The second of those two factors is now correcting itself, as asset prices collapse and the finance industry is humbled; the high-flying super-rich are being brought back to earth. But as yet there is little prospect for reversing the other, older trend that is pulling the middle class apart. Globalization - which has thrown billions of new factory workers into the global labor force - is putting downward pressure on the wages of people who can't do high-skilled work. Continued rapid technological progress is a contributing factor as well.
Intertwined with this reality is decreasing income mobility. When you hear the word "inequality" in the media, you're usually hearing about disparities in income or wealth, but to many Americans the really important kind of equality is equality of opportunity. And equality of opportunity has dwindled:
America and Britain...have the highest intergenerational correlations between the [income levels] of fathers and sons [among rich countries]; the lowest are found in egalitarian Norway and Denmark...
As a result, talent is being neglected. Of American children with the highest test scores in eighth grade, only 29% of those from low-income families ended up going to college, compared with 74% of those from high-income families. Since the better-off can afford to keep their children in higher education and the poor cannot, breaking out of the cycle is hard.
Perhaps Americans put up with this system because they have unrealistic expectations of their chances of success. One study found that 2% of Americans described themselves as currently rich but 31% thought that they would become rich at some stage. In fact only 2-3% of those in the bottom half of the income distribution have a chance of becoming very well off (defined as having an annual income of more than $340,000). Just over half of those earning $75,000 a year think they will become very well off, but experience suggests that only 12-17% will make it.
To anyone who believes that America should be a land of opportunity, this is unacceptable.
What can be done to correct the problem? The most frequent answers are "education" and "unionization". Although unionization appeals to me on an emotional level (the little guys banding together to demand more from the fat cats), the failure of the American steel and auto industries has made me highly skeptical.
That leaves education. Fixing primary education is a topic of much discussion (which I won't repeat here), but the Economist article indicates that secondary education is experiencing a different kind of failure; affordability. When poor kids with good test scores can't pay for college, that's not just a huge waste - it's a huge constraint on income mobility. Having a rags-to-riches story in today's America almost always requires a college degree.
Therefore, in order to decrease inequality and increase opportunity, the government should pay for smart poor kids to go to college. The easiest way to do this would simply be to give out scholarships to any kid who gets a high score on a national standardized test (SAT, ACT, etc.) and can prove low income on a FAFSA financial need form.
In the long term, increasing equality of opprtunity should help economic performance as well. Though I don't have the data in front of me, my instinct says that the "new rich" are more likely to start new companes and create new technologies than the "old rich," who on average will be more focused on maintaining family businesses. For anecdotal evidence, just look at America's top entrepreneurs; very few come from wealthy families. We need more of those people.
In any case, if anyone has an argument against the government using taxpayer money to increase oportunity for the children of lower-class parents, I'd like to hear it. Whether you care about income inequality, economic growth, or the ideal of the American Dream, this would seem to be sound policy.
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