Thoughts from the Frontline

Inequality and Opportunity

March 16, 2014

“Nothing is more dangerous than a dogmatic worldview – nothing more constraining, more blinding to innovation, more destructive of openness to novelty.”

– Stephen Jay Gould

My letters the last few weeks on income inequality (here and here) brought more response from readers than any topic I’ve written on in the history of this letter. And there was certainly no unanimity of viewpoints. Some of you strongly agree with me; some of you aggressively disagree and think I’m full of it; and others see the issue in an entirely different light. Many of you offered links to other research, which I have spent a great deal of time reading. Today we will continue our thinking about income inequality, and I will respond to some of your letters, as they make good launching points for further discussion of the topic.

Income inequality is going to be a central theme in political campaigns for the rest of the decade, so what I want to try to do is simply get some facts on the table so that at least we know what the research says and doesn’t say. A lot of emotional content is offered under the guise of economic research in order to support various political positions. The data suggest that the problem is both worse than we might think when viewed through one lens, and not that big a problem – or at least a very different problem – when viewed through another. I suggest that we look as objectively as possible at all of the data and not just cherry-pick the data that supports our views.

But before we jump back in, I am really pleased to announce that I’ve persuaded George Gilder, one of the finest thinkers and philosophers I know, and Stephen Moore, contributing editor to the Wall Street Journal, along with Grant Williams of Things That Make You Go Hmmm... fame to speak at the 11th annual Strategic Investment Conference in San Diego May 13-16. They will join Niall Ferguson, Kyle Bass, Newt Gingrich, Ian Bremmer, David Rosenberg, Dr. Lacy Hunt, Anatole Kaletsky, Patrick Cox, Dylan Grice, David Rosenberg, David Zervos, Rich Yamarone, my Code Red coauthor Jonathan Tepper, Jeff Gundlach, and Paul McCulley. Nothing but headliners, one after the other, for 2½ days. Plus some of the best money managers around, some names I hope to confirm within the next few weeks, and one or two people who are trying to figure out how to change their schedules in order to get there and who will be fabulous surprises for the attendees. By the way, many of the speakers are planning to hang around and listen to the other speakers. This means you will have chances to engage them at the lunches, dinners, and breaks. Most speakers simply fly into a conference and fly out, but my conference is little different.

This is an annual gathering you simply don’t want to miss. I can’t think of any conference anywhere that has a lineup this strong. When I first broached the idea of our conference to Jon Sundt, the founder of cosponsor Altegris, the one rule I had was that I wanted the conference to be one I would want to attend. The usual conference boasts a few headliners, and then the sponsors fill out the lineup. I wanted to do a conference where no speaker could buy his or her way onto the platform. That means we often lose money on the conference (hard as that may be to imagine, at the price, I acknowledge); however, the purpose is not to make money but to learn with – and maybe have some fun with – great people. We do put on a great show, and my partners make sure it is run well. But the best part will be your fellow attendees. A lot of long-term friendships are forged at this conference. You can learn more and sign up at .

At the close of the letter, I also want to tell you about an exclusive interview with Janet Yellen – but first, let’s think about income inequality.

No Serious Economist Would Bother

As noted above, the previous two letters on income inequality evoked more responses than any other topic I’ve written about. Some rather heated debate ensued between readers, which I actually think is a good thing. For the record, I read every comment posted on our website and many that are sent to me directly. I typically don’t answer, simply because I could spend all day answering, although I certainly get tempted when there’s a comment like the one in which a reader asserted that because I predicted a continuation of the Muddle Through Economy in January 2005, I completely missed the recession that came along three years later! I was clearly predicting recession in late 2006 and a collapse in subprime debt. If anything, I was way too early, and subprime was worse than the $400 billion in losses I suggested at the time.

Let me note that every letter I’ve written since January 2000 is online. Some of them have aged quite well, and a few are simply embarrassing, but I think it would be disingenuous to pull them down. The record is what the record is. But the letters all generally focus on a single topic in a single week. If I make a forecast, it is typically for a discrete period of time. Further, in total agreement with John Maynard Keynes, when the facts change, I will change my mind. (My less-than-sainted Dad would often remark, when I challenged him over his frequent changes of mind, “A wise man changes his mind. A fool never does.” There were times in my youth when I really got tired of hearing that, but now I would love to hear it just one more time if I could.)

But to the point of last week’s letter, retired economics professor Dr. John Seater  of North Carolina State University took me to task (yet again). John is courteous and a real scholar and was gracious enough to talk me through some of his thoughts. Basically, he felt the paper that had me so thoroughly aroused was not worth the time and effort. But I’ll let his words speak for themselves and then reply.

