Lack of Income Mobility Hurts Us All

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When looking at the New York Times’ David Leonhardt’s fascinating research on how your location determines your income mobility, there are some obvious conclusions.

We all know that there are certain areas where poverty is rampant and multi-generational.  Those are areas where we would expect income mobility to be low.

What is striking is that even the earning potential of the affluent is affected by location.  In areas designated below average in income mobility, future income is also diminished for high income households.

Some will take this data and simply conclude that families must leave low income mobility areas in favor of high income mobility areas.  Certainly, we have seen instances where that has already taken place.

However, what if low income mobility areas greatly outnumber high income mobility areas?  There are certain regions of the U.S. where some combination of family traditions, marketable skill sets, and quality of life concerns limit where you are willing to move.  A look at the U.S. map shows there are very few states that are effectively avoiding this problem.

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Areas in blue and green indicate good income mobility, while red and orange areas suggest improvement is necessary.  Though it appears that the Great Plains region is excelling, the South and Southwest regions are not.

Therefore, what can be done to boost income mobility, so that overall living standards improve?

First, let us look at five common themes that drive good income mobility:

  1. Less segregation by income and race
  2. Lower levels of income inequality
  3. Better schools
  4. Lower rates of violent crime
  5. Larger share of two-parent households

Perceived cultural differences drive residential segregation patterns.  When there is the presence of unruly children and lack parental involvement in the schools of some communities, upwardly mobile parents are reluctant to place their children in those schools.

This mindset has implications that drive all five of the above factors.  White flight emerges and drives them away from blacks because there is a perception that black families have discipline issues and devalue education.  High income families isolate themselves from low income families for similar reasons.

Regions where there are one or two good schools surrounded by a number of under-performing schools can stigmatize a region and reduce overall investment and job creation.  Those economic factors often drive up violent crime and result in more unfavorable family compositions.

In order to address this problem, we must realize that solutions must come locally, rather than nationally.  In an era of high federal deficits and strained state budgets, it will be difficult to solve these socioeconomic problems with an influx of public funding.

Instead, it will take strong and inclusive civic leadership where serious dialogue takes place on race and social class.  Identifying influential leaders covering a broad spectrum of the community, including industry, education, non-profit organizations, and religious institutions, will be essential.  Establishing parameters that allow for free-flowing dialogue will be challenging, but necessary to overcome the wall of fear and mistrust.

Communities committed to active engagement and willingness to seek common ground on difficult issues will thrive.  On the other hand, communities accepting the status quo will continue to wilt.

Are you willing to start the dialogue and push your community forward?

All-In Nation: Are You In or Out?

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Are you in?

All-In Nation is a collaboration between the Center for American Progress and PolicyLink  and it is centered on exploring ways to create broad-based economic growth.  Their progressive agenda is to lower income inequality by ensuring that barriers and obstacles are eradicated through encouraging more public investment and breaking down employment discrimination through stricter regulation.

Here are three reasons why the U.S. should buy in to All-In Nation:

  1. Minimizes income inequality, which is a threat to a stable democracy.

  2. Improves the skill-sets of workers currently not desired by the private sector.

  3. Ensures a more diverse leadership body by rectifying institutional bias through stiffer regulation.

Minimizes income inequality, which is a threat to a stable democracy.  Since 1980, there has been a steady erosion of the middle class as an emphasis on technology has transformed our workforce.  It was also during that time that we saw a drastic reform within our tax code where marginal income tax rates were substantially slashed at the very top from 70% in 1980 to a low of 28% in 1988.  While that encourages more investment and higher economic growth, the downside is that it could enrich few and impoverish many.  This result has given rise to grassroots movements, such as Occupy Wall Street, that are demanding that wealth be redistributed to the masses.  If this goes unaddressed, the basic fundamentals of capitalism could be threatened.

Improves the skill-sets of workers currently not desired by the private sector.  Businesses are committed to maximizing profits and that implies a lesser commitment to investing in individuals with less marketable skills.  In those instances, the public sector can fill those gaps through workforce development investments.  That could entail more funding to various local Department of Labor locations or grants to local colleges and universities.  There are also opportunities where there can be greater collaboration between the public sector and private sector, so that market forces are more aligned.

