The Rich Are Different: They’re Luckier
This long attack on the unfairness of progressive taxation from the Hoover Institution by Kip Hagopian usefully embodies a lot of right-wing delusions about income inequality. It argues that a person’s income is determined by three things:
America’s free enterprise system provides an environment in which the substantial majority of its citizens can realize their fullest earnings potential. Within that environment, individual economic outcomes are the product of a combination of three elements: aptitude, work effort, and choice of occupation.
Aptitude. For the purposes of this essay, aptitude is broadly defined as the capacity to produce, or to earn income. For the most part, it comes from circumstances of birth and is distributed unequally. Aptitude may be derived from innate talents (cognitive, musical, artistic, athletic, etc.) or physical attributes (appearance, dexterity, possession of senses, etc.). Or it may be acquired from lessons learned from parents and other life experiences. Aptitude emanating from circumstances of birth (either innate or acquired) can be significantly enhanced by individual effort applied to strengthening one’s skills (see “Work Effort” below). Aptitude is measured from low to high in accordance with the monetary value placed on it in the marketplace. This is a measure of earning power and is not in any way an indication of an individual’s intrinsic worth as a human being. For most people aptitude is the most significant determinant of income. But it has to be understood as capacity; aptitude does not produce income until it is combined with individual effort.
Work effort. For any given level of aptitude and occupation, work effort plays the decisive role in determining income, and in many cases may result in persons with lower aptitudes earning more than their higher-aptitude peers. For the purposes of this essay, the term “work effort” includes not only the number of hours worked, but also the intensity of the effort applied during those hours. As noted above, it also includes work effort applied to strengthening one’s skills.
At every level of aptitude and in every profession, whether the pay is in salary or hourly wages, there are workers who outperform their peers in each hour worked. They do this by performing tasks more quickly; focusing on the tasks more intently; finding and completing additional tasks that need to be done; and using some of their leisure time practicing or training to become more skilled. These people get more raises, larger bonuses, and more promotions than their peers. Thus, greater work effort can produce higher income whether the person is paid by the hour or earns a salary.
In addition to producing higher income in its own right, work effort applied to strengthening one’s skill — resulting in “learned” or “enhanced” aptitude — can make a substantial contribution toward increasing income. The “rough” carpenter who spends nights and weekends developing the skills necessary to qualify as a more highly valued “finish” carpenter will move up the wage scale by doing so. Professional athletes, musicians, singers, and other performers can enhance their innate aptitudes substantially through extensive practice, and a great many are renowned for having done so. A classic example is Hall-of-Famer Jerry Rice, who is generally recognized as the best wide receiver in NFL history. He was one of the highest paid players in pro football for twenty years, an achievement largely credited to his intense practice and workout regimen. Perhaps the most effective way of enhancing aptitude is through increased study in school. Whether it is grade school, high school, vocational school or college, for any particular tier of aptitude, those who study the most almost always get the best grades, matriculate to the best colleges, and secure the best jobs.
Choice of occupation. Choice of occupation is also important in determining income. Had Bill Gates decided to finish Harvard and become a high school math teacher, he almost certainly would have been successful, but he would not have become a multi-billionaire.
Earned income is determined by a mix of the three factors described above, and the relative contribution of each varies by individual.
This is obviously written to minimize the role of luck. It acknowledges that Bill Gates made more money by choosing to become a software mogul than by choosing t be a high school math teacher. But, of course, Gates (as he has acknowledged) benefited enormously not just from his family situation but from the timing of his birth, which put him in the work force at a moment when computing technology was set to explode. If he had been born a decade or two earlier, he probably would have been an anonymous lab geek if he had followed his mathematical inclinations, or perhaps the owner of a successful grocery store chain if he had pursued his entrepreneurial instincts.
What’s more, it is demonstrably not the case that income levels simply reflect aptitude and effort. Now, obviously being from a richer family affords all sorts of advantages, including physical, emotional, and cultural development. But factor all that out of the equation and assume that it’s just fair for all those things to translate into higher academic performance and higher earnings.
Even assuming that, there are massive advantages inherent simply in being born rich (and disadvantages in being poor.) My favorite example, simply because it’s so dramatic, is that a child born into the lowest-earning quintile who manages to attain a college degree is less likely to be in the highest-earning quintile than a child born into the top quintile who does not attain a college degree. This is all the more remarkable when you consider that making it to, and through, college is far harder for poor kids than rich kids even at a given level of aptitude. (Two thirds of the kids with average math scores and low-income parents do not attend college, while almost two-thirds of high-income kids with average math scores do.)
How would Hagopian explain this? The lower-income kids managed to beat the odds by graduating from college, yet they make less money than the rich kids who beat the odds in the other direction by not going to college. By any measure, the former group has more aptitude and greater work ethic. Now, clearly right-wingers in general, and wealthy right-wingers in particular, like to think aptitude and effort and choices determine how much money you make. (Hagopian is the co-founder of a venture capital and private equity firm.) You see this from Greg Mankiw, Arthur Brooks, and on and on. The right-wing worldview is based on a moral premise about the relationship between merit and wealth that is demonstrably false.
By: Jonathan Chait, The New Republic, April 1, 2011
A Minimum Wage Increase Will Not Kill Jobs
As the nation grapples with a jobs crisis and unemployment hovers near 9 percent, it is easy for policy makers to forget the plight of those who work but earn very little. There are about 4.4 million workers earning the minimum wage or less, according to government statistics. This amounts to about 6 percent of workers paid by the hour. They need a raise.