I am sorry to be the bearer of bad news, but John’s column is a waste of time. Most of what John has to say is right, but the article that he uses as a launch pad (Cynamon and Fazzari) is simply silly. No serious economist would bother with it. The authors don’t understand economic theory at all, and they certainly propose nothing coherent in their paper. Their citations are almost entirely from fringe outlets that most serious economists never heard of. They also do not understand general equilibrium, which is amazing for macroeconomists because macroeconomics is nothing but dynamic general equilibrium. In any case, because they ignore general equilibrium and its requirements, they say foolish things. A big whopper, for example, is their assertion that a shift in income from the poor to the rich will reduce total spending.

Complete nonsense. What it *may* do is shift the *composition* of spending away from consumption a little toward investment. The permanent income/life cycle theory of consumption, developed independently by Modigliani and Friedman in the 1950s questions even that conclusion. All serious economists know these things, even though Cynamon and Fazzari, who apparently live in the mindset of the 1930s, do not. Also, their paper indeed *is* just a paper. It’s not even published. I can pretty much guarantee that it will not appear in any respectable journal, not because of any intellectual snobbery (the authors are at places that, until now at any rate, I thought were pretty good) but because the paper is terrible. I can assure John and his readers that mainstream economics is far less confused and ridiculous than the pathetic paper that got John started.

I can add a few more constructive comments. First, the Wikipedia definition of Keynesian economics that John cites misses the most important element of the Keynesian approach, which is the assumption that in periods of recession markets do not clear. Keynesians assume that prices are “sticky” at least downward, leading to excess supply during periods of recession. Downward price stickiness is and always has been the central tenet of the Keynesian approach. There is very little direct evidence to support it. Mark Bils and Pete Klenow, for example, have shown that prices move around far too much to be consistent with the Keynesian assumption of “sticky” prices. However, there is a strong indirect piece of evidence, which motivated Keynes himself, that in recessions there are idle productive resources, both capital and labor, willing to work at the going price and that therefore should be employed but that nevertheless remain idle. That strongly suggests that prices are not moving fast enough to clear the market, as Keynes assumed.

So, although I am very skeptical of Keynesianism, I have to concede that the problem that motivated Keynes remains a problem today – how to explain the presence of persistently idle resources. Furthermore, it also is true that *if* resources are idle because prices really are sticky, then it also is true that an increase in government demand will stimulate the economy by getting those resources back to work. It is *not* a crazy theory. I don’t have much regard for Keynesian theory because there is in fact little or no theory there. Keynesians have utterly failed to produce a microeconomic foundation for their macroeconomic model that is both internally coherent and also consistent with the facts. Unfortunately, no one else has a convincing theory for recessions, either. After spending several decades trying to understand recessions, economists still don’t understand them.

Second, John says most academics accept the view that inequality hinders growth. I don’t know how he knows that. I certainly don’t know that to be true. I am an academic economist, and I am unaware of any such consensus. I also know for sure that few and probably no economists who actually study economic growth (which happens to be my own current field of research) believe such a thing. I note that Cynamon and Fazzari propose no theory of economic growth. They just make a bunch of assertions. They cite literally no works on economic growth. I doubt they know much if anything about it. In any case, they are not at all representative of what other economists think about economic growth.

First of all, Dr. Seater makes very good points. Cynamon and Fazzari are to some degree straw men who don’t put forth the best of arguments. But the problem from my point of view is that the arguments they make are becoming more mainstream. Last week the IMF published a paper extolling the virtues of income redistribution to address income inequality. Then this week we got a paper from the Federal Reserve Bank of Richmond suggesting that income redistribution is in fact one of the appropriate tools for dealing with income inequality, although that particular paper is far more nuanced, and caveat-rich. And I would call Paul Krugman a more or less mainstream economist (tongue firmly wedged in cheek here), and he is certainly espousing income redistribution. He has just announced that he is leaving Princeton University and will be joining the Graduate Center at CUNY, where he will focus on issues of income inequality.

The use of income inequality as a justification for income redistribution is popping up more and more in mainstream economic journals and thinking. Everyone is writing about it, which is why it is such a hot topic among my readers when I write about it. Hot, as in, some of you get hot and bothered about it.

In a rather wide-ranging discussion this morning, Prof. Seater began to cite studies which demonstrate that 75% of income inequality is actually due to age distribution. The older you are, the more likely you are to be in the top 20% of whatever category you’re looking at. (I “assigned” John the task of producing a paper on this theme for Outside the Box. I will publish it when he turns his homework in.) There other factors besides age (education, the status of your parents, etc.) that also help explain income inequality, and we’ll get to those later in the letter. This is not to say that income inequality is not real, but you have to know what you mean by the term and then decide whether income redistribution will actually fix what you think is the problem.

