Four Ways to Close the Income Inequality Gap

Income inequality is in the news on a daily basis. Occupy Wall Street maintains the top 1% live in a different world than the rest of us.  A recent study by the Congressional Budget Office (CBO) agrees.  Apparently, from 1979 to 2007, the now famous top 1% saw inflation adjusted annual income increase by 275%. The top 10% (excluding the top 1%) saw a 65% increase, while further down the ladder; the poorest fifth only experienced an 18% increase.

Many want to blame the 1%, figuring they are taking advantage of the bottom 50-80% to increase their own wealth. Is there any truth to this?

There’s little more than anecdotal evidence that growing income disparity is some form of Social Darwinism.  Yes, Bernie made off with lots of other people’s money, and Wall Street was bailed out with taxpayer dollars thanks to alumni planted in the White House and Treasury Department (Rahm Emanuel, Hank Paulson, et al).  However, these examples, alluring as they are to conspiracy theorists and class warriors, cannot explain 90% of millionaires in the United States.  They come from all walks of life, are doctors, lawyers and entrepreneurs.  Not surprisingly, those groups have always done well, it’s just that over the past few decades, they have stretched out their lead.  The two main reasons have more to do with the inexorable march of technology and the development of formerly “third-world” countries.

In 1979, Moses Malone was the first NBA player to earn $1 million dollars per year. This was a ton of money for the time, approximately 65 times what the median American earned. In 2011, LeBron James is expected to earn $44.5 million, over 1,000 times what the median American earns.

While LeBron’s salary is a big part of his income, the majority comes from endorsements. The NBA has benefitted from the explosion of media in the past three decades which leads to additional coverage in the U.S. and a large footprint in both Europe and Asia, neither of which had the slightest interest in Moses Malone back in 1979. While Malone was an excellent basketball player who earned a very large salary and did occasional endorsements, LeBron is a global brand, with more fans in China than the U.S. Imagine how much he could earn if he actually won a championship?

Why did the top basketball earner see his income grow from 65 times the national median to 1,000 times?  Did he steal from the 99%?  Has he rigged the game?  Obviously not.  LeBron has benefitted from a variety of trends in society that have moved in his favor, trends that are irreversible and mostly beneficial, although they have increased inequality:

• There are more Americans and they own more TVs, and they watch more TV,  making televised events and celebrities more valuable.
• Americans have more disposable income, creating more demand for advertising and athlete endorsements
• More people around the world are exposed to American sports and are willing to buy jerseys and products endorsed by athletes.

With Fortune 500 companies, athletes, entertainers, technology companies, etc. being able to reach more people who have more spending power both domestically and around the world, people at the top of their field have a much wider market for their services.  This, not failure to effectively re-distribute their income, it the biggest reason for the success of the top 1%.

While the huge improvement in Chinese living standards provides a new customer base for Nike and LeBron James, industrial China also provides competition for the lower-skilled American worker. In the 1950’s, when average wages increased with great regularity, there was very little international competition. As time progressed, countries like Japan and (West) Germany became strong competitors in the world economy, slowly beginning to put pressure on wages of American workers.  However, there was still an enormous gap between the U.S. and the majority of the world.

Consider this example: In 1979, you might have seen a construction site in America with one man operating a cement mixer truck and another operating a pumping crane to send concrete up to the second floor.  In a typical third world country, you would have found hordes of workers with shovels digging ditches, mixing cement by hand and wheeling up scaffolding to a second floor.  Why?

• America being a wealthier nation, had the capital to invest in equipment to make workers more productive.
• American workers were more educated and better trained to take advantage of modern equipment.
• American workers, having higher productivity, justified higher wages, which increased living standards, continuing the virtuous cycle.

Welcome to the second decade of the new millenium, where foreign competitors have caught up.  Dozens of countries have enough capital resources to compete with the United States.  Transportation and technology have reduced the physical barriers that impeded competition between workers across the world and workers in the United States.  In 1979, China and India, the two most populous countries in the world were not part of the global economy.  As a result, wages of semi-skilled and lower-skilled American workers have not grown substantially, while the rest of the world is catching up.

In the 1970s Americans were significantly more educated than people in other industrialized countries, and had an enormous advantage over less developed nations like China and India, particularly with regards to the education level of women. The gap has narrowed considerably, with Europeans and Japanese as educated as Americans, and more recently developing countries getting closer. The median American worker does not have the same advantage that he or she did a generation or two ago.

In the meanwhile, there is still a shortage of high-skilled workers. This means the highest paid workers face less competition for the better jobs, increasing the wage premium and inequality.

At a time where we have unfilled high-skill jobs, and millions of unemployed and underemployed lower, semi and medium-skilled workers, Detroit Public Schools are proud to announce they have reached a 62% high school graduation rate.

