Income, Wealth Inequality And Opportunity In the US

In this Age of Piketty, there have been more and more writing about the issue of income and wealth inequality. Three articles particularly resonated with me.

Equality of opportunity, not wealth
The first was a piece from Richard Reeves of the Brookings Institute called Noah Smith showing evidence of an emerging class system in America:

If there’s one political idea most people agree on these days, it’s the rule of law. We argue endlessly about income inequality, wealth inequality, or inequality of opportunity, but we take it as given that equality under the law is a prerequisite for a just society. And the consequences of private law are dire. The original system of French privilege was one of the main causes of that country’s bloody, chaotic revolution.

Now here’s the problem: The U.S. is looking more and more like it has a real privilege system. We are enforcing laws differently based on race, but also based on class. This is un-American, and it has got to stop.

First, there is race privilege. The tragic shooting of an unarmed black teenager by a police officer in Ferguson, Missouri, has put this issue front and center, but the facts bear repeating. Our police officers enforce the law differently for different races. They arrest a much higher percentage of black people for using drugs, even though blacks and whites use illegal drugs at about the same rates and whites use the most harmful drugs -- cocaine and heroin -- at higher rates. That is an injustice.

We have all heard about the offence of "driving while black":

Our courts are no less of a problem. Blacks are 30 percent more likely to be thrown in prison than whites who were convicted of the same crime. Furthermore, our Constitution guarantees citizens the right to a trial by a jury of their peers, but many black defendants are prosecuted by all-white juries, which are significantly more likely to return a guilty verdict against blacks. Finally, racial profiling is so rampant that black Americans who have committed no crimes at all have to live in constant fear of getting stopped by the cops. White Americans don't have to live with this fear.

The whites aren`t immune to the class system either, according to Smith. There is one set of laws for the rich and another set for the "great unwashed masses":

White Americans can be complacent about racial disparities in law enforcement, thinking that at least they themselves are safe. Except that in modern America, the law now seems to be different for people of different income levels as well.

In 2010, Martin Erzinger, a private-wealth manager for Morgan Stanley Smith Barney, was the driver in a hit-and-run of a bicyclist in Eagle, Colorado. The victim suffered spinal injuries and brain bleeding. But the prosecutor dropped felony charges against Erzinger, giving the following justification:

Felony convictions have some pretty serious job implications for someone in Mr. Erzinger's profession, and that entered into it," [prosecutor] Hurlbert said. "When you're talking about restitution, you don't want to take away his ability to pay.

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In addition to the story of Martin Erzinger, Noah Smith had a number of other examples of how the rich got off easily with a slap on the wrist from the justice system when faced with serious offences.

Notwithstanding the ideas of a class system runs counter to the founding myth of America, what is more disturbing is that it can lead to economic stagnation. The landmark study , Branko Milanovic of the World Bank showed how global inequality has been changing. The chart below shows who won and lost in the inequality race globally. The x-axis on the bottom splits the world population from the poorest on the left in subsistence economies to the richest on the right, while the y-axis shows the real income growth in PPP terms between 1988 and 2008.

Milanovic went on to show that the country that you were born matters a lot more now than the social class that you were born into. In 1988 to 2008 30-year interval, the winners in the inequality race were the middle class in emerging economies, because of the effects of globalization, and the very rich, who engineered the globalization revolution. The losers were the very poor in subsistence economies, who weren't able to benefit from and the middle class in developed economies, who did not receive the benefits of the productivity gains in the last few decades. The latter represents the disaffected group that Reeves and Hanauer wrote about.

So, is the American Dream still alive? Well sort of. It got globalized and the winners of the American Dream are not likely named Joe, but Rajiv.

As to the question of whether this represents a bug, or a feature, of economic policy, that question is way beyond my pay grade.