Using academic economic studies on income inequality as a Trojan horse to argue for higher taxation on the rich when higher taxes may or may not solve the problem of income inequality is a canard. Especially when those studies, which may issue from prestigious organizations, do not address the problem in totality. This is a very complex topic, and producing a paper in which it is demonstrated that one or two sets of data correlate with your data on income inequality can be very misleading. Correlation is not causation, and to think that it is proves to be one of the most pernicious problems in economic analysis as well as investment analysis.

And despite Dr Seater’s counsel, I want to address at least one other point the Cynamon and Fazzari paper makes, as that point keeps showing up in articles and opinion editorials everywhere. They say:

We argue that demand drag caused by inequality is now constraining the U.S. economy. The result is aggregate consumption substantially below comparable trends for past U.S. recoveries. We consider several alternatives that might restore a healthy demand generation process, but we conclude that a robust recovery is unlikely without policy or other institutional change that at least stops, or even reverses, the trend toward greater income inequality. Without such changes, we question whether the U.S. economy can generate the demand growth necessary to maintain stable full employment….

In this simple framework, it is evident that stagnating income growth for any group of households need not create demand drag immediately, but the choice to keep consumption growth above declining income growth will lower the saving rate and increase the fragility of the group’s collective balance sheet.

Net worth cannot decline indefinitely, nor can debt rise indefinitely relative to income. While households may initially choose to respond to lower income growth by reducing saving growth rather than reducing consumption growth this choice is not sustainable over some horizon: eventually rising debt forces households with lower income growth to cut back consumption to satisfy their intertemporal [basically, relative-value choices] budget constraint.

What Cynamon and Fazzari argue is that – because a significant percentage of the US population borrowed too much money prior to 2008 and used that money to increase their consumption –  unless a way is found to increase the income of the bottom 95%, a recovery is not possible. They don’t see the problem as one of people borrowing too much money and getting into debt and now having to pay that money back (irrespective of whether such borrowing was encouraged by unscrupulous banks and given the blessing of regulatory authorities). Not having ongoing access to ever-increasing debt will in fact reduce people’s consumption. Especially when some of that consumption was financed by debt to begin with, and must now be paid for.

Adam Smith argued that housing is not a source of wealth, but simply shelter. In the US, housing has come to be seen as a form of wealth and particularly as the foundation for increasing leverage and debt. The increasing use of leverage to finance consumption is precisely what Minsky, Kindleburger, and Fisher would predict, as stability sets the stage for capital misallocation and eventually gives way to instability across the economy. Now, Cynamon and Fazzari, along with many other researchers, want government solutions (notably forced income redistribution) to solve what is essentially a government-created problem. Hold that thought.

Who Are the Rich?

Back in 2006 it took $382,000 to be in the top 1% of all US taxpayers. The latest data from 2011 tax returns shows that it now takes an adjusted gross income of $389,000. There are 1.37 million Americans make this amount or more, and they report almost 19% of total taxable income.

And while many people think of the top 1% as Wall Street bankers, hedge fund and other money managers, Fortune 500 company executives who make 500 times the salary of their lowest-paid workers, and so on, the fact is that there are really only a few such people (10,000 perhaps). Throw in a few well-paid athletes and movie and rock stars, and you might get to 10K. The vast, vast majority of this top-income group are small businesspeople, farmers, doctors, and other professionals. These are not people that we tend to think of as people who don’t deserve what they make.

And while the share of income of the top 1% has risen in the past decades in the US, the shares of the immediate 9% just below them hasn’t moved all that much. There is some upward bias for the top 2-10%, but it is nowhere near significant. For confirmation we can look at the latest research paper offered by Prof. Emmanuel Saez of UC Berkeley. The chart below shows the top decile’s US income share for the last 99 years. The chart following it breaks that share up into three different classes, and we can note that the top 1% made almost half the total income of the top-10% group.

To get into the top 10% of income earners in the United States, a family needed to make $114,000 in 2012. As it turns out, the national share of people reporting over $100,000 in income has much more than doubled since 1975. Quoting from a recent op-ed by Professor Don Boudreaux of George Mason University and Liya Palagashvili in the Wall Street Journal:

The Census Bureau in 2012 compiled data on the percentage of U.S. households earning annual incomes, measured in 2009 dollars, in different income categories (for example, annual incomes between $25,000 and $35,000). These data reveal that between 1975 and 2009, the percentage of households in the low- and middle-income categories fell. The only two categories that saw an increase were households earning between $75,000 and $100,000 annually, and households earning more than $100,000 annually. Remarkably, the share of American households earning annual incomes in excess of $100,000 went to 20.1% in 2009 from 8.4% in 1975. Over these same years, households earning annual incomes of $50,000 or less fell to 50.1% from 58.4%.

