Inside Job
Page 34
BOTH IN PERSONAL conversations and in the statistics, I sense a change among America’s young, who increasingly display both a pervasive cynicism about politics (particularly after Obama turned out to be business as usual) and also, unless they are in the upper 5 percent or so, a fatalism about their personal career prospects. Their general view is: if you have rich parents, a computer science background, or an MBA, you’re okay; otherwise, you’re not okay, and if you want to change that and make some money, you had better concentrate really hard on pleasing the boss. Outside of Silicon Valley and Wall Street, the America of possibility, openness, progress, and opportunity seems increasingly distant. Most older Americans, in contrast, still do not seem to realize how unfair their society has become over the last generation unless they have become victims of it themselves.
First, the numbers. Since 1980, there has been a pronounced shift of taxable income towards the top tenth. As the top chart on the next page illustrates, their share of all reported income, including capital gains, grew from a bit over a third in 1980 to virtually half (49.7 percent), in 2007. The top tenth’s share of income in 2007 is the highest on record, just above the 49.3 percent share garnered by the top tenth in 1928, the year before America entered the Great Depression.
Even more remarkable, however, is the growth of inequality within the top tenth, as the bottom chart shows. Since 1980, the top tenth has increased its share of income by about half. But the share of the top 1 percent of taxpayers more than doubled, from 10 percent of total income in 1980 to over 20 percent in 2010. And what is truly stunning is that by 2007, the top one-hundredth of the top 1 percent, less than twenty-five thousand households, earned more than 6 percent of all national income—nearly $1 trillion. This percentage was considerably higher than the previous record, also set in 1928. This striking divergence of share gains within the top tenth is shown in the second chart on the next page, taking the respective shares in 1980 as 100.
Income Share of the Top Tenth, 1917-2008
Facundo Alvaredo, Tony Atkinson, Thomas Piketty, and Emmanuel Saez, World Top Incomes Database, http://g-mond.parisschoolofeconomics.eu/topincomes/
Share Gains Within Top Tenth of Taxpayers, 1980–2008 (1980=100)
Facundo Alvaredo, Tony Atkinson, Thomas Piketty, and Emmanuel Saez, World Top Incomes Database, http://g-mond.parisschoolofeconomics.eu/topincomes/
Real Median Household Income, 1967-2009
US Census bureau, http://www.census.gov/hhes/www/income/data/historical/household/index.html, Table H-3
Moreover, these changes occurred when most American households actually found their real incomes stagnant or declining. Median household income for the last four decades is shown in the chart above.
But this graph, disturbing as it is, conceals a far worse reality. The top 10 percent did much better than everyone else; if you remove them, the numbers change dramatically. Economic analysis has found that “only the top 10 percent of the income distribution had real compensation growth equal to or above . . . productivity growth.”14 In fact, most gains went to the top 1 percent, while people in the bottom 90 percent either had declining household incomes or were able to increase their family incomes only by working longer hours. The productivity of workers continued to grow, particularly with the Internet revolution that began in the mid-1990s. But the benefits of productivity growth went almost entirely into the incomes of the top 1 percent and into corporate profits, both of which have grown to record highs as a fraction of GNP. In 2010 and 2011 corporate profits accounted for over 14 percent of total GNP, a historical record. In contrast, the share of US GNP paid as wages and salaries is at a historical low and has not kept pace with inflation since 2006.15
As I was working on this manuscript in late 2011, the US Census Bureau published the income statistics for 2010, when the US recovery officially began. The national poverty rate rose to 15.1 percent, its highest level in nearly twenty years; median household income declined by 2.3 percent. This decline, however, was very unequally distributed. The top tenth experienced a 1 percent decline; the bottom tenth, already desperately poor, saw its income decline 12 percent. America’s median household income peaked in 1999; by 2010 it had declined 7 percent. Average hourly income, which corrects for the number of hours worked, has barely changed in the last thirty years.
Ranked by income equality, the US is now ninety-fifth in the world, just behind Nigeria, Iran, Cameroon, and the Ivory Coast. The UK has mimicked the US; even countries with low levels of inequality—including Denmark and Sweden—have seen an increasing gap since the crisis. This is not a distinguished record. And it’s not a statistical fluke. There is now a true, increasingly permanent underclass living in near-subsistence conditions in many wealthy states. There are now tens of millions of people in the US alone whose condition is little better than many people in much poorer nations. If you add up lifetime urban ghetto residents, illegal immigrants, migrant farm-workers, those whose criminal convictions sharply limit their ability to find work, those actually in prison, those with chronic drug-abuse problems, crippled veterans of America’s recently botched wars, children in foster care, the homeless, the long-term unemployed, and other severely disadvantaged groups, you get to tens of millions of people trapped in very harsh, very unfair conditions, in what is supposedly the wealthiest, fairest society on earth.
At any given time, there are over two million people in US prisons; over ten million Americans have felony records and have served prison time for non-traffic offences. Many millions more now must work very long hours, and very hard, at minimum-wage jobs in agriculture, retailing, cleaning, and other low-wage service industries. Several million have been unemployed for years, exhausting their savings and morale. Twenty or thirty years ago, many of these people would have had—and some did have—high-wage jobs in manufacturing or construction. No more.
