Twilight of the Elites

October 15, 2012

Christopher Hayes. Twilight of the Elites: America After Meritocracy (Crown Publishing Group, 2012).

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In this book, MSNBC commentator Chris Hayes ties the recent financial crisis to a larger crisis of authority. For Hayes, the financial meltdown is just the most recent example of “elite failure,” the “latest in an uninterrupted cascade of corruption and incompetence” that also includes Enron and other corporate scandals, the inept response to hurricane Katrina, baseball’s steroid scandal, and the coverup of sexual molestation by the Catholic Church. Even before the financial crash, surveys showed an erosion in trust in almost every social institution. And here the exceptions may be as troubling as the rule: What kind of democratic society has high confidence in its military but almost no confidence in its elected representatives?

Hayes distinguishes between “institutionalist” and “insurrectionist” responses to the crisis of authority. For institutionalists like David Brooks, popular distrust is itself the problem, since it can lead to a breakdown of social order. For insurrectionists like Hayes himself, the real problem is the elite behavior that has inspired the distrust. Loss of confidence in elites could be a step toward social reform, but for the most part that hasn’t happened yet, so we remain in limbo with poorly functioning institutions, largely run by “the same elites who screwed them up in the first place.”

What makes this book different from many discussions of elite failure is the depth and breadth of Hayes’s critique. He is not simply attacking particular groups of leaders for particular behavior; he is questioning the fundamental assumption on which leadership in America is largely based, which is the assumption of meritocracy. Emerson said, “The existence of an upper class is not injurious, as long as it is dependent on merit.” The idea that inequality based on merit is both morally justifiable and practically efficient is fundamental to the American belief system. One corollary is that giving people something they haven’t merited is immoral. Conservatives like meritocracy as a basis for authority and privilege, and liberals like it as a basis for openness and diversity. Talent rises to the top, and social factors like race, ethnicity, religion and gender need be no obstacle to the recognition of talent. Hayes cites the election of Barack Obama to the presidency as the “crowning achievement” of meritocracy, although ironically occurring “just at the moment that the system was imploding on itself.”

A belief in the importance of education goes hand-in-hand with a faith in meritocracy. In theory, good schools identify and develop talent from all corners of society, and then funnel it into positions of responsibility. Between 2000 and 2005, 40% of Princeton’s fully employed graduates took jobs on Wall Street. Hayes’s critique of the meritocratic system begins with education, specifically the elite elementary school he attended, Hunter Elementary School in Manhattan. It is a free public school accepting high achievers from all over the city on the basis of a single admissions examination administered to sixth-grade students. But as economic inequality has increased in New York, as elsewhere, Hunter’s enrollment has become increasingly wealthy and white, and minority admissions have slowed to a trickle (3% black and 1% Hispanic by 2009). This is partly because the successful applicants can afford special coaching to prepare for the test. It also reflects the general rule that income is a good predictor of test scores, since children of successful parents have opportunities that other children don’t have.

Advocates of meritocracy usually make a sharp distinction between equality of opportunity and equality of outcomes; meritocracy is supposed to provide the former but not the latter. Equality of opportunity provides the “level playing field” for competition, but the rewards go primarily to the winning competitors, as they should. Hayes questions whether opportunity and outcomes can be so neatly separated. He proposes the following “Iron Law of Meritocracy”:

Eventually the inequality produced by a meritocratic system will grow large enough to subvert the mechanisms of mobility. Unequal outcomes make equal opportunity impossible….Those who are able to climb up the ladder will find ways to pull it up after them, or to selectively lower it down to allow their friends, allies, and kin to scramble up. Whoever says meritocracy says oligarchy.

If that sounds familiar, it’s because it was inspired by the “Iron Law of Oligarchy” proposed by German sociologist Robert Michels in 1911. Michels was describing the process by which entrenched oligarchies emerge in any complex organization, as people who obtain important positions use them to maintain their power. Hayes also notes that Michael Young, the British writer who coined the term “meritocracy” in 1958, intended his book as a warning about what he perceived as a threat to democracy. He saw meritocracy as a system in which a small group of winners could run society to the detriment of the losers, as opposed to a system in which large groups like industrial workers could get ahead together.