They show that when you add in benefits to pay and use the same measure of inflation for both pay and productivity, the disconnect between worker pay and productivity goes away, both in the US and Britain.

Their conclusion? “Middle-class stagnation and the ‘decoupling’ of pay and productivity are illusions. Yes, the U.S. economy is in the doldrums, thanks to a variety of factors... But by any sensible measure, most Americans are today better paid and more prosperous than in the past.”

Equality of Opportunity

In one of the most far-reaching studies I’ve seen, a group of Harvard economists have compared upward mobility – the ability to rise from lower to higher income groups – among US metropolitan areas, as well as among developed nations. Their rather remarkable website and database can be found here. Their one-paragraph summary is:

In two recent studies, we find that: (1) Upward income mobility varies substantially within the U.S. [summary][paper] Areas with greater mobility tend to have five characteristics: less segregation, less income inequality, better schools, greater social capital, and more stable families. (2) Contrary to popular perception, economic mobility has not changed significantly over time; however, it is consistently lower in the U.S. than in most developed countries. [summary][paper].

The map below from the Harvard study shows upward mobility in the United States. The patterns are a little complicated, but the lighter the color, the greater the upward mobility in the population. The New York Times did a rather remarkable job of making the map interactive, and you can play with that here.

In looking at the map I find a lot of the research counterintuitive. Why does Houston show more upward mobility than Dallas? And upward mobility is higher in the Northeast than it is in the industrial Midwest.

From the New York Times article (which is interesting):

“Where you grow up matters,” said Nathaniel Hendren, a Harvard economist and one of the study’s authors. “There is tremendous variation across the U.S. in the extent to which kids can rise out of poverty.”

That variation does not stem simply from the fact that some areas have higher average incomes: upward mobility rates, Mr. Hendren added, often differ sharply in areas where average income is similar, like Atlanta and Seattle.

The gaps can be stark. On average, fairly poor children in Seattle – those who grew up in the 25th percentile of the national income distribution – do as well financially when they grow up as middle-class children – those who grew up at the 50th percentile – from Atlanta.

Geography mattered much less for well-off children than for middle-class and poor children, according to the results. In an economic echo of Tolstoy’s line about happy families being alike, the chances that affluent children grow up to be affluent are broadly similar across metropolitan areas.

Given the rise in the percentage of total income of the top groups, there is remarkably little difference in income mobility during the last 45 years. While the bottom income group and the top income group are further apart (the income inequality is increased) the chances of moving from the bottom group to the top group are roughly the same.

The researchers concluded that larger tax credits for the poor and higher taxes on the affluent seemed to improve income mobility only slightly. The economists also found only modest or no correlation between mobility and the number of local colleges and their tuition rates or between mobility and the amount of extreme wealth in a region.

But the researchers identified four broad factors that appeared to affect income mobility, including the size and dispersion of the local middle class. All else being equal, upward mobility tended to be higher in metropolitan areas where poor families were more dispersed among mixed-income neighborhoods.

Income mobility was also higher in areas with more two-parent households, better elementary schools and high schools, and more civic engagement, including membership in religious and community groups.

Regions with larger black populations had lower upward-mobility rates. But the researchers’ analysis suggested that this was not primarily because of their race. Both white and black residents of Atlanta have low upward mobility, for instance.

The authors emphasize that their data allowed them to identify only correlation, not causation. Other economists said that future studies will be important for sorting through the patterns in this new data. Still, earlier studies have already found that education and family structure have a large effect on the chances that children escape poverty.

(I commend the professors for making all of their data and analysis available.)

To me their study reinforces my basic premise that valid conclusions about causes of income inequality are more difficult to come by than are the simple correlation analyses presented in many academic and political policy papers offered by various advocates in support of their personal policy choices (both conservative and liberal).

Upward Mobility Across Nations

Finally we will look at a study by Miles Corak of the University of Ottawa that shows the correlation between socioeconomic mobility and income inequality. Notice that Sweden (along with the rest of Scandinavia) shows some of the lowest income inequality and highest social mobility, while the reverse is true for the US.

Silence of the Left

Conveniently for the discussion of our topic, John Goodman posted a brief article on this week called “Silence of the Left”:

The topic du jour on the left these days is inequality. But why does the left care about inequality? Do they really want to lift those at the bottom of the income ladder? Or are they just looking for one more reason to increase the power of government? If you care about those at the bottom then you are wasting your time and everyone else’s time unless you focus on one and only one phenomenon: the inequality of educational opportunity. Poor kids are almost always enrolled in bad schools. Rich kids are almost always in good schools.

