Irrationally Informed Four Things Your Friends Get Wrong About the US Economy

It’s getting harder and harder to get folks to agree on the basics. It used to be – or so I’m told – that Democrats and Republicans shared a common vision for the country and simply disagreed on how to get there. Or maybe they shared an understanding of the facts, but couldn’t agree on where to go with them. Frankly, I’m starting to doubt there ever was a quieter, more peaceful time in our politics. Everyone talks about the ’50s, but back then much of the country looked like this:

The '50s: not great for everyone.

The ’50s: not great for everyone.

If you’re ever tempted to develop a serious case of nostalgia, read up on the Presidential contest between Thomas Jefferson and John Adams or the later race between Andrew Jackson and John Quincy Adams. (Come to think of it, those Massachusetts Adamses were a piece of work.)

Every now and then someone will tell me about how great the ’60s and ’70s were, not because the country was peaceful, but because the youth stood up and demanded change. But the youth of the 1960s are middle-aged today, and as far as I can tell, they’re still marching on Washington and demanding change – except now they run the place.

Well, if it was never perfect, then today doesn’t look so bad by comparison after all. (That’s called ‘looking for the silver-lining’.) And one thing I’m pretty sure hasn’t changed since our country was founded is this: whenever two or more are gathered to discuss public policy, at least one guy in the room is plowing straight ahead with an inspiring disregard for the facts. Back then it was whether or not you could successfully float a currency which seemed to confuse people. These days, most Americans seem pretty scarce on the facts when it comes to:

(1) Wealth Distribution

I know we’ve all heard it by now: makers versus takers, the 1% versus the 99%, Obama wants to take your money away and gave it to the hipster down the street, the GOP would just as well turn us all into Soylent Green, and Mitch McConnell wants you to buy him a turtleneck. Most of us have largely stopped listening. If you want to fleece the rich to pay for a solar-powered Birkenstock factory then I’m not sure what I’m supposed to say to change your mind. If you think that’s what the left wants, then I’m not sure where to begin the conversation.

But here’s the troubling thing: even after an extended election cycle that largely focused on wealth inequality, most Americans have no clue how unequal our country is. Econometricians have a tool for measuring inequality called a ‘Gini Coefficient’. I won’t torture you with the statistical work beneath the hood, but you should know Gini Coefficients are typically reported as values between 0 and 1, with 0 expressing total equality of distribution and 1 expressing maximal inequality. (It is possible to have Gini Coefficients greater than 1 if members of the group have a negative holding of an asset, as is the case with debt, but this is highly unlikely in very large groups.)

Here’s a map showing Gini Coefficients from 2009:

Gini 2009

The data on that map aren’t great. They’re not all from the same year and they’re not all calculated in the same way. In fact, countries routinely report incompatible macroeconomic data – the most frustrating example is unemployment data. But before you start feeling better about it, consider the following two things. First, the US and European data are the most reliable and also the most directly comparable. So maybe it’s hard to have too much confidence about whether we’re slightly better off or slightly worse off than China, but you can be pretty sure we’re a heck of a lot more unequal than Norway.

Second, that map is for income inequality. Wealth inequality is much more pronounced. This makes sense: very poor people don’t earn wages, but neither do very rich people – they get returns on investments. Such people don’t show up in wage inequality, but they do in measures of wealth inequality. For 2010, the US Census reported an income Gini Coefficient of 0.469. For 2009, NYU economist Edward Wolff reported a wealth Gini Coefficient of 0.865. I’ll let that sink in for a second.

And like I said, Americans have no idea. In 2011, Michael Norton out of Harvard and Dan Ariely out of Duke conducted a study of what Americans know about the US economy. They found that respondents thought the richest fifth of Americans should hold, ideally, about a third of the wealth. This is interesting since it seems to show that Americans welcome some level of inequality. The same respondents believed the country to be more unequal than this ideal: they believed the richest fifth actually held almost 60% of the wealth. In reality, that top quintile holds more than 80% of the country’s wealth. Here’s the same information set to ominous music.

But, you might interject, that’s quite okay because there’s so much mobility in American society. Not at all like those aristocratic Europeans. Except…

(2) Class Mobility

There’s no easy way to say this: France has more interclass mobility than the United States. In fact, any day now, the American Dream might come with a side of escargots rather than good old American, well, French Fries. Maybe we can compromise and get poutine instead.

So here it is:

Class mobility is typically measured in two ways: intra-generational and inter-generational. Intra-generational class mobility refers to changes in class status over the course of your lifetime. This is what happens when you’re born into poverty, go on to school, get a decent job, buy a house you can’t afford, go into default, and declare bankruptcy. Those ups and downs are intra-generational.