In support of his contention that inequality of outcomes can undermine equality of opportunity, Hayes cites economic research showing that economic mobility has decreased as income inequality has increased. Contrary to what advocates of meritocracy might hope, the U.S. has more inequality and less mobility than most other industrial democracies. For Hayes, the issue is not just that this is unfair, but that it bears on the the crisis of authority, the perception that our elites just haven’t been doing a very good job lately. Extreme inequality creates a corrupted upper class that serves society poorly. I’ll explore this aspect of Hayes’s argument in my next post.

(Continued)

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Posted by Ed Steffes

Presidential Debate: Performance vs. Substance

October 5, 2012

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Reactions to Wednesday night’s first presidential debate seem to have reached a general consensus along these lines:

  • Governor Romney’s debate performance was stronger than President Obama’s
  • Many of Romney’s key statements were substantively inaccurate or misleading, but Obama didn’t respond very effectively
  • Performance matters more than substance, and so Romney won the debate

As Rachel Maddow pointed out last night, challengers have usually performed very well in their first debate against incumbent presidents, the most notable exception being Senator Bob Dole’s debate with President Clinton. A common strategy is to attack the president’s policies, which are clearly on the record, while remaining vague enough about one’s own plans to inspire hope–or should I say wishful thinking–among the voters. Mitt Romney has perfected this strategy, and it worked for him pretty well the other night. How much it contributes to useful policy debate is another question. In an earlier post, I quoted Ezra Klein’s remark, “Quite simply, the Romney campaign isn’t adhering to the minimum standards required for a real policy conversation.”

Steve Benen has been serving as a one-man truth squad, reporting on the remarkable number of discrepancies between Romney’s statements and reality as most of us know it. I can’t vouch for every single objection he raises, but he does document his points carefully. Benen’s take on Romney’s debate performance is here.

President Obama was particularly flummoxed by Romney’s denial that he was proposing a $5 trillion tax cut. That figure is based on the analysis of the governor’s proposal by the Tax Policy Center:

This plan would extend the 2001-03 tax cuts, reduce individual income tax rates by 20 percent, eliminate taxation of investment income of most taxpayers (including individuals earning less than $100,000, and married couples earning less than $200,000), eliminate the estate tax, reduce the corporate income tax rate, and repeal the alternative minimum tax (AMT) and the high-income taxes enacted in 2010’s health-reform legislation.

We estimate that these components would reduce revenues by $456 billion in 2015 relative to a current policy baseline. According to statements by Governor Romney and his advisors, the remainder of the plan will include policies to offset this revenue loss, although there are no details on how that would be achieved.

The $5 trillion figure comes from accumulating the annual revenue reductions over ten years (a common practice in fiscal projections) and rounding the result to the nearest trillion. When confronted with this figure, Romney doesn’t try to clarify it or revise it; he just denies it.

If we could agree on at least a ballpark figure for the magnitude of the Romney tax cuts, then we could have a substantive discussion of how to make up that revenue, since he insists that his tax cut will not increase the deficit. One way he can do it is by closing tax “loopholes,” but he refuses to say which deductions he would eliminate. He does claim that eliminating or capping deductions for wealthy taxpayers (incomes over $250,000) will make his proposal revenue neutral for that group. One problem with that is that it undercuts his own argument for cutting taxes in the first place, which is to give “job creators” more money to invest in new jobs. A second problem is that cutting deductions doesn’t make the numbers add up unless you hit very popular ones, such as the charitable deduction and home interest deduction, and also eliminate them for more taxpayers than just the very wealthy.