It turns out that homes cost roughly 20% more in areas with good schools. School choice is already in effect because people with more money buy homes in areas with better public schools. Children of families with less money on average tend to be stuck in lower-performing public schools.

Goodman cites a Brookings Institution study that investigated the same phenomenon nationwide:

  • Across the 100 largest metropolitan areas, housing costs an average of 2.4 times as much, or nearly $11,000 more per year, near a high-scoring public school than near a low-scoring public school.
  • This housing cost gap reflects that home values are $205,000 higher on average in the neighborhoods of high-scoring versus low-scoring schools. Near high-scoring schools, typical homes have 1.5 additional rooms and the share of housing units that are rented is roughly 30 percentage points lower than in neighborhoods near low-scoring schools.

Goodman continues:

You almost never see anything written by left-of-center folks on reforming the public schools. And I have noticed on TV talk shows that it's almost impossible to get liberals to agree to the most modest of all reform ideas: getting rid of bad teachers and making sure we keep the good ones.

Here is the uncomfortable reality:

1. Our system of public education is one of the most regressive features of American society.

2. There is almost nothing we could do that would be more impactful in reducing inequality of educational opportunity and inequality overall than to do what Sweden has done: give every child a voucher and let them select a school of choice.

3. Yet on the left there is almost uniform resistance to this idea or any other idea that challenges the power of the teachers’ unions.

That “socialist” bastion of income equality and mobility – Sweden – uses vouchers for education.

Krugman argues against school vouchers because they might reduce support for public schools. And then he actually writes, “And – dare we say it? – we should in general oppose privatization plans if they are likely to destroy public sector unions.”

We have total academic, bureaucratic, and teachers’-union capture of public education. We are subjecting our children to an education system that that was designed for and that worked remarkably well during the first two industrial revolutions but that is now utterly inadequate for the coming Age of Transformation. The new New York City Mayor, Bill de Blasio, is working to shut down many of the best-performing schools in his city – charter schools – which are hated by teachers’ unions. Rather than ask what is good for the children, he and many others simply want to expand the power of the unions.

If we want to do something about income inequality, perhaps we should think about the data that shows the remarkable correlation between education, educational opportunity, and income.

Exclusive Video: An Interview with Janet Yellen

My friend Jim Bruce, the producer of the fabulous documentary on the US Federal Reserve system, Money for Nothing, conducted a remarkable two-hour interview with Janet Yellen when she was the president of the San Francisco branch of the Federal Reserve. He has edited the interview down to a little more than 10 minutes of the most important parts. For the time being, it is available exclusively at Mauldin Economics at this link.

You can order your own DVD of Money for Nothing at a link underneath the video interview. If you have not seen it, you should get it and make sure that it is played in schools and for social groups everywhere. This is the most powerful video presentation on the role and history of the Federal Reserve that has ever been done. It’s hard for me to recommend it enough, and I’m proud to be able to offer it to readers of Thoughts from the Frontline.

Argentina, South Africa, New York, Europe, and San Diego

I leave next Wednesday evening for Argentina for 12 days, then return home for eight hours before I take off for 12 days in South Africa. I’m going to try something new this trip and post a few pictures and comments to Twitter. Follow me if you like. After South Africa I’m back home for like a day before I have to run up to New York to do some videos. Then it’s back home for a few weeks (or so it appears) before I head to Amsterdam, Brussels, and Geneva. I’ll come home for a few days and then hightail it to San Diego for our Strategic Investment Conference – one of my real highlights of the year. And then – where were we? – ah yes, I’ll be home for more than two whole weeks before heading to Tuscany for a few weeks of vacation. Whew. I will be ready to relax at the end of all that travel.

Today was all about the one-year birthday party of my granddaughter Addison Porter. It was held at my apartment, since there were lots of family member and friends who wanted to help us celebrate the event. Given the occasion, I thought it would be appropriate to play Disney family tunes over the sound system. My own kids grew up with Disney music, and I’ve learned to appreciate it. A very special tune came on – one of my favorite songs of all time. We know it as the introduction and ending to the Disney movie Pinocchio. It’s Jiminy Cricket singing “When You Wish upon a Star.” If you listen to it, notice that the books Jiminy Cricket is leaning against as he sings are Peter Pan and Alice in Wonderland – and this was prior to Disney’s actually turning them into movies. The singing is done by Cliff Edwards, who was known as Ukulele Ike. His lilting falsetto created a song sensation that the American Film Institute says is the seventh-best movie song of all time and easily the top Disney song. Edwards was quite popular back in the ’20s and ’30s, and his number-one song was “Singing in the Rain.” Sadly, he had a troubled life and ended up broke, a welfare patient in a California nursing home. That said, he left us one of the most beautiful melodies of all time. Just a little nostalgic trivia brought on by a granddaughter’s birthday. And yes, she is gorgeous. My daughter Amanda mischievously placed a small cake with lots of pink cream icing on her lap and let her explore the icing and cake with her hands, which of course ended up all over her face, giving everyone great photo opportunities. And now when I wish upon a star, I will think of Addison and that icing-splattered face.

