The Price of Everything (20 page)

Still, Americans are less economically mobile than the citizens of many other countries. There is a 42 percent chance that the son of an American man in the bottom fifth of the income distribution will be stuck in the same economic slot. The equivalent odds for a British man are 30 percent, and 25 percent for a Swede.

Even if inequality were an undoubted motor of economic growth, we might invoke other reasons to put some limit to the concentration of riches at the top. Intense inequality breeds mistrust, envy, and hostility across income groups. Equity fosters a sense of solidarity and shared purpose that makes for good social glue.

Rising income disparities push less fortunate families out of desirable neighborhoods as the rich snap up the real estate. In cities like Manhattan, central Boston, or San Francisco, the only people on moderate incomes are those who clean the homes, cook the food, and care for the kids of the rich before going home at night to a cheaper location.

Between 1970 and 2000, house prices in central San Francisco rose 1 percent to 1.5 percent a year faster than in the rest of the country, and it became a city of the rich. The share of families that made more than $136,000 a year, in today’s money, rose from 10 percent to 31 percent, more than double the national rate of increase. People of middle income were elbowed out. In 1970, some 70 percent of families in San Francisco made less than $90,000, in current dollars. In 2000, the share was about half.

Geographic segregation fosters educational segregation. School finances depend on property taxes, which in turn depend on property prices. Given that people’s wages are closely dependent on the quantity and quality of their education, families that are forced into areas with inferior schools will lag further behind.

Ultimately, inequality’s power as a goad for growth depends on its being perceived as fair, or at least not entirely illegitimate. Today, many Americans doubt the rich “deserve” their pay. This is especially true of bankers, who somehow managed to cause a catastrophe like we had not seen in decades and still made off with an enormous bonus.

There was a time when the United States offered workers a shot at prosperity. My father’s parents were not highly educated. My grand-father grew up on a farm in Winnipeg and may not have finished elementary school. As a young man, he worked in Chicago’s slaughterhouses. But he moved to Phoenix, got a union job at the Salt River Project power plant, and trained as an electrician. In the 1970s, when I spent summers with my American grandparents, they lived in a house with a front yard, a backyard, a den with an eight-track system, central air-conditioning, a car, a pickup truck, and a trailer. In Mexico, where I lived at the time, electricians did not have that life.

Incomes per person in the United States soared almost sixfold over the twentieth century, driven by a burst of technological progress. But the most remarkable feature of this growth was that through most of the century it was widely shared. In 1928, the top 1 percent of American families hoarded nearly a quarter of the nation’s income. By the 1950s their share had fallen to 10 percent.

Economists have ventured several hypotheses for this dynamic. Some suggest the playing field was leveled by the institutions that emanated from the New Deal—including the minimum wage, labor protections, and government programs like Social Security, coupled with high tax rates and strict regulations constraining the profits of industries like banking. The rise of organized labor played a part, as unions negotiated better pay for their members.

Yet another factor stands out: education. Throughout the century, businesses demanded increasingly educated workers to keep pace with technological progress, offering higher wages to laborers with more schooling. And workers responded by going to school.

From the generation born in 1870 to that born in 1950, each cohort of Americans received more education than their parents. By the 1950s, 60 percent of seventeen-year-olds had graduated from high school; roughly six times the share in the United Kingdom. Then the GI Bill kicked in, offering to finance college for veterans returning from World War II. In 1915, the average American worker had 7.6 years of education. In 1980, he had 12.5.

One consequence of this investment in human capital is that the income of most American families grew 2 to 3 percent per year in the quarter century after the end of World War II, more or less evenly across the income scale. These families built the American middle class.

 

 

SOMETIME IN THE
1980s the dynamic broke down. Since then bankers, lawyers, and engineers, those with a college education or more, have seen wages rise substantially. Workers at the bottom—janitors and nursing-home staffers, housekeepers and nannies—have also benefited from slightly improving pay. But workers in the middle, like union workers in steel plants and car companies, have suffered as their pay stalled and declined.

It all comes down to the question of who is easiest to replace. It’s tough to mechanize a nanny. It’s also difficult to replace lawyers and bond traders. But jobs that can be reduced to a mechanical routine, like spray-painting a car, have disappeared or gone somewhere else. In 2008, the
Orange County Register
in California hired an Indian company, Mindworks Global Media, to take over some editing functions. In 2007, Reuters opened a bureau in Bangalore, India, to cover American financial news.