Ensures a more diverse leadership body by rectifying institutional bias through stiffer regulation.  It is human nature to have conscious or subconscious biases when it comes to hiring staff.  They can occur through distorted images from media or limited interactions with people of different cultures.  When making key hiring decisions, it is often more convenient to rely on an insulated network that is not as diverse.  With both instances, we see a management structure might not be attuned to their market and ignore highly talented prospects.  This can be rectified through affirmative action or other legislative acts that force management to broaden their job search scope.

Here are three reasons why the U.S. should pass on All-In Nation:

  1. Compromises future economic growth with taxes rising on more productive assets.

  2. Bureaucrats in Washington are ill-equipped to make decisions that will optimally benefit society.

  3. Discourages incentives by enabling counter-productive behavior.

Compromises future economic growth with taxes rising on more productive assets.  The U.S. has accumulated successively higher budget deficits because their spending has outpaced revenues collected.  Making investments in infrastructure that cannot be supported with current fiscal conditions will likely worsen future economic prospects.  While the U.S. has been fortunate to finance deficit spending without a huge increase in interest rates, this is not a sustainable strategy in the long-term.  Rising interest rates will undoubtedly occur in the future and that will hamper both businesses and consumers ability to access cheap credit.

Bureaucrats in Washington are ill-equipped to make decisions that will optimally benefit society.  The danger in placing more control with government is that they are either incapable of adjusting to dynamic market conditions or are more interested in fulfilling their selfish pursuits over more valued needs of society.  While the free market system allows market forces to veer to projects that will yield the highest economic benefit to society, yielding control over to bureaucrats might result in funding initiatives where political connections trump overall economic benefits.

Discourages incentives by enabling counter-productive behavior.  In an attempt to reduce inequality, many anti-poverty programs are designed to provide financial and food support.  Even though this is certainly helpful in the short-run for families falling on tough times, there are inadequate mechanisms in place to encourage people to wean off public support.  In fact, there are instances where people opt to stay on public support, even when work is available because they find it more financially beneficial.  While that might be helpful in the short-run, their future job marketability is compromised when the length of unemployment continues to rise.  Prolonged periods of unemployment end up hurting them more in the future and creates a poverty cycle that is hard to reverse.

Or are you out?

When A College Degree Is Not Valuable

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PIMCO Managing Director William Gross offers his opinion that college degrees might be overvalued and it is a valid point.   Now that might be odd since I’m an educator, but let me explain.  The global marketplace has radically changed over the last decade and it is placing more value on math and science, rather than the liberal arts.  Therefore, the value of a college degree varies based on area of discipline and  academic rigor.

In today’s educational environment, there is more focus on ensuring that all segments of society matriculate through the K-12 system.  The primary objective is to lower dropout rates, which is an admirable and worthwhile goal because it has the potential of decreasing crime and boosting productivity.  However, achieving that goal by lowering expectations and not insisting students meet key academic requirements has severe consequences for the rest of the student body.

Human behavior revolves around tying action to consequences.  There is a perception that many school districts are giving a free pass to unruly or disengaged students.  By not intervening at an early stage, there is no incentive to change these self-defeating acts.  Not only is this damaging to the low-performing student, it affects the morale and productivity of the rest of the classroom.

If this perception is true and students are leaving high school and entering college without a good foundation, then they are not equipped to fully take advantage of the benefits of a college degree.  In a global economy that is placing greater emphasis on math and science, students are avoiding those rigorous disciplines in favor of liberal arts where evaluation is more intrinsic and subjective.

It is certainly not my intention to denigrate liberal arts because there is great value in possessing strong communication and critical thinking skills.  However, it is easier to meet minimum requirement in the liberal arts than nursing, engineering, math, and economics, since the later disciplines require quantitative competencies that are more objective and not subjective.  In fact, a superior liberal arts students will remain in great demand because they will have a strong foundation in critical thinking that will prepare them for a variety of disciplines.

What is needed is higher standards for not only students and teachers, but also parents.  While there are some who believe that will result in more students falling through the cracks, it is my belief that our youth will rise to the challenge of higher expectations.