And now it is time to hit the send button. I’ll be writing to you in the next few weeks from far locales, but I’ll stay in touch, and Thoughts from the Frontline will come at more or less the same time on the weekend. Thanks for taking the time to read, and keep those cards and letters coming.

Your thinking about my granddaughter’s education analyst,

John Mauldin

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March 25, 2014, 10:13 a.m.

You correctly point out in your article that correlation is not causation. Yet you seem to forget that statement, when you cite your beliefs about the source (causation) of income inequality. “If we want to do something about income inequality, perhaps we should think about the data that shows the remarkable correlation between education, educational opportunity, and income.” Or that of others that you site, Goodman for example: “If you care about those at the bottom then you are wasting your time and everyone else’s time unless you focus on one and only one phenomenon: the inequality of educational opportunity.” You can’t have it both ways. Either correlation is causation or it isn’t. It isn’t.  It is nothing like causation. Not even if it is “remarkable correlation.” There is also the use of the word “explains” when many conservatives talk about income inequality.  As in, for example: “Educational inequality explains 80% of income inequality.” I’m not sure what “explains” means here, but I’ll tell you, it doesn’t mean “causes.” Let me give you a simile: the geocentric model of the behavior of planets and stars explains 95% of their movement. Explains is not causes in this example, as it isn’t in the above, but it is a remarkable correlation, no?

What I sense here is the Herculean effort to explain income inequality by anything other than how that income is distributed.

Ben Jozefowicz Ph.D

March 19, 2014, 1:17 p.m.

I read your “Thoughts” of Mar 16 with great interest. The data (and especially the charts—the singular tool for forcing information into my poor brain) were very welcome.
I have a few thoughts to share.
First, and foremost, in regards to the Goodman excerpt: I am a member of the left (how far? on a scale of 1 to 10, right and left, with 0 as purely independent, I’d say about L6). I do not wish government to be any stronger than is necessary to curb the natural tendency of some individuals (some with extraordinary powers of intellect or charisma, some with a great lack of empathy) in in a narcissistic quest for riches/power/fame, to cause harm to more ordinary individuals who search only for some contentment and greater success for their children. I don’t know how strong government must be to attain that end; I do know that some in government are the very narcissists that trouble private life (take, for instance, Vlad Putin).
Second, I do think that the single most important factor acting (causal) toward upward mobility for any child is the attitude of the parent(s): their wish and constant pressure toward instilling in their children a desire to learn and produce.
That said, I see that there are myriad factors working against parents achieving that end.
Possibly the greatest, the killer app of child failure, is a parent holding firmly to a culture antagonistic to success: “What’s good enough for me is good enough for my kid.”
Poverty, in a family where all care-givers are forced to work multiple jobs and lack time or energy to interact with children is another.
Extreme poverty when the parent’s skills, combined with economic conditions make earning enough to feed and house children impossible requires some kind of relief. Sufficient relief to afford necessities is humanely necessary, but culturally insufficient.
Add lack of medical care, poor education, lack of personal security—for parents as well as children.
Children with special attributes—sixth sigma intelligence, physical ability, musical talent, etc.—will be more likely to progress, but the remaining five sigma are left increasingly behind.
Yes, the situation is complex and complicated. The solution is a multiplicity of integrals of an nth order equation with unknown constants and multiple variables. It may be that the solution will never be perfectly reached. The Biblical passage “The poor you will always have with you” may be a reality, but it doesn’t mean we shouldn’t do our collective best to reduce their proportion in societies that can do so without materially harming those at the opposite end of the financial spectrum. It does mean a fight against selfishness, greed and uncaring.

William McCarthy

March 19, 2014, 11:57 a.m.


The leftist apparatchiks are running the inequality propaganda machines overtime. Now, even NASA is weighing in on the relationship between inequality and the decline of civilization. It seems they are getting out of their orbit. Of course, this is from a bureaucracy that for over forty years has not figured out how to get humans out of low earth orbit; literally flying around in circles the entire time.