The other way to offset the big tax cut–and another matter for serious debate if Romney would engage in it–is to create a broader tax base by growing the economy. Romney claims that he will do that, but he provides no details. This is the familiar article of faith among “supply-siders” that tax cuts are always good for the economy, and so they can pay for themselves. The recent record on this is not encouraging, since Republican tax cuts from Ronald Reagan to George W. Bush have created large deficits. Faced with those deficits, Reagan was willing to put taxes back on the table, but recent Republicans have insisted that the budget axe fall entirely on domestic spending. Romney’s running mate, Paul Ryan, is famous for proposing unpopular budget cuts. But Romney avoids talking about such cuts, except for the vague promise to make people less dependent on government, as if throwing them off Medicaid were doing them a favor.

Romney’s wonderful “performance” is like a magic act–It’s mostly sleight-of-hand. He shows us a big tax cut, but if we question how he will pay for it, it suddenly disappears. He’s not really cutting taxes for the wealthy, you see, because he’s closing (unspecified) “loopholes,” and the rest is offset by “growing the economy.” He substitutes the dubious magic of supply-side economics for the inconvenient fact that he has a certain amount of revenue to find. (When Obama tried to bring that up, Romney hit him with the zinger that being President doesn’t give him the right to his own facts–point to Romney if you’re keeping score.) Paul Ryan worked the same magic with his budget plan; he instructed the Congressional Budget Office to assume that his tax cuts were revenue neutral without providing any supporting evidence. (And the CBO still couldn’t find too much deficit reduction in his plan because of his refusal to cut defense spending or allow the Bush tax cuts to expire. He achieved his reputation as a “deficit hawk” just by being tough on domestic spending.)

Whichever candidate won the debate, the American electorate lost. We deserve a serious policy debate; what we got was obfuscation and befuddlement.

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Posted by Ed Steffes

Would Another Tax Cut Help?

October 1, 2012

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One of the biggest disagreements between the presidential candidates is over tax policy. It’s really another episode in the ongoing debate over how best to create jobs and maintain a strong economy. “Supply-siders” recommend low taxes to encourage savings and investment, while Keynesians recommend government spending to boost aggregate demand for goods and services. The government can’t do too much of both at once without running large deficits. Keynesians are explicitly willing to allow deficit spending when combating recessions. Supply-siders more often claim to be deficit “hawks,” but they often run up debt anyway because of their eagerness to cut taxes.

President Obama’s position on taxes is familiar by now. He would keep tax rates the same as they are now, except that he would allow the Bush tax cuts on incomes over $250,000 to expire. He would use part of the additional revenue to support spending intended to create jobs, and part to reduce the deficit. Republicans characterize Obama’s policy as a “job-killing” tax increase. Democrats defend it as just bringing tax rates on the wealthy back up to where they were in the Clinton years, when job growth was actually much stronger than it has been since then.

Governor Romney joins most Republicans in opposing any expiration of the Bush tax cuts. He would also preserve tax breaks that specifically encourage investment, such as low rates on capital gains and municipal bonds. In addition, he proposes another large cut in income tax rates, as well as the complete elimination of estate taxes. He maintains that he can cut taxes without increasing the deficit, for two reasons. First, for incomes over $250,000, the reductions in tax rates would be balanced by the elimination of “loopholes,” so the revenue collected from the wealthy would remain the same. Second, the rate reductions would encourage saving, investment and job-creation, and that would broaden the tax base and generate new revenue. So the idea is to help the economy without aggravating the deficit.

Critics of the Romney plan usually make one or more of these points:

  1. Offsetting rate cuts for the wealthy by closing loopholes is very difficult, perhaps mathematically impossible. Romney refuses to say what deductions he would eliminate, but the independent Tax Policy Center concluded that the eliminations would have to hit less wealthy taxpayers as well in order for the numbers to add up. Political resistance to some of the changes would be strong; for example, the deduction for mortgage interest is important to housing sales and the deduction for charitable contributions is vital to non-profits. This is one reason why the tax cuts are likely to increase the deficit, just as the Bush tax cuts did.
  2. Although the assumption that tax cuts generate economic growth is an article of faith for supply-siders, the evidence for it is weak. Testing it properly would require cutting taxes while holding other factors constant–especially spending–but that’s not what governments in recent memory have done. Ronald Reagan and George W. Bush both cut taxes, but they also increased military spending and ran big deficits; job growth was good for Reagan but poor for Bush. Job growth was even better during the 1950s and 60s when taxes were higher, as well as during the Clinton administration, as mentioned earlier. Overall, researchers have found little correlation between rates of taxation and rates of economic growth. If the Romney tax cuts turned out to be no more successful than the Bush tax cuts in expanding the economy, then that’s another reason why they might just aggravate the deficit.
  3. Even if we assume that another tax cut could pay for itself by creating jobs and broadening the tax base, the existing deficit would remain an issue. If the Romney tax cut turned out to be revenue neutral at best, and the Republicans continued their refusal to reduce military spending, then the entire burden of reducing the deficit would fall on domestic spending. That is essentially the Ryan budget plan. The trouble with that is that cuts in domestic spending destroy jobs, both the jobs of government employees and those of private workers whose work (such as road construction) doesn’t get funded. Economists such as Mark Zandi of Moody Analytics calculate that each dollar spent by the government has a larger multiplier effect on economic activity than each dollar reduction in taxes. For that reason, the Economic Policy Institute estimates that job creation would be much weaker under Romney’s plan than under President Obama’s plan (considering both his tax increase on the wealthy and his American Jobs Act).

A positive effect of another tax cut on the economy is not out of the question. But the benefits seem dubious, and the risks of higher deficits or more jobs destroyed seem very high.

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Posted by Ed Steffes

Good Jobs, Bad Jobs (part 2)

September 27, 2012

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In my first post about Arne Kalleberg’s Good Jobs, Bad Jobs, I described the author’s general framework for understanding the increasing polarization of work. He considers many factors: the social and economic forces that have transformed the economy (globalization, new technologies), the composition of the labor force (by education, race, gender, etc.), the mediating role of other institutions (government, financial institutions, unions), and the organization of work itself (“high-road” and “low-road” employment strategies). Now I want to take a closer look at work polarization, starting with changes in the distribution of occupations.

Kalleberg ranks broad occupational groups according to measures of job quality. He confirms that occupations in the middle range have lost workers, while occupations at the high and low ends have added workers. For example, a lot of the losses have involved semiskilled machine operators and administrative support workers, where new technologies have reduced the need for labor. My Dad’s first job after college was as a statistical clerk, armed with only a slide rule and an adding machine. When I taught statistics a generation later, my students and I had computers to do the busywork. When I later became an independent financial planner, my desktop computer provided all the administrative support I needed.

Remember the old IBM slogan, “Machines should work; people should think”? Many optimistic social scientists of the 1960s and 70s expected technological change to improve the quality of work, eliminating the drudgery and expanding the creativity. Workers could take the benefits of their high productivity as higher wages and/or more time off the job. Part of this vision has come true. High-end occupations–managerial, professional and technical–have expanded. But they haven’t expanded enough to employ all the workers displaced by technological obsolescence or outsourcing. In the long run, new technologies may create as many jobs as they destroy; in the short run, destroying a good job may be easier than creating one. Capitalists are job destroyers as much as job creators, as the current political debate over Bain Capital illustrates. Getting the same work done using fewer American workers can be easy with new technologies and a global supply of labor. Doing something new and paying someone a good wage to do it is more challenging. It may involve taking more risk, making an investment in worker training, and finding a market for a new good or service. Much of the work worth doing has social–not just individual–benefits, so the demand may not be there without some financial commitment from the taxpayers.

The phenomenal growth of low-wage service jobs results partly from the growth in the number of workers who are available for such jobs. This in turn results from a combination of labor-force characteristics (so many workers who lack the skills required for higher-level work) and work organization (too many companies adopting “low-road,” cost-cutting approaches to labor instead of “high-road” investments in human capital). These factors are reinforced by the demand for cheap services in a society with so many low-income households. Of the ten occupations with the largest projected job growth from 2006 to 2016, seven are low-wage sales or service jobs (such as retail salespersons, food preparation and service workers, home health care aides, and janitors).

