Income Inequality & Social Mobility

America (the concept, not the country) has several striking paradoxes. One of those paradoxes keeps coming to mind as we hear both parties bloviate incessantly about the fiscal cliff.

The fundamental concepts in America are rooted in liberty and equality. The founders saw the concept of “equality” as a function of treatment under law. If a rich man and poor man are suing each other for a right to a slice of property, the fact that one is rich and the other is poor shouldn’t matter. The history of America has been a history of hypocrisy on this score, with citizens denied rights according to race, gender, sexual orientation, etc. Yet we strive to make it better for everyone, and indeed the genius of the American experiment was that the founders realized that we would continue to strive to make it better.

One of the goals of the American experiment (especially among the Jefferson-led anti-Federalists) was social mobility. The existence of an aristocratic class had plagued Europe, and the atrocities of the French Revolution made the point all the more poignant.

Now to the paradox: it is difficult to marry the most acceptable economic system for a freedom-loving people (capitalism) with an antipathy for the rise of an aristocratic class. Indeed, capital accumulation is both a central tenet of capitalism and aristocracy.

The graph below depicts the so-called Gatsby Curve, which illustrates this well.

great_gatsby

The United States is outperformed by other advanced economies on social mobility and economic equality, which many lament as an economic problem. It seems that it is more an illustration of the schizophrenia of American ideals.

This begs the question: is liberty more desirable, or is equality?

The Beauty of Creative Destruction

I’ve written about creative destruction as it relates to the mobile app Uber, and we are seeing it play out in education as well. The video below explains the concept rather well.

There are a couple notable observations. The first, a rather simple definition of creative destruction, is made by Stanford professor Art Carden:

It is the process of change whereby new ways of doing things replace old ways of doing things.

Change doesn’t come without a human cost. The demand for ice delivery men evaporated with the invention of the refrigerator. The guys who drove horse buggies had to find different work when the automobile became an economically feasible product for the masses. As Alan Greenspan once noted:

The problem with creative destruction is that it is destruction and there is a very considerable amount of turmoil that goes on in the process.

This human cost is outweighed, however, by the fact that people are able to save money and create other economic opportunities with those savings. Economist Joseph A. Schumpeter once put it as follows:

[A thriving economy is] incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

Often policy makers, with the best intentions, attempt to mitigate the turmoil but actually exacerbate the problem for those in turmoil and hamper growth opportunities.

Housing Prices Since 1890

I was always told that taking out debt to fund the purchase of a home or education would always pay for itself.

This graphic is from Nate Silver’s new book.

20121028-200353.jpg

It’s interesting that housing prices were relatively stable before the misguided policies of the Clinton and Bush administrations perpetuated a bubble. These policies were rooted in the idea that every American should own a home.

One can’t help but wonder whether the same will hold true for education. Is the notion that everyone needs to have a college education (and misguided policy) leading to a student loan bubble?

The Weak Recovery

Russ Roberts of the Hoover Institution has been doing some pretty innovative things to spread his Austrian economic worldview. I’ve been listening to his informative podcast EconTalk for years. It seems that he’s getting even more creative with “chart casts”, which are basically podcasts with charts visualizing the points the speakers are making. Here is a recent chart cast in which Russ Roberts and John Taylor discuss the modesty of the current economic recovery.