The education premium is bigger than ever. In 1973, men who had at least a college degree made 55 percent more than those who had only completed high school. In 2010, they made 84 percent more. Yet perhaps due to the hollowing out of the labor market, this premium is no longer working well as an incentive. The educational attainment of the average American worker grew only one year from 1980 to 2005.

These days the American Dream is a pretty misleading reverie. The hourly wage of the average shop-floor worker was lower in 2009 than it was in 1972, after accounting for inflation. The typical American family—two earners, a couple of kids—made less than it did a decade before. It’s been forty years since the last time the average worker could afford to pay the bills of the average household on a forty-hour workweek at the average wage. At the end of the first decade of the new millennium, the prosperity boom experienced by many workers in the twentieth century looks like a flash in the pan.

This reconfiguration of prosperity is not simply about changes in the way we pay for work. The entire set of rules governing American capitalism changed. Those that emerged over the past three decades hammered the middle class.

Trade barriers fell during this period, and capital controls were done away with. Welfare payments were redesigned to force the unemployed to look for work. Large swaths of regulation were cast aside as misguided hindrances to business. The shift lifted many of the protections that had shielded American workers from some of the harshest economic forces. And it provided enormous opportunities to those able to seize them.

Take banking. Finance today is one of the most lucrative industries for bright college graduates. But it wasn’t always this richly paid. Financiers had a great time in the early decades of the twentieth century. From 1909 to the mid-1930s they made about 50 percent to 60 percent more than workers in other industries. But the stock-market collapse of 1929 and the Great Depression changed all that. In 1934, corporate profits in the financial sector shrank to $236 million, one eighth what they were five years earlier. Wages followed. From 1950 through about 1980, bankers and insurers made only 10 percent more than workers outside of finance.

To a large extent this mirrors the ebb and flow of restrictions governing finance. A century ago there were virtually no regulations to restrain banks’ creativity and speculative urges. They could invest where they wanted, deploy depositors’ money as they saw fit. After the Great Depression, President Roosevelt set up a plethora of restrictions to avoid a repeat of the financial bubble that crashed in 1929.

Interstate banking had been limited since 1927. In 1933, the Glass-Steagall Act forbade commercial banks and investment banks from getting into each other’s business—separating deposit taking and lending from playing the markets. Interest-rate ceilings were also imposed that year. The move to regulate bankers continued in 1959 under President Eisenhower, who forbade mixing banks with insurance companies. Barred from applying the full extent of their wits toward maximizing their incomes, many of the nation’s best and brightest who had flocked to make money in banking left for other industries.

Then, in the 1980s, the Reagan administration unleashed an unstoppable surge of deregulation that continued for thirty years. By 1999, the Glass-Steagall Act lay repealed. Banks could commingle with insurance companies at will. Ceilings on interest rates had vanished. Banks could open branches anywhere. Unsurprisingly, the most highly educated returned to finance to make money. By 2005, the share of workers in the finance industry with a college education exceeded that of other industries by nearly 20 percent. These smart financiers turned their creativity on, inventing junk bonds in the 1980s and moving on, in the last few years, to residential mortgage-backed securities and credit default swaps. By 2006, pay in the financial sector was again 70 percent higher than wages elsewhere in the private sector. Then the financial industry blew up.

Since the end of 2008, when the demise of the investment bank Lehman Brothers sent financial markets into a tailspin around the world, bankers have argued insistently against regulatory efforts to limit their remuneration packages, observing that curtailing financial activity will hamstring their ability to hire the best of the best. That’s perhaps true. The new financial regulations passed by Congress in 2010 may reduce the financial sector’s profitability. Bonuses might suffer.

Still, this is probably a good thing. Only 5 percent of the men who graduated from Harvard in 1970 would end up working in finance fifteen years later. By the 1990 class it was 15 percent. Meanwhile, the percentage of male graduates going into law and medicine fell from 39 percent to 30 percent. Of the 2009 Princeton graduates who got jobs after graduation, 33.4 percent went into finance; 6.3 percent took jobs in government. From our current vantage point, this looks like a misallocation of resources. For the good of the rest of the economy, bankers should earn less.

TO THOSE WHO
believe the Internet will change everything, October 10, 2007, marks a minor watershed. On that day, the British alternative band Radiohead offered fans the chance to pay whatever they chose to download its new album
In Rainbows
. If they wanted, they could get it for free. About a million fans downloaded the album in the first month, according to comScore, a market research firm, of whom more than six in ten paid nothing. Several million more downloaded the album from peer-to-peer services that offer fans the ability to share their music online, rather than from Radiohead’s free Web site.