Kalleberg’s findings on wages are consistent with those of other researchers: More workers at the high and low ends and fewer in the middle. Between 1973 and 2009, real (inflation-adjusted) wages for workers in the 95th percentile have increased from $39 to $55 per hour for men, and from $24 to $41 per hour for women. At the median (50th percentile), wages have increased slightly for women ($11 to $14) but have stagnated for men (around $18). In the 20th percentile, wages have also increased a little for women ($8 to $9), but have fallen for men ($12 to $10). And at the bottom, the minimum wage of $7.25 has not been adjusted for inflation, and so it has declined in real value since its peak in the 1960s.

Wage disparities have increased the correlation between educational level and income. The economic advantage of a college education has increased, although the cost and the debt one incurs has too. The United States ranks relatively high on average education and other measures of skill, but it also ranks high on the proportion of workers in very low-paying jobs. Other countries have had more success in maintaining decent wages. Kalleberg says,

Institutions matter for wage-setting: inequality tended to be greater in liberal market economies such as the United States, Britain, and Canada, which have relatively weak unions and decentralized patterns of wage-setting, whereas inequality was relatively low in countries such as France and Germany, which have relatively centralized wage-setting mechanisms and stronger unions.

This more sociological view contrasts with the economic theory of skill-based technical change (SBTC), which attributes wage disparities primarily to individual worker qualifications, without much regard for institutional variables.

Kalleberg also finds increasing inequality in the availability of benefits, especially health insurance and defined-benefit pension plans. The United States is unusual in its reliance on employers to provide such benefits at their discretion, rather than making them rights of citizenship. As stable employment relations and the social contract between management and labor have broken down, this system provides fewer reliable benefits, especially for workers at the low end. The proportion of workers covered by defined-benefit pension plans has been cut in half since 1980. Defined contribution plans like 401(k)s shift the risk of poor investment performance to the individual worker.

One particularly discouraging aspect of job polarization is the effect it has had on racial inequality. Whatever progress we have made in combating racial discrimination has been counteracted by the economic forces and decisions that have tended to polarize the labor force. Occupational segregation by race declined a bit in the 1970s, but stopped declining after that. Many of the jobs that had helped other ethnic groups move into the middle class–especially manufacturing jobs with modest skill requirements but good wages–are no longer available, and what good jobs there are have higher educational requirements. To make matters worse, minorities (and women) who do have college educations still don’t obtain their proportional share of the good jobs, suggesting that discrimination remains a problem at the high end of the occupational spectrum.

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Good Jobs, Bad Jobs

September 26, 2012

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Arne L. Kalleberg. Good Jobs, Bad Jobs: The Rise of Polarized and Precarious Employment Systems in the United States, 1970s to 2000s (New York: Russell Sage Foundation, 2011)

Sociologist Arne Kalleberg analyzes job trends over the past four decades to document a growing divergence in job quality. Of course, jobs have always varied in pay, benefits, autonomy, job satisfaction, and other characteristics. What Kalleberg confirms is just how polarized employment has become, with more jobs that are distinctly good or bad and fewer in between. His findings support those of other analysts who observe a shrinking of the middle class (see, for example, “The Lost Decade of the Middle Class“).

In contrast to what has been happening recently, the several decades preceding the 1970s were a period of middle-class expansion. American manufacturing, construction and transportation industries were booming, and they provided many blue-collar jobs that required only modest skills but offered good wages and a fair amount of security. That was the era of the social contract between business and labor, in which “workers received fairly secure and well-paid jobs in exchange for labor peace and productivity.” That contract was supported by recently-enacted labor laws that guaranteed collective-bargaining rights and regulated hours and working conditions. Many descendants of turn-of-the-century immigrants became stable breadwinners and homeowners, and then raised the next generation to advance even farther.