Looking at various dimensions of the challenge, we can rule out a capital shortage in the United States, there is plenty sitting on the sidelines, waiting for good opportunities.  We can rule out hoping the rest of the world will decide to put their progress transmission into reverse (they are more likely to shift into a higher gear).  The only viable solution is to improve the skill level of the average American and in order to fix negative trends in educational attainment, we need to start in the classroom with the following prescriptions:

1. More school days and longer school days. Many studies have shown the students of less-affluent parents have trouble retaining knowledge over lengthy summer breaks. According to the research, the better off and more educated your parents are, the more you learn over the summer. If your parents are in the top bracket, you’ll actually go back to school knowing more than when the term ended, if in the middle, you’ll stay about the same, and if your parents are on the lower end, it will take you several months just to get back to where you were.

For families with less disposable income, needing to find day care options over the summer or in the afternoon after school lets out is more difficult as well. It’s clear that offering at least the option of a longer school term would give less affluent students more chance to learn and retain, while giving their parents a break on day care expenses.

2. Merit pay. Without it, better teachers wind up with easier kids, Advanced Placement classes, etc. as a reward, and the disadvantaged students never get better teachers. Plenty of teachers would be willing to take on more challenging assignments in exchange for more money. Despite spending more per-student than other countries, American teachers do not outdistance their international peers in the pay department.

This indicates a much larger percentage of American education funds are spent outside the classroom. The limited amount spent inside is distributed without regard to the effectiveness of the teacher. A few states, most notably Indiana and Florida, have moved in this direction recently, but they are still the exception.

Allowing schools in less-affluent areas to compete for top teachers would put those children on a more level playing field with their peers growing up under more advantageous conditions.

3. Hiring teachers from less traditional backgrounds, without an MA in Education, etc. There are tons of people in this economy who are willing to teach and would do a good job. By limiting the pool of possible teachers, we are preventing students from having access to the best possible instructors. Malcolm Gladwell highlighted this in Outliers, explaining the upward mobility for people who were products of New York City public schools in the 1930′s when the depression made teachers available who would otherwise have done something else. Combined with merit pay you can keep the best teachers, even after the economy improves.

4. Ending or limiting tenure.  In order to take more chances on hiring teachers, you also have to be able to fire teachers. In a separate essay, Gladwell points out the similarities between teaching and being an NFL quarterback. In both cases, it is very hard to know how effective someone will be until they actually take snaps in the NFL or spend time in front of a classroom as a primary instructor.

The current system makes it hard to try teachers out, limiting the ability to find good ones, but makes it virtually impossible to fire an underperforming teacher, meaning mistakes last for decades. When budget cutbacks force layoffs, tenure trumps talent, as the last hired is usually the first laid off, regardless of classroom performance.

As the old proverb says, give a man a fish, feed him for a day; teach him to fish, feed him for a lifetime. We can either redistribute after the fact, continuing to patch holes, and ultimately weakening ourselves, or we can invest in serious education reform, providing opportunity for the majority of Americans instead of only those in select neighborhoods, leaving the whole country better off.

A more educated workforce will allow us to compete more effectively in the global economy and provide more competition for the top 10-20%, both flattening the income curve and increasing the overall income and GDP of the country. You don’t actually have to choose between having a bigger pie and cutting the slices more equitably. Both are possible, but it’s much easier if you start by growing the pie.

Two caveats:

1. Spending more money on education isn’t the answer. We already spend more than everybody else does, without better results. The problem is the money isn’t making it in to the classroom. We are paying more per student for less class time per student and worse test results, literacy, etc.

2. This must happen from the local level up, not top down. This is too important to trust to one central entity. The needs of different students in different parts of the country, neighborhoods, etc. are too diverse to handle by relying primarily on federal government regulations. Give parents control, use best practices, etc. No Child Left Behind proves good federal intentions don’t guarantee good results. Vouchers and charter schools are not an end in themselves, but they are a good option for many parents.

Education has seen the least innovation of any industry you can think of.  In many ways, we’re using the same techniques that were used 100 years ago. The Internet has brought new ways to cheat on papers and tests and new ways to catch cheaters, but little innovation in terms of education itself.  Education is a major industry employing millions of people with spectacular amounts of spending. Why so little innovation?  How does it compare to say, the transportation industry over the last 100 years?

Transportation went from coal burning trains to diesel trains, internal combustion autos, airplanes, transoceanic freighters, transcontinental pipelines, computerized distribution systems that can route millions of packages around the world overnight through Memphis, individual package tracking, etc. Teachers are still teaching groups of 30 students by standing up in front of them for six hours a day and sending them home with a textbook to do homework.

Who knows what innovation has been squelched by our current system?  Most developments in other industries weren’t conceived of 10 years prior to their adoption. Why don’t we have individualized curricula based on student performance, interest and learning style?  Why don’t we have the LeBron James of teachers teaching thousands of kids nationwide via webcast or recorded lectures, with local support provided by local learning coaches?  Who knows what innovations we can’t yet imagine that our children could be benefiting from in 10 years if we unshackle the innovators in education?

We need to find out soon.  Each day we wait, the gap between the top few percent and the average American grows, and economic mobility shrinks.  If we really want a more balanced, egalitarian society, the formula begins in the classroom.

-Evan Dodge and Jim Kee

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