There is much commentary about how inequality has a bad ending. Sounds reasonable on the surface. But, it seems the real issue is how “inequality” is mitigated or at least reduced. Most of the top down centrally managed solutions embraced by the left did not stand the test of time and collapsed. Not to mention required the facilitation of many bullets with much blood letting and starvation. Even the much vaunted social democracies of Europe seem to require predatory merchantilism or gobs of cheap debt from foolish lenders. Neither of which can last.

Their are some obvious problems such as the finacialization of our economy that rewards the few while giving them too much politcal influence, trade policies that punish our workers, a bizarre immigration policy/non-policy that limits the talented and admits the less than talented willy-nilly thus creating more competition at the lower wage scales. And, of course the dismal condition of public education. Plus, we seem to be hellbent on subsidizing and incentivizing (encouraging) numerous social pathologies such as out of wedlock births, the demise of marriage, indolence etc., etc. All, of which militate toward poverty. And, I will toss in the outsize share of GDP that corporate captains seems to command at the moment for questionable performance; hopefully, this will mean-revert.

But, one thing most of us seem to skirt around is the unpleasant fact that maybe too many of us from the perspective of production are simply superfluous. And, maybe this is a partial cause of “inequality”. For obvious reasons, I don’t think I will pursue this line of thought too far. But, it is sobering.

Justin McCarthy


Stephen Davis

March 19, 2014, 7:58 a.m.

Blah. Blah. Blah. 

Economic growth comes from increasing productivity.  Outsourcing, downsizing and consolidation increase economic productivity but it strips income out of the middle class.  Period. 

Yes excessive Government regulation, fees and procedural hoops play a very large role but that’s not to say that all regulation is bad.  Getting your deck inspected and obtaining a permit seems to be a logical necessity in the long run for all.

Economic growth comes from consumption which is fueled by rising incomes, savings or credit.  Long periods of falling or stagnant real wages decreases savings (long and short run) and increases credit expansion.

The point is most things are bought (with the exception of Lexus cars, Coach purses and Le Creuset cookware) by the bottom 90%.  Take away their purchasing power and the economy stalls.

Giving them cheap credit and then blaming them for lack of discipline is actually pretty hilarious.  No “serious reader” can really take your comments seriously, unless of course your blinders on on.  Just curious.  How many economic empires failed because they were too nice to their citizenry?  Seems to me, historically,  the debilitating amounts of debt that take down empires is due from military extensions.  Just saying….

One last thing that the Professor brings up that gets my crawl.  Our school systems are fantastic.  Education starts and ends at home.  We have two family income earners and many of them are working two and three part time jobs to make ends meet (and pay down that debt they so carelessly built).  Trade offs must be made and unfortunately it is often at the expense of our children.  Anyone that thinks implementing school vouchers as a “solution” to our education dilemma is delusional.

I am in the top 1% and consider myself an economic conservative.  I also consider myself an economic realists.  I would not call myself a neo-Keynesian by any means but most people fail to remember that Keynes believed Government debt MUST be paid back during the good times.  Clinton and Gingrich realized this but the rest of them haven’t picked up on that. 

Stephen Davis

March 19, 2014, 7:21 a.m.


Good for you.  This is an important topic and must be presented.

Capitalism is very akin the game of monopoly.  At some point, you have to give the rest of the players money if you want the game to continue.

This, however, is not a new topic by any means.  Kevin Phillips made this a theme of his 1991 book “Politics of The Rich and Poor”

Keep up the good work.

March 18, 2014, 10:03 p.m.

I thought the world had already done the inequality experiment which ended in abject failure. It was called “communism”!!! Those states still buried under it’s yoke are starting to dig themselves out from under it before their entire world collapses from it as did the Soviet Union. See China, Cuba and hopefully soon, North Korea.

Paul Speer

March 18, 2014, 4:06 p.m.

Permit me to write on by far the most basic fallacy regarding Income Inequality—the analysis of the whole rather than the componnt parts.

The economy is not a singular beast.  In order to properly analyze Income Inequality we must look at each part of the economy and its contribution to growth and GDP. 

I submit that economists are loath to do that when aggregate information is available and the calculations reach the end which suits the their predisposition.  I have communicated with you similar bias among professionals in failing to calculate the size and extent of the Gray Market and thus its effects on GDP on the one hand and movement within the deciles on the other.  When aggregate data is available on the surface, why bother to mine?

It is clear that an economy, composed of several known sectors. does not advance in lock step in each of the sectors.  It is clear as ell that an economy is not a closed loop, peculiar to single nation.

I suggest that the median income in the Finance Industry is not equal to that in each of the other parts of the Private Sector or of the Public Sector. If this is so, the decile income groupings would not be at the same levels.  When a product is exported and revenue flows to that Industry from outside the country, the revenue, and thus the income does not lessen the income levels in the remainder of the economy but adds to it bothe directly and as a multiplier.