But in addition to growing inequalities in income and wealth, America exhibits growing inequality of opportunity, both economically and in all the determinants of a healthy, happy, secure life, ranging from health care to nutrition.
There are many facets to the decline in fairness and opportunity in American life. Perhaps the worst are the conditions now imposed upon young children born into the underclass and subjected to the recent evolution of the educational system. They are related, and they reinforce each other; their combined result is to condemn tens of millions of children, particularly those born into the new underclass, to a life of hardship and unfairness. For any young child whose parents don’t have money, or who is the child of a migrant agricultural worker and/or an illegal immigrant, prenatal care, nursery, day care, after school, school nutrition, and foster-care systems are nothing short of appalling. And then comes school itself.
The “American dream”, stated simply, is that no matter how poor or humble your origins—even if you never knew your parents—you have a shot at a decent life. America’s promise is that anyone willing to work hard can do better over time, and have at least a reasonable life for themselves and their own children. You could expect to do better than your parents, and even be able to help them as they grew old. More than ever before, the key to such a dream is a good education. The rise of information technology, and the opening of Asian economies, means that only a small portion of America’s population can make a good living through unskilled or manual labour. But instead of elevating the educational system and the opportunities it should provide, American politicians, and those who follow their lead around the globe, have been going in exactly the wrong direction. As a result, we are developing not a new class system, but, without exaggeration, a new caste system—a society in which the circumstances of your birth determine your entire life.
As a result, the dream of opportunity is dying. Increasingly, the most important determinant of a child’s life prospects—future income, wealth, educational level, even health and life expectancy—is totally arbitrary and unfair. It’s also very simple. A child’s future is increasingly determined by his
or her parents’ wealth, not by his or her intelligence or energy. To be sure, there are a number of reasons for this. Income is correlated with many other things, and it’s therefore difficult to isolate the impact of individual factors. Children in poor households are more likely to grow up in single-parent versus two-parent households, exposed to drugs and alcohol, with one or both parents in prison, with their immigration status questionable, and more likely to have problems with diet and obesity. Culture and race play a role: Asian children have far higher school graduation rates, test scores, and grades than all other groups, including whites, in the US; Latinos, the lowest. So, yes, it’s complicated.
But it’s also simple, really. The largest single factor is the decline in educational opportunity and achievement, which are driven by money. If you don’t have money, you lose—through the declining quality of public education in poor school districts, insufficient day care, inadequate preschool programmes, financial and social pressure to quit school prematurely, and the soaring cost of university, both public and private. The historical accident that American state schools are funded through local property taxes plays a huge role here. As income inequality grows, so does the disparity between poor and wealthy school districts in the tax receipts available to fund schools.
So now, if your parents make enough money, they can live in a good school district, and if they’re really wealthy, they’ll send you to private schools. The food will be good. You won’t face pressure to drop out to take care of your younger sister; they can send her to day care or hire a childminder. They’ll buy you a computer, and piano lessons. Someone will be home, and you won’t be left to fend for yourself on the streets. But if your parents don’t have the money and they need to work two jobs, or if your parents have succumbed to alcohol or drugs, none of those nice things will happen, and you’ll go to bad schools, and probably drop out of school.
Increasingly, America has three parallel educational systems. There is an extremely high-quality, elitist, extremely expensive private system for the upper 5 percent or so. Second, there is a reasonably good system for comfortably middle-class professionals who can live in good state school districts and send their children to university. And then, there is a truly awful system for everyone else. The “everyone else” is now at least a quarter, and by some criteria may be nearly half, of the American population. That’s a lot of people to waste.
Is this a system to emulate?
Further, America’s high school graduation rate is difficult to estimate accurately, in part because government statistics at all levels—national, state, local—often cover up the situation. But despite estimates that range surprisingly widely, the basic facts are clear. America’s school graduation rate is much lower than it should be, and it is declining, both absolutely and relative to the rest of the world. So is the quality of government-provided education, even for those who do graduate. Anyone from Asia, and most of Europe, will opine that most American schools are a joke. And America’shigh school graduation rate is already inferior to that of most other developed nations, including those where graduating from school means much more than it does in America. The best estimates place the current US school graduation rate at 75–80 percent. Since graduation rates from exclusive private schools are nearly 100 percent, America’s state-run school graduation rate is probably under 75 percent, and may be as low as 70 percent. In contrast many European and Asian nations have graduation rates of around 90 percent.
Again, is this a system to emulate?