Today, a worker laboring 40 hours a week nonstop throughout the year for the federal minimum wage could barely keep a family of two above the federal poverty line. Though it rose to $7.25 an hour in 2009, up $2.10 since 2006, the minimum wage is still lower than it was 30 years ago, after accounting for inflation. It amounts to about $1.50 an hour less, in today’s money, than it did in 1968, when Martin Luther King Jr. and Robert Kennedy were killed, Richard Nixon was elected president and the economy was less than a third of its present size.
The minimum wage has many opponents among big business and Congressional Republicans. In Nevada, the Las Vegas Chamber of Commerce is pushing to repeal the state’s minimum wage, a whopping $8.25 an hour. Representative Darrell Issa, the California Republican, has proposed a bill in the House that would effectively cut the minimum wage in states where it was higher than the federal threshold by allowing employers to count health benefits toward wages.
Opponents argue that raising the minimum wage would inevitably lead to higher unemployment, prompting companies to cut jobs and decamp to cheaper labor markets. It is particularly bad, the argument goes, to raise it in a weak labor market. Yet with unemployment likely to remain painfully high for years to come, this argument amounts to a promise that the working poor will remain poor for a long time.
What’s more, we know now that the argument is grossly overstated. Over the past 15 years, states and cities around the country have rushed ahead of the federal government to impose higher minimum wages. Economists analyzing the impact of the increases on jobs have concluded that moderate increases have no discernible impact on joblessness. Employers did not rush off to cheaper labor markets in the suburbs or across state lines for a simple reason: that costs money too.
The most recent research, by John Schmitt and David Rosnick at the Center for Economic and Policy Research, found that San Francisco’s minimum wage jump to $8.50 in 2004 — well above the state minimum of $6.75 — improved low-wage workers’ incomes and did not kill jobs. An even bigger jump in Santa Fe, N.M., the same year — from $5.15 to $8.50 — had a similar effect.
Despite evidence to the contrary, businesses and Republicans may keep pushing against the minimum wage — using the jobs crisis now to clinch their argument. They should be disregarded, because their argument is wrong and the United States is too rich to tolerate such an underclass.
By: Editorial, The New York Times, March 25, 2011
The “Have-Nots” Sink While The “Haves” Smirk
The “race to the bottom” used to refer to the competition with low-cost foreign labor that threatened to undermine the wages of U.S. workers struggling in the same industries.
Now it refers to the competition between private- and public-sector workers to see who can become poorer faster.
In essence, that’s what the fight in Wisconsin is about. It’s also what last weekend’s Niagara Square rally with 250 union supporters was about.
But who’s going to foot the bill for the standard of living they want to protect? Middle-class taxpayers are tapped out. Wisconsin Gov. Scott Walker made that point, as did Gov. Andrew Cuomo when calling New York “functionally bankrupt.”
In other words, the money is gone.
But as private-sector workers turn on public employees, and non-union workers castigate their unionized brethren, the internecine warfare distracts from a more fundamental question: Where did the money go?
In a nutshell, it went up. Not in smoke, though it could have, as far as the middle class is concerned. Rather, it went to the top of the economic pyramid.
A Center on Budget and Policy Priorities review last year found that the gap between the top 1 percent and those in the middle and at the bottom “more than tripled between 1979 and 2007.” (If the wealthy lost any relative ground during the Great Recession, they’ve more than made up for it during the recovery.)
Similarly, the Economic Policy Institute — in its State of Working America report last month — found that average annual income growth from 2000 to 2007 went entirely to those in the top 10 percent, while “income for the bottom 90 percent actually declined.”
And what of those government workers lavishly compensated with our tax dollars?
A review by the center last week found that, when controlling for education, job tenure and other variables, “public workers are paid 4 to 11 percent less than private-sector workers.” A separate study by the institute found that state and local government workers make $2,001 less on average, even when benefits are included.
Yet the fight rages on among those in the middle of the pyramid.
Meanwhile, in its annual Executive Excess report, the Institute for Policy Studies calculated that CEOs of major firms made 263 times the average compensation of American workers in 2009.
SEIU Local 1199 Vice President Todd Hobler, who was at the Niagara Square rally, says such inequity gets accepted because the media suggest “that the goal of all people is to become rich, and that those who have fortunes deserve it and have earned it.”
But are corporate bosses 263 times smarter than you are? Do they work 263 times harder?
Yet despite the reams of data, the issue of inequity gets little traction in this country. Republicans philosophically don’t believe in greater income equality unless it occurs by accident, while Democrats have no beliefs at all that they’re willing to fight for.
The result is that anyone who mentions the income gap is accused of “class warfare,” which brings to mind a quote by billionaire Warren Buffett, whose Berkshire Hathaway owns The Buffalo News, that “my class is winning.”
But apparently working-class Americans are OK with that. We’ll dump teachers, close libraries and let parks go to seed because we can’t afford to pay more. Yet we’ll never ask, “Who can?” That’s not what we do.
Washington extended the Bush tax cuts for the top 2 percent; New York will let its surtax on millionaires expire. Both capitals are responding to working-class voters who apparently don’t want to “redistribute” wealth and are satisfied fighting one another for the scraps.
After all, we’re not Tunisians. We’re not Egyptians.
We’re Americans.
By: Rod Watson, News Columnist-BuffaloNews.com, March 3, 2011
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