Strangely Unconvincing

Gregory Mankiw writes on income inequality in the NY Times and, although nodding to its limitations, eventually comes picks an increasing return to education as the explanation:

WHILE education is the key to understanding broad inequality trends, it is less obvious whether it can explain the incomes of the superrich. Simply going to college and graduate school is hardly enough to join the top echelons with Lloyd Blankfein [Chairman of Goldman Sachs] and Bill and Hillary Clinton.

But neither is education irrelevant. If Mr. Blankfein had left the New York public school system and gone directly to work, instead of attending Harvard College and Law School, most likely he would not be the head of a major investment bank today.

If the Clintons had been content with high school diplomas and not attended Georgetown, Wellesley, Oxford and Yale, they most likely would not have reached the White House and Senate, and it is a good bet that they would not now be getting multimillion-dollar book deals and $100,000 speaking dates. A top education is no guarantee of great riches, but it often helps.

Maybe educational levels are like Willie Wonka’s chocolate bars. A few of them come with golden tickets that give you opportunities almost beyond imagination. But even if you aren’t lucky enough to get a golden ticket, you can still enjoy the chocolate, which by itself is well worth the price.

What, Bill Gates, Harvard drop-out, was not available for comment? 

Look, Bill, Hillary, and the chairman of Goldman Sachs have impressive educational credentials and are certainly very smart, but there are plenty of other smart people working alongside them that are not making their kind of money.  Maybe Robert Reich can be asked whether either (a) Bill and Hillary are that much smarter than he or (b) he has quietly made $100 million over the last few years.

To some extent life has always had an element of lottery, or, in Prof. Mankiw's preferred idiom, a Willie Wonka Golden Ticket.  But there seems to be evidence that the Golden Tickets have gotten notably larger over the past few decades.  A satisfactory explanation of rising income inequality ought to include some sort of superstar effect, or winner-take-all market structure, or change in societal norms, or something other than education and luck.  Mark Thoma has thoughts on that.

Comments

[mcp]

Also add Michael Dell to your list of successful dropouts.

For the most part, I think the "super-rich" are irrelevant in discussions of income distribution. Class friction and dissatisfaction comes from comparing your lot with people two or three income brackets above you, not with Hollywood or NFL stars or hedge fund managers.

But this bothers me: "What’s more, the superrich have been getting an increasing slice of the economic pie." I dislike this zero sum view of income distribution. Does anybody ever study the distribution of individual wealth relative to that person's wealth creation? What percentage of the wealth Gates' created ended up in his own pocket? Is it more or less than that of a factory worker or college professor?

[Soylent Red]

Does anybody ever study the distribution of individual wealth relative to that person's wealth creation?

Bingo.

A lot of people seem very invested in Michelle Obama's notion that the pie doesn't grow. But this ignores that people both give to and take from economy.

Once that point has been driven home (in probably about 190 years, with daily reiteration), the American public can finally get past the Politics of Envy.

[M. Simon]

I read a study that said that the consumption differences between the top and bottom were around 4:1. The difference is that those at the top are investing their surplus.

The more capital invested the more the economy grows and the higher pay for all jobs.

A friend of mine on the left tells me that in the VC area there is more money chasing alternative energy projects than there are projects available to absorb the capital.

Given that such projects take about 10 years to have an effect on the economy look for the world to be awash in energy by around 2020.

[M. Simon]

Re: the Politics of Envy. 401K plans have made over 50% of all Americans stock owners. Punishing business is not as popular as it once was. It should become even less so over time.

[Charlie (Colorado)]

Not too long ago, I wrote about "Bear Stearns and March Madness", pointing out that in any random process --- like the markets --- there will be some winners just because of the way random processes work.

It's been known for a long time that incomes have a Pareto distribution with a very few people having very high incomes --- but those high incomes contributing very little to total wealth.

The null hypothesis here ought to be that the Golden Tickets are drawn completely randomly; Reich ought to have to first justify the notion that there's anything meaningful about there being a few really rich people at all.

[clarice]

If I'd given the matter sufficient thought at the time, I'd definitely have been born as Tori Spelling and not the child of a Polish immigrant to the south side of Milwaukee .Now they tell me!

[M. Simon]

I wouldn't trade my life for any other.

It has been very interesting so far.

I have had the chance to associate with billionaires and outlaw bikers. Plus the opportunity to contribute in a very small but significant way in the development of the Internet and the microprocessor revolution.

[Danube of Thought]

I've always felt that by far the most important aspect of an "elite" education is the network effect: If you go to an Ivy League school you will meet and be comfortable with a group of people who are going places, along with you, at least initially on the basis of the name of the school on the diploma. If you go to Wichita State, you can get virtually the same education, in that the texts will be the same, and what you learn from them is up to you, as it is anywhere. It's not so much the "education" as it is the brand name.

[Elliott]

Danube,

You make excellent points. I agree entirely.

[Patrick R. Sullivan]

In the 1960s we had tremendous political changes--The War on Poverty, Civil Rights Revolution, Anti-Discrimination laws--that have had some unpleasant side effects for the intended beneficiaries.

