americans are Republican Texans (loud, chauvinistic and prone to hypocrisy), anglos tend to think all Frenchmen are rive-gauche intellectuals (dilettantist, chauvinistic and prone to hypocrisy).

Most French economists do not fit this stereotype - their faults are more likely to be too great a tendency to mathematical abstraction (its the baneful influence of Continental idealism). Also, just as in the US, "where economists know most and are most agreed is where they are least influential; where they know least and are least agreed is where they are most influential" (I'm quoting Krugman from memory).

Posted by: derrida derider on April 23, 2003 06:30 PM

THe Anglo delusion about the French that dsquared referred to is real (though I think his reaction to a throwaway line was a bit over the top). Its simply because France has such an obnoxious chattering class and all we can hear is their chatter; just as the French think all Americans are Republican Texans (loud, chauvinistic and prone to hypocrisy), anglos tend to think all Frenchmen are rive-gauche intellectuals (dilettantist, chauvinistic and prone to hypocrisy).

Most French economists do not fit this stereotype - their faults are more likely to be too great a tendency to mathematical abstraction (its the baneful influence of Continental idealism). Also, just as in the US, "where economists know most and are most agreed is where they are least influential; where they know least and are least agreed is where they are most influential" (I'm quoting Krugman from memory).

Posted by: derrida derider on April 23, 2003 06:31 PM

Excess in the defence of France is no vice, just as moderation in the defence of mathematical economics is no virtue, as a great Frenchman once said.

I'm not even prepared to concede Andrew's compromise position; even the provincial universities of France employ people like Jean Tirole (Toulouse).

And unfortunately, I am doomed to act the smartarse with K Harris again; neither Newton nor Leibniz were French, though obviously many extremely prominent mathematicians were.

If I ever get rich enough to be a crank, I have always intended to endow a foundation for the purpose of translating the French-language economics literature; there are a number of fantastic papers which aren't available in English. It's not quite at the level of the German physics and classical studies literature, but there's an important gap here.

In retrospect, I think that some sort of apology is in order for the implicit charge of homophobia; I was actually joking but didn't make it clear enough, sorry.

I suppose that in principle, the "Frogs can't do maths" trope might have something to do with the Post-Autistic Economics movement, which started as a protest by French economics undergraduates at the amount of mathematics they were forced to do in the French undergraduate syllabus.

Posted by: dsquared on April 23, 2003 11:43 PM

Urge to resist.....off topicness.....failing.

Americans think the French are bad at math because all we know about the French is their obsession with culture and art. All the artists you knew in college are horrible at math, so why would the French be any different?

Posted by: Jason McCullough on April 24, 2003 12:26 AM

As a gay French math major, I am appalled. ;)
And any good post-modern subjectivist knows that the perception of math precedes the reality.

On the rising inequality question...The host asserts that rising inequality might slow in the next decade or so...
"...I don't see current trends as continuing, but as highly likely to be reversed in the next generation."--Brad DeLong

Might this already be coming true, if much of the recent, rapid growth in inequality (late 90's) was more the result of the stock market bubble and its disproportionate effect on the wealthiest, than the result of more structural divergence between the quintiles?
Bubble deflates, inequality growth slows.
This, of course, doesn't address the longer-term trend of slowly rising inequality since the early 1970's.

Posted by: andrew b. on April 24, 2003 02:14 AM

"...neither Newton nor Leibniz were French." Actually dsquared, K Harris is correct, since the invention of the calculus was a continuuous not an all-at-once process, and many e.g. Lagrange credit the Frenchman Fermat (of Fermat's Last Theorem fame) with the "discovery" of the calculus.

Posted by: Andrew Boucher on April 24, 2003 03:36 AM

*falls to the off-topic instinct and forgets about inequality*

If one REALLY wanted to make the case that a Frenchman invented calculus (and many people in this comments section seem to want to, for some reason), one could make the case that Newton and Leibniz were all a bunch of pseudo-mathematical cranks whose speculations regarding calculus were frequently heuristically based, and say that it was really Cauchy who invented calculus, since he was the one who came up with a real definition for limits.

Posted by: Julian Elson on April 24, 2003 06:16 AM

Very good point. People laugh at Bishop Berkeley for claiming to have "refuted" Newton's calculus because of the "repugnance" of an infinitesimal quantity in philosophical terms, without noting that Berkeley's argument was a) mathematical, not philosophical and b) right, not wrong.

Posted by: dsquared on April 24, 2003 10:25 AM

Andrew Boucher says "since the invention of the calculus was a continuuous not an all-at-once process"

Calculus is continuous, not discrete?!? Who would have guessed?

{Contemplates limit as ee->0 of e^(-x^2/(4*ee)) / (2*Sqrt[pi*ee]) }

Noooooo!!!!!!!!!

Posted by: Tom on April 24, 2003 02:40 PM

Ben Hyde wrote "The other way [to reverse the trend towards more concentration of wealth] is a burst of economic growth that benefits huge tail of the L curve."

How would everybody feel about a huge burst of growth that benefits the tail across the world, but the tail in the US. The obvious example would be a big fall in barriers to international trade in intellectual activity [via the web], and a corresponding big increase in trade that raises the stand of living for many outside the US, at the cost of reducing the "rent" for being in the US.

Posted by: Tom on April 24, 2003 03:02 PM

Ben Hyde wrote "The other way [to reverse the trend towards more concentration of wealth] is a burst of economic growth that benefits huge tail of the L curve."

How would everybody feel about a huge burst of growth that benefits the tail across the world, but *not* the tail in the US. The obvious example would be a big fall in barriers to international trade in intellectual activity [via the web], and a corresponding big increase in trade that raises the stand of living for many outside the US, at the cost of reducing the "rent" for being in the US.

Posted by: Tom on April 24, 2003 03:06 PM

>How would everybody feel about a huge burst of growth that benefits the tail across the world, but *not* the tail in the US.

Since nearly all the growth in fossil fuel burning/CO2 output going forward will occur as a result of growth in China, India and other developing nations, someone ought to tell the Greens.


Posted by: Bucky Dent on April 24, 2003 04:14 PM
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