And, as with private planes and private lifts, so with private education; there has arisen an increasingly segregated system of private primary and secondary schools for the wealthy. It’s not very subtle. Where does John Paulson send his children to school? His twin daughters attended preschool at the 92nd Street Y, which costs over $20,000 per student per year—yes, for nursery. Paulson is on their board. He also manages some of their investments, which he has guaranteed against losses. Many other board members have sent children to the school; four of them also manage money for the institution. This is not unusual. One of Mr Paulson’s daughters, having left nursery behind, now attends Spence, another exclusive private school in Manhattan. Mr Paulson is on their board too.16
Equally disturbing are trends in higher education. When I attended the University of California, Berkeley, in the mid-1970s, tuition for California residents was less than $700 per year. In 2011 undergraduate tuition for state residents was $14,260. Private universities have displayed similar changes. When I entered MIT as a first-year PhD student in 1978, annual tuition was $4,700. For the 2011–12 academic year, it was $40,460. In that same year, Harvard’s tuition was $36,305. Harvard estimated its total annual costs (tuition, fees, room and board, supplies) at $52,652; so the total cost of sending your child to Harvard for four years, even assuming no further cost increases, was already over $210,000.
Harvard, and most other elite private schools, claim that their admissions are merit-based and need-blind, and that everyone who qualifies will receive enough financial aid to attend. This is bullshit, of course. If your parents went to Harvard (or another Ivy League university, such as Yale, Princeton, etc.) and have donated money, or if your father runs a huge global bank or is prime minister somewhere, your chances are surely somewhat improved. But forget about that—just look at the money and the students. In the 2011 academic year, Harvard’s administration proudly announced that slightly over 60 percent of its undergraduates received some level of financial aid and also stated that no student whose family earned less than $180,000 per year would be required to pay more than 10 percent of their total costs.17
Think about that for a minute. If you’re a Harvard student who receives no financial aid at all, you come from a family that makes much more than $180,000 per year. Let’s say the eligibility cutoff for receiving any financial aid at all is $300,000 (Harvard doesn’t reveal the number). This means that nearly 40 percent of Harvard undergraduates came from families whose income is at the very upper end of the American income distribution. This means that Harvard’s income distribution is probably even more skewed than America’s: in the nation as a whole, in 2010 the top 1 percent of families received about 20 percent of all annual income.
At the same time as tuition is rising, there is a widening gulf in quality and resources between private universities and the state universities and community colleges that have traditionally provided the majority of educational opportunity for poor students. As income inequality has grown, donations to private universities have grown, as have their endowments, while government support for public education has stagnated or declined. As a result, between 1999 and 2009, spending per student at private universities grew from about $29,000 to nearly $36,000, while spending per student at community colleges remained nearly flat at about $10,000 per student. Since 2008, the situation has worsened; tuition at public universities and community colleges has increased sharply, while spending per student has declined, in some cases by more than 20 percent.18 The University of California, the largest and best state university in the world, has seen its budget cut by over 20 percent since the financial crisis.
Should anyone want to emulate the tuition costs and bifurcated system of the American higher education system?
But there is yet another way in which America has become less fair, and it is even more disturbing than the growth in economic and educational inequality. It is this: increasingly, you make more money by being crooked and destructive than you do by being productive and honest. Thankfully this isn’t true everywhere—brains, work, and reputation still count in many places. (Once again, high technology stands out.) But in a sharply increasing, already frighteningly high percentage of society, honesty is now a major professional and financial liability.
This pattern started, not surprisingly, in the same place as today’s economic decline: the highly concentrated industries that had become severely inefficient by the 1980s. The people who mismanaged America’s car, s
teel, and telecommunications industries did not, in general, suffer for their incompetence. They stayed in their jobs and kept their perquisites, while their companies deteriorated. But now, with the financial sector and its friends free from risk of prosecution, looting has moved to a whole new level.
The Ultimate Insult: The Financial Penalty for Being Decent
ANYONE WHO HAS ever lived or worked in a corrupt dictatorship knows what happens. When the system is rigged, when ordinary citizens are powerless, and when whistle-blowers are pariahs at best, three things happen. First, the worst people rise to the top. They behave appallingly, and they wreak havoc. Second, people who could make productive contributions to society are incented to become destructive, because corruption is far more lucrative than honest work. And third, everyone else pays, both economically and emotionally; people become cynical, selfish, and fatalistic. Often they go along with the system, but they hate themselves for it. They play the game to survive and feed their families, but both they and society suffer. This issue is rarely mentioned in public or in the US or European media, but in my personal experience it is increasingly discussed in private conversation.
Consider now the high-income, high-education sectors that are the principal subjects of this book: financial services, academia, politics, and policy making. Over the last several decades, the financial sector has sharply increased its share of GNP, total corporate profits, and employment. Its income per employee is now double the national average, and people at the top of the financial world today make phenomenal amounts of money. Over the same period, the industry’s ethical standards deteriorated sharply.
Over the last decade executives, salespeople, and traders in the financial sector made truly obscene sums, by doing truly obscene things. With a few exceptions, the worst offenders made the most money. None of them have been prosecuted, and none of them have been forced to return the money. Most of them have kept their jobs. Even those who destroyed their own firms have remained both free and extremely wealthy. Jimmy Cayne saw his net worth decline from about $1.5 billion to a mere $600 million or so after Bear Stearns collapsed, but he can probably survive on that. Stan O’Neal received a severance of $161 million for being greedy and incompetent at Merrill Lynch. Henry Paulson made something like half a billion dollars turning Goldman Sachs into an organization that made money betting against its customers, and his successor Lloyd Blankfein hasn’t done badly either. Angelo Mozilo still has his half a billion too. And so on.