Inter-generational class mobility is what happens when your father was a bar owner and you turn out to be Speaker of the House of Representatives. In all seriousness, well done Mr. Boehner.

The disturbing trend is that while the United States used to lead much of the world in inter-generational mobility, in recent years that trend has been largely curtailed. This graph shows the degree to which the advantage of a wealthy parent is passed on to the child, which is a good measure of inter-generational mobility, in each of nine developed countries.

The metric is a tad-bit technical, but the gist is this: the lower the value, the greater the chance that a person’s income is not determined by the income of their parents. In other words, how easily can you overcome adverse circumstances during your early years? That task is now much easier in Denmark than it is in the United States.

Intergenerational_mobility_graph-1

These numbers really do have to be taken within the context of the inequality numbers referenced above. During the run up to the last general election, former Pennsylvania Senator Rick Santorum made a number of remarks objecting to the very notion of a middle-class America. He kept insisting that our country is classless (something we’re quite frequently accused of, even if it is in a different sense): we all tumble together in this fine scrum, some emerging more victorious than others and appropriately rewarded for their efforts. It’s a comforting notion to those who strive to improve their lot in life, as well as to those who want to believe that everything they have, they’ve earned on their own.

Unfortunately, the facts don’t seem to bear this out. America is becoming more unequal and that inequality is becoming harder to bridge. But, fortunately, Americans know who to blame: China.

(3) Manufacturing

Pick your poison: you can either drive through any of the dozens of hollowed-out Rust Belt cities or you can walk yourself down to the local Town Hall and talk to folks. Either way, you’ll see the same basic fact regarding the American economy: blue-collared workers are suffering because we don’t make things anymore. Right?

Except, at least for now, we still lead the world in manufacturing. It was always unrealistic to imagine the United States wouldn’t come down from the post-WWII manufacturing peak. After all, we’d just finished bombing all the other competitors into the Stone Age. But even as other countries’ manufacturing capacity has come online, the US has remained a manufacturing powerhouse. How has it done this? It has become more efficient and hence the job losses. We haven’t stopped building things; we’ve just stopped building things with people.

In recent months, there has been revived interest in the idea that a lot of the manufacturing that had gone overseas looking for lower labor costs might come back as a result of multiple variables, including 3D printing and the need for shorter and more reliable supply chains. That would be great for US competitiveness, but it won’t mean the return of those blue-collared jobs. The truth is, Americans simply can’t be bothered to work for the same wages that Chinese rural folk move to the cities in droves for. That reality is a challenge, but I think we’re missing something profound if we fail to realize that all in all, it’s a good thing. That Americans aren’t that desperate is an accomplishment; that overseas workers who might otherwise not have employment have a way out of poverty is also an accomplishment.

Now, if we could only do something about those zoning laws and building codes.

4. Money vs. Wealth

I’m not trying to say we don’t have a jobs problem – clearly we do. And I’m not trying to say that the jobs problem isn’t somehow tied into the changes in global trade and manufacturing – clearly it is. What I am trying to say, or at least what I was trying to say just now, is that outsourcing itself isn’t the problem. The efficiency that outsourcing makes possible is something we all should benefit from (more on that below), even if it’s in ways that are really difficult to see at first.

The benefits of global trade are difficult to see because we’re used to thinking in terms of income (i.e., money), when what we really care about is wealth. No, I’m not going to tell you that the value of your beautiful smile is difficult to measure. Rather, I’m going to ask you how much you paid for your television. In 1955, you might have paid $200 – that would be equivalent to approximately $1,700 in today’s money. Now, if I gave you $1,700 to buy a television, what kind of television could you buy with that? Well, it would be a lot better than mine and mine is a whole lot better than anything you could have bought in 1955. The money cost might be ‘equivalent’, but the value clearly isn’t.

What about an iPad? How much would that cost in 1955? Does that question even make sense to ask? Back then, you couldn’t have paid for a heart transplant or for a Liam Neeson movie with all the gold in Fort Knox. And it’s hard to put a price on Liam Neeson.

The average American today has a higher quality of life, on most important measures, than the great monarchs of the Middle Ages. You’re reading this on something your adolescent grandparents would have had a hard time conceiving of. My grandfather was born before the first trans-Atlantic flight and he died after the first rover was put on Mars.

That’s what economists mean by ‘creative destruction’, that’s what efficiency gets you. It gets you to Mars. Now, the question for us is, can we harness that great wealth and efficiency to give an inner-city boy a chance at a better life than his father?

Follow Pedro on Twitter @IamPedroA.

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