How did the country go from an expanding middle class, with mass participation in the benefits of economic growth, to a situation of increasing polarization of employment and income? Kalleberg provides a comprehensive framework for thinking about the problem, including these elements:

  • The social and economic forces that have transformed the economy: Globalization has increased the competitive pressures on companies and their workers, challenging them to be more flexible. Information and communication technologies facilitate this flexibility, replacing some forms of labor and enhancing others. Elimination or offshoring of manufacturing jobs shifts the center of job creation to the service sector.
  • The composition of the labor force: As education and skills become more essential for good jobs, the large disparities in educational attainment within the U.S. population help divide workers into good and bad jobs. Groups with historical disadvantages in education, such as non-whites and immigrants from poorer countries, are vulnerable to being channeled into the worst jobs, a pattern reinforced by discrimination. The large numbers of women who are now in the labor force are disadvantaged less by education than by their traditional role as mothers, since the U.S. lags behind other countries in providing time off for parenting, illness or even vacations; and part-time jobs are often particularly poor in wages and benefits.
  • Mediating institutions: Employment trends are not just automatic responses to global economic forces or labor market conditions, but are shaped by other social institutions. Government decisions to deregulate industries and weaken labor law enforcement have given American companies more freedom to restructure in ways that destroy good jobs. Advocates of corporate flexibility have advocated a “neoliberal” free-market ideology that favors competitive, rugged-individualist solutions over cooperative, social solutions. The decline in American unions, which has been worse than in many European countries, has created the world’s largest gap between the number of workers who want a union and the number who can have one. New institutions in the expanding and increasingly deregulated financial sector, such as private equity firms specializing in corporate takeovers and restructuring, increase the pressure on companies to pursue short-term profits by cutting labor costs.
  • Work organization: Companies struggling to compete in the global marketplace can go about it in more than one way. Most American firms have relied heavily on “low-road” strategies that focus on cutting labor costs. But some have adopted “high-road” strategies that invest in quality labor to produce quality products. Some firms do both, with a core of skilled workers and a periphery of workers with lower skills, pay and security.

Perhaps the most important take-away from Kalleberg’s book is that organizations and societies have choices. Global competition, the information revolution and the service economy are here to stay. But we don’t have to reconcile ourselves to a continued proliferation of low-wage jobs. We have plenty of work to do, work that could utilize skilled workers getting good wages justified by the value of what they produce. Creating better jobs is partly a matter of upgrading skills, but it’s also a matter of organizing work in a way that best utilizes those skills, and of giving workers a voice in that organization. Each of these reinforces the others.

Consider what Kalleberg has to say about personal service jobs:

Personal services such as home health care are typically provided by the private sector in the United States; they are very expensive if they are performed by highly qualified people. Consumers are not able and often unwilling to pay for the true value of these services (especially once they have gotten used to not doing so). How we remunerate these kinds of personal service jobs is a social choice, however; we do not have to let private markets make these decisions. Personal and other services can be delivered at many different levels of quality. If we want higher-quality services, we will need to upgrade these jobs and hire workers with greater skills to do them. Personal service jobs tend to be low-skill in the United States because we have defined them that way, paying them low wages and recruiting people with relatively few qualifications to do them. If we insisted on higher standards of quality for, say, child care, then we could require those jobs to be more highly skilled and pay qualified people more. Other countries have upgraded the quality of these kinds of personal service jobs by putting them in the public sector and supporting them publicly through taxation (as in Sweden, for example). Since many of these personal service jobs are paid by public funds one way or another, their levels of compensation are ultimately social and political decisions, requiring only the will to upgrade them.

Of course, some people may prefer to live in a low-tax, cheap-product society, even if that means tolerating a lot of low wages and poor-quality services. But that’s a debate we can have. Kalleberg’s point is that we have a choice. We don’t have to accept the present state of affairs as an unavoidable outcome of inexorable economic laws. A society with more good jobs and high-quality services is theoretically possible, although it may take more effort and creativity to achieve.

(Continued)

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