However, if you aggregate across all of the economy the individual incomes it becomes clear that you do not have economic analysis but political chopped liver.  GINI fails the smell test.

Rolando Campos

March 18, 2014, 3:35 p.m.

I guess China wants the race to the bottom to continue for a few more years…

“China’s long-awaited plan approved this week to move more people to cities in a bid to boost economic growth would mean a population shift of about 100 million over the next few years.”

China gets it, increase supply of labor, keep wages down, destroy any burgeouning labor bargaining power; it’s so strange that a communist country is such an ultra-capitalist.

As the supply of labor increases expect even worse inequality where the owners of capital reside. Not everyone can be above average; not everyone can become an engineer or computer scientist. Real wages for the bottom 10 or 20% in the US continue to converge upon a global mean. Extreme income/wealth inequality will eventually lead to rampant corruption at public services (police, fire, ambulance, hospital, DMV, education), illegal activities, and kidnapping/theft. 12 foot metal fences with barbed wire up top, enclaves, just travel a few hundred(or thousand) miles south to Mexico and see what it looks like.

I don’t know if this is clear, this is what happens in countries around the world where inequality is very high—and the wealthy end up leaving those countries and coming to the US (and others), what are they going to do when the US is just as dangerous? Huddle up in Singapore, Hong Kong, & London? Yep. Renounce their US citizenship? Yep. IF our political and economic policy is leading inexorably towards such a scenario, is that not treasonous? This is a nation and while a bigger government is not the answer, a living wage for those on the lower income part of the scale is in the long-term interests of this country. I actually oppose redistribution, large & too-powerful government, but how can this be remedied if not by business owners and capitalists? If the government does it you’ll get monstrosities like FBAR, ACA, FinCen 144, GSEs, across the board min. wage raises, Social Security, underfunded & overly generous pensions. Businesses and owners need to lead the way and show that there’s a better way. Is that naive?

March 18, 2014, 1:50 p.m.


I have been reading your letters avidly for the last six years. These last two provoke me to comment because I think you are missing a few points.

If the global population was a corporation, I wonder what you would say is the ‘mission statement’. The greatest good for the greatest number for the longest time? I think that would make a great topic for a future letter.

I wonder if you could comment on the following points.

1. Savings equals investment. But there is good investment and bad investment. Bad investment is speculation in property, stocks, currency. I would hypothesise that the 1% focus on bad investment - using their power ( as with high speed trading) to take money from the 90% or invest in political lobbying to bias things in their favour. Good investment used to be channelled through the banks combining the meagre savings of the 90% to create small business loans for entrepreneurs.

2. Government is notoriously bad at allocating investment. But any society needs an infrastructure - roads, railways, utilities, law and order, defence etc- which must be paid for through taxation. There is a legitimate debate to be had about the size of this investment and the allocation of the taxes, but lack of investment in infrastructure is a drag on economic growth. The best investment any individual or any country can make is in education- “give a man a fish and you feed him for a day, teach a man to fish and you feed him for life”. Government should ensure affordable high quality education for all.

3. As well as economic instability, the world faces three other major challenges right now - the rapid growth in population, the depletion of natural resources and climate change. The timing and degree to which each will become critical is debatable, but we can expect that within the next 30 years the combined impact of these trends will have a significant impact on growth in GDP/capita.

4. I can site no research to support this, but my reading of history is that civilisations collapse when the gap between rich and poor becomes unacceptable. This time may be different, but history shows resentment builds to the point where the masses turn on the wealthy. Income inequality cannot be ignored.

5. You refer to breakthroughs in healthcare as the next ‘industrial revolution’. I fail to see where the return is on this. The majority of the global population cannot afford to pay for healthcare, and if they did the impact would be increased lifespans which will make my point 3 above worse.

Thanks for the letters - keep them coming!

March 18, 2014, 11:10 a.m.

It’s all very simple - Teachers Unions vs. Students that the teachers educate. They have competing priorities so it should be no surprise that we’ve created this monster with our good tax dollars.  The idea that any political party is truly interested in the well-being and advancement of U.S. students is absolute hogwash and they should be called out.

In fact, 60 Minutes did a piece which touched on this a few years ago (dealt with the New York City public school system). One of the takeaways that has always stuck with me was the strength of the Teachers Union in NYC. How strong? Try this: since something like 1975, they’ve had more teachers die on the job than have been fired.  Could there possibly be a greater example that the entire system desperately needs a massive overhaul? No wonder teaching is such a good gig. Reasonable pay, tons of vacation, great benefits and very little accountability for your actual performance.

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