Inequality in the US-II

Last month in this column (“Inequality in the US”, Business Standard, December 18), I pointed to worsening inequality in the United States, where, by the end of the 20th century, economic growth slowed and inequality of income and wealth grew. Whatever gains there were, benefited smaller slices of the population at the top. Trend analysis using tax data received a thrust when Thomas Piketty and Emmanuel Saez in a 2003 paper used French data to demonstrate “vertiginous” growth of income at the top during the 1970s and 1980s. US data was subsequently used to show growing inequality of income and its components(1).

The so-called “natural law” of the market that assured increased benefit to all as economies grew, failed. Inequality got exacerbated as the rate of return to capital exceeded the rate of economic growth. Robert Solow, well-known in the field of economic growth, iterated, “equitable growth is the central economic issue.” Income distribution became increasingly unequal, more so with wealth. Some of the stock of wealth that comprises money, property, stocks, bonds and other capital, could be hidden and not counted. Gabriel Zucman claimed that $8.7 trillion in wealth or 11.5 per cent of world gross domestic product (GDP) was held in offshore accounts (see my article on tax havens, November 20, 2019), of which 80 per cent by the top 1/10 of 1 per cent. 

As income and wealth distribution worsened, microeconomic aspects began to be analysed revealing how worsening distribution obstructed the economy and its economic mobility. Heather Boushey has reviewed this literature comprehensively(2). Raj Chetty viewed inequality as: “Fewer kids across the income distribution—in the middle class and at the bottom—end up doing better than their parents did”, countering the achievements of the 1960s and 1970s. Chetty and others estimated that 70 per cent of the decrease in absolute mobility would not have occurred had the inequality in income and wealth been kept in check. Clearly, for the US youth to move up, the gap between incomes at the top and the bottom has to narrow. 

Economic inequality led to health inequality that, in turn, exacerbated differences in lifelong skills people acquired. Claudia Goldin, Lawrence Katz, Janet Currie, Douglas Almond and Duncan Thomas demonstrated this in various ways. In the UK, 17,000 children born during one week in 1958 and tracked through adulthood, revealed that healthier ones passed school English and Maths more easily; they were 4-5  per cent more able to have jobs, and received higher wages at age 33. Based on this, in 1999, Currie and Rosemary Hyson concluded that children’s health at birth relates to health during life. Adult employment is related to low birth weight. Thus, child and family characteristics at school entry explain future outcomes as much as the number of years of education. Epidemiologist David Barker pointed to mother’s nutrition and health rather than only genetics or poor lifestyles as determinants of health disorders. Others related birth weight to the probability of graduating high school. These researchers thus have taken the view that prenatal conditions have lifelong ramifications.

Illustration: Binay Sinha

Education differences have had a dual directional relation with inequality, one feeding the other. Out of the 31 Organisation for Economic Co-operation and Development (OECD) member countries, the US ranks 20th in formal childcare, and 29th in preschool enrolment. An early “controlled experiment” by a number of joint authors more than half a century ago, studied 123 African American children from low-income Michigan families. At age 3-4, they were randomly assigned to, or excluded from, attending high quality pre-school. When they all reached around age 40 at the turn of the century, those who had attended pre-school, had experienced higher school completion rates, college attendance, higher earnings, more stable housing and family relationships, and fewer arrests(3).

The difference in education ultimately reflects different access to resources. Kerris Cooper and Kitty Stewart summarise research findings between 1988-and 2012 to conclude that poorer children perform poorly because they are poorer, implying that transferring money to poorer families would improve children’s outcomes. This was established by Robert Dahl and Lance Lochner for children’s performance in families that received transfers through the US’s Earned Income Tax Credit programme. 

Not only cash, but maternal nutrition, safe drinking water, pre-school services, school quality, neighbourhood safety, libraries, parks, zoos, museums, all have lasting effects on children. For this, feasibility to provide family care through paid parental leave ranks high, though the US lags behind Europe on this too. Garey Ramey and Valerie Ramey have argued that college educated parents spend more time with children to get them into competition for top college admissions. It is obvious that, otherwise, children would lose out in the competition.

To conclude, Boushay points out that children and their impact on the future of the US economy cannot be considered in a vacuum but as part of a holistic environment. She has argued in favour of continually disaggregating economic growth as it occurs, in order to view it more clearly and, accordingly, take policy action to make it less obstructive. 

Accordingly, Boushey proposes a list of actions: (1) For every official updating of income and wealth growth statistics, show how that growth has been distributed across income and wealth deciles. I would say, do so for even fractions of the top decile since concentration is growing even within it. (2)  Remove the hoarding of opportunity by the top which stops others from contributing to growth or receiving benefit from it. (3) To achieve this, socio-economic policy must target society from early on through access to high quality child care, preschool, public schools of high quality, and public health. (4) Prioritise infrastructure investments that buttress them. (5) Regulate those who subvert fair processes and manipulate economic growth in their own favour. (6) Rein in monopoly power that would generate more government revenue that could be used for the needed expenditures. And (7) boost the collective bargaining power of workers. Further (8) discourage capital use in investments such as financial products that do not lead to real productive activity or to an increase in economic instability.

1.-Lena Edlund, Wojciech Kopczuk and others have shown that inequality of women (versus men) and of minorities (versus the majority) has worsened even more than the inequality of income itself.

2. UnBound: How Inequality Constricts Our Economy and What We Can Do About It, Harvard University Press, 2019

3. Today such controlled experiments would be considered unethical in advanced economies inasmuch as half the needy children were excluded from a good early education. It is curious that controlled experiments in rudimentary environments continue to be conducted and awarded.

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