Yet More From the Neighborhood

Below is my take on the real causes of wage and income inequality and increasing socio-economic rigidity in the U.S. and whether tax policy can solve the problems:

Huzzah for the middle class! But where does it come from and why has it been getting harder for the poor to move up the ladder? There are many who want to take the short-cut and use tax policy to transfer wealth. I'm very much in favor of the social safety net but income transfers, pursued too aggressively, would have the effect of reducing long-term growth by reducing investment, research and development and employment. And who gets hurt the most in a low-growth environment? Not the rich, you can be sure of that - they have resources and the ability to shelter themselves from government policies. The real losers are the middle-class and poor.

The actual cause of the decline in economic mobility, I think, is a lot more complex and is directly related to human capital development which is the true source of all wealth. A recent book, "The Race Between Education and Technology," by Claudia Goldin and Lawrence Katz throws this issue into high relief. At the end of the 19th and beginning of the 20th centuries, rapid industrialization occurred in tandem with the rise of the high school movement. For the first time in human history, a society decided to begin equipping most people -- male and female -- with high quality basic education. The young adults moving from farms into factories were arriving at work with strong literacy and numeracy skills and the capacity to adapt quickly to changing technology. The result was explosive economic growth, rising incomes across the board and the rapid expansion of the middle class.

Since the 1970s the picture as been the opposite. Education and technology have been out of sync, with the effectiveness of our education system falling behind technology at a rapid rate. The result of lower levels of education has been a "bidding-up" by the market of the available workers. (This trend is further exacerbated by the demographic squeeze brought on by smaller family sizes.) This is the real source of growing income inequality. Repeat after me: the market always wins. A declining supply of educated, flexible workers means the average unit cost of those that remain goes up. This market effect is what is driving wage and income inequality. If we want to strengthen the middle class, the long-term solution is to do a better job at educating and training the workforce to be able to staff a technology-driven economy.

Of course, the education and training problem isn't equally distributed across society. For the middle and upper class, the education systems still work pretty well. Schools serving poor kids? Not so much, mostly because the kids aren't arriving ready-to-learn in classrooms, live in chaotic households, and are often members of sub-cultures where learning isn't valued or esteemed resulting in dropout rates exceeding 50 percent. I doubt we will fix these problems by spending more on schools. District of Columbia public schools spends more per capita than any system in the country and has traditionally had some of the worst outcomes.

So what's the answer? Poor families, neighborhoods and communities need help to achieve a shift that fosters safety, health, and a love and appreciation or education. Government can do some things (like a better job of policing and expanding access to health care) that will help. But the bigger problems lie outside the realm of government and require strengthening non-governmental institutions, religious and community organizations, for instance, that can help deal with the values questions. Youth mentoring is a good example of this because it helps prepare children for opportunity by changing their beliefs about themselves and the world around them. It is only when we address these precursor or learning-readiness issues that all our other investments will begin to pay off. Otherwise, it is pouring water into a basket - it just runs right through.

In short, resentment toward the rich can feel very rewarding, and, on some level, may even be deserved. But making the rich poor does not mean you will make the poor rich or even middle class. If you take the easy way out, the way that demands nothing from those you are trying to help, you could very well end up making the problem worse not better. Proceed with caution.