As an advocate for broad-based economic growth and minimizing income inequality, we must change our paradigm to properly equip all segments of society to deal with the needs of the global economy.

Let’s Amend, Not End, Capitalism

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The United States prides itself as being the “land of opportunity”.  With the U.S. being a favored destination for immigrants across the world, that distinction still has merit.  However, there are disturbing trends where many are questioning the value of capitalism due to its contribution to income inequality.  Even so, we must acknowledge the role that capitalism played in lifting not only Americans out of poverty and into prosperity, but in Canada, Europe, and all parts of the world.  Having said that, we must recognize that our current economic system needs to be amended to level the playing field.

Many Americans are divided on the moral implications of income redistribution.  On one hand, there are those that believe that extravagant wealth is immoral and that there should be a limit on executive pay.  In fact, Japan has embraced this culture and have stifled executive pay.  Their executives must publicly disclose their pay if it exceeds $1.1 million and only 7.5% of them exceeded this baseline.  That is dwarfed by American executives, whose top 10 earn between $43 to $131 million in annual salaries.

Then there are others, who believe too much income redistribution is immoral because it unfairly penalizes hard work and achievement.  When an individual makes sacrifices in their education and career, why should they be forced to give up a portion of their earned pay to subsidize an irresponsible individual, who squandered opportunities by not valuing their education early in life?  If taxes are increased substantially as your income rises, then the payoff of extra work and risk is lowered.  Why go through the rigors of medical school, engineering, and law school, when one can make a similar amount in a less demanding field?

In deciding between two competing narratives, the difference comes down to economic mobility.  Is our present economic system more conducive to promoting competition between social classes?  Unless one believes that effort and ability is only consigned to the affluent, one would think that the U.S. economy and its promotion of economic liberty would result in healthy movement between the poor, middle class, and upper class.  However when compared to our peers, we are laggards Markus Jantti’s study comparing the U.S. with the United Kingdom, Denmark, Norway, Sweden shows that Americans are less likely to rise from poverty across generations than any of those four countries.

Certainly, it is fair that a successful professional, who has excelled at their craft, should be able to pass their hard-earned dollars to their children to help them compete.  One of the motivations to taking on additional responsibilities on a project or working 60-70 hours a week is to provide a better life for our children.  That means living in a better neighborhood and access to superior schools.  However, should there be limits imposed on those advantages in the form of higher taxes?

Specifically, there’s a growing body of research that income inequality imposes significant costs on the economy.  In order to counter these costs, there are policy initiatives that would boost equality and shift the economic gains would shift from the affluent to the low and middle class.    When there is too much income inequality, it can actually inhibit economic growth and cause more instability.  Raghuram Rajan elaborates on this view in Project Syndicate.  Specifically, he blames deregulaton and legislative acts promoting home ownership as the root causes of the financial crisis as low- and middle-income households took on too much debt to maintain their standard of living in the face of declining income growth.

With rising inequality, the occurrence of rent-seeking is more prevalent.  This is where individuals use their financial resources and influence to affect policies that benefit their interests over society.  The prevalence of special interest groups and less restrictive campaign financing laws provide the potential to seek loopholes and other avenues to enrich themselves at the expense of others.  Columbia University economist Stiglitz pointed to lack of effective oversight of the financial industry where irresponsible mortgage products caused our steep recession.  Then there are exploitations of the tax code where societal benefits are minimal when these advantages boost corporate balance sheets, rather than worker payrolls.  Lastly, it stunts the progress of competitors who are not able to buy influence.

It is imperative that we achieve legislative reform that minimizes the influence of special interests and replace it with investments toward minimizing the skills divide.  A two-pronged attack is necessary.  First, we need a quick fix in updating adult skill sets that are struggling to meet the requirements of a technology-based economy.  As for schools, they must find ways to increase academic performance within low-income and middle-income households despite challenges within family structures and less than ideal neighborhoods.  This must start with better parental training and access to early child education resources.  Both will require more funding and resources.

Capitalism remains the ideal economic system in the world, but ignoring the negative effects of income inequality can lead to its demise.