For instance, people covered by those laws are DANGEROUS to have as employees, because they can sue their employers if they don't work out.

Or, an example from Scotland being the teacher who put in a claim for disability because he's bald.

And, more seriously--and also from the UK--the permanent underclass as represented by the hoax kidnapping of nine year old Shannon Matthews:

What you see here is a tragic map of social breakdown: families who once stood on their own feet being replaced by single parenthood, multiple partners, reliance on State benefits and, perhaps inevitably, children being looked after by the local authority.

....What emerges is a fascinating, if bleak, pattern of gradual social disintegration. It surely resonates with what is happening in many other Northern, white, lower working-class communities. An epoch has passed.

[Mother] Karen Matthews is a striking figurehead for this generation.

She has never been in regular work yet receives £400 a week benefits, having had seven children by five different men.

Changed incentives means changed behavior. Comparing families from the early 70s with those of today is hardly an apples to apples comparison.

Then there is the little matter of the consumption statistics not jibing with the income statistics. Say, the fact that the bottom 1/5 of people by income spend more than twice what they earn.

Or, that the median size (square footage) of a newly constructed house in 2005 was more than 40% larger than in 1973. How is that possible if median family income didn't also rise.

[Charlie (Colorado)]

Or, that the median size (square footage) of a newly constructed house in 2005 was more than 40% larger than in 1973. How is that possible if median family income didn't also rise.

Cost per square foot dropped.

[MayBee]

I've always felt that by far the most important aspect of an "elite" education is the network effect: If you go to an Ivy League school you will meet and be comfortable with a group of people who are going places, along with you, at least initially on the basis of the name of the school on the diploma.

I agree, although it is more important for some careers than for others. In politics and law (and medicine maybe), you always know where people received their education. The "Harvard '76" publicly travels with them as they progress, it is always mentioned as a qualification, it is a discussion point.
In business, not so much. Jack Welch got his MS and PhD from the University of Illinois. Highly educated, yes, but not from an elite university.

[Jane]

In politics and law

Not so true in law. I can look it up in the red book, and on occasion do to see if we have something in common. But after your first job, that stuff doesn't matter at all. I chose my law school because for people practicing in Boston it seemed to have the most prestige - Harvard lawyers don't practice in Boston for the most part. Just ask DOT. (I didn't apply to Harvard, and surely would not have gotten in, but I also had no interest in going there given that I wanted to be a litigator in MA.)

[MayBee]

Hmmm...so just in politics? It is a very social-network, cv-driven career.
Perhaps I always hear Ivy League lawyers discussing their (and others') Ivy League credentials because they are Ivy League, and not because they practice law.

[vnjagvet]

Patrick:

It struck me that the linked news story could be about any number of families in the US.

If you compared the stories of this English family with the stories of certain African American ghetto families and of certain Appalachian families, it should be clear that this kind of behavior does not originate from racial patterns or from historic cultural patterns.

This behavior pretty clearly derives from economic imperatives of "pay by the child" welfare programs that subsidize fatherless children.

Fortunately, they have been reduced in the US. Unfortunately, they have not been eliminated everywhere.

[vnjagvet]

Patrick, your linked article struck me. It evidences that the disintegration of the family is neither racial nor cultural. The story is echoed in the US in urban African American ghettoes, and in Appalachian farms.

These stories reveal the profound damage of "pay by the child" welfare systems. Fortunately, they are diminishing here in the states. Unfortunately, they have not disappeared completely.

[vnjagvet]

I thought my first post disappeared. I wrote another and lo, the first one reappeared.

The wonder of TypePad.

[boris]

Glory TypePad Hallelujah!

I didn't write this post at all, it was completely fabricated by TypePad.

[TypePad]

Ha, bet you all thought boris was a real person! Actually we just made him up.

[B Moe]

If the Clintons had been content with high school diplomas ... they would not now be getting multimillion-dollar book deals and $100,000 speaking dates.

Probably not, but slick talking, charismatic, ethically challenged shit weasels don't typically have much trouble making money in this country.

[Charlie (Colorado)]

Oh, speaking of the Bear Sterns post, I just wanted to point out there are a helluva lot more college drop outs who didn't become billionaires than ones who did. All Gates and Dell prove is that it's not completely impossible to get rich with no baccalaureate.

[Mike G in Corvallis]

I've always felt that by far the most important aspect of an "elite" education is the network effect: If you go to an Ivy League school you will meet and be comfortable with a group of people who are going places, along with you, at least initially on the basis of the name of the school on the diploma.

There's the other kind of "network effect" too -- networking, AKA good old cronyism. People who go to Harvard and Yale meet and befriend Important People and the sons and daughters of Important People ... and after graduation, when an Important Person is looking for someone to fill a position, the job will go to someone he or she knows and trusts and who has the Right Attitudes about the Important Things in Life, rather than to some unknown schlub who might be theoretically qualified according to information on a resume.

[kim]

Typepad, we knew; the machine logic is the giveaway.
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