AUCTIFICUS AEQUALITAS

Note: This post is part of our League Symposium on inequality. You can read the introductory post for the Symposium here. To see a list of all posts in the Symposium so far, click here.

By Wardsmith

Dr. Hanley has thrown down the gauntlet yet again to get our collective juices flowing so we can get to the bottom of “Equality”. There have been innumerable discussions here at LoOG on equality and its evil twin inequality.  Kuznets Curve indicated that over time, inequalities washed out of the system as the poor eventually get to catch up to the rich, who clearly do better in the middle period. Those who disagree and there are plenty usually point to local maxima and minima plots within a country. In fact as the article in the Atlantic mentions, it all seemed to fall apart in the 1970’s. So what began to happen then, what was the event and what are the consequences?

Globalization – Pure and simple. The problem with all analyses that have as their boundaries those geopolitical lines on a map that define a country are doomed to failure. We are a world, made up of (at last count) 192 states. Some are large, some are small, many are ridiculous but it is a world nevertheless. Wealth generating activities among the richest Western nations are buffered by poor nations and their citizens getting into the act as well. When Kuznets theorized his curve, he was envisioning a society that was slowly migrating out of rural farming subsistence to urban industrialization (think China). As the Chinas of the world begin to participate in industrialization and the wealth multiplication it produces they necessarily dampen the wealth inequality curve making it appear less improved on a country by country basis, but still improving on a worldwide basis. I’m not interested in rehashing economics theories from the 40’s and 50’s here, but rather to wave away arguments of the, “But, but, wages have stagnated in this country!” variety. The X axis says, “Income per Capita” and the Capita here is rapidly approaching 7 billion (or whatever population of the world engages in productive activity). That makes for a looongg X, meanwhile market distortions cause the inequality axis to extend as well spiking the peak of the parabola.

But we’re the industrialized West, and we’ve been on top of the food chain for hundreds of years and we’d like to remain there. So what if the poorest in America are statistically better off than 99% of the rest of the world? There are still /other/ Americans here who are better off than us, dammit, so we want redress! However useful the politics of envy are to the political class, and the many rebuttals it produces, I suspect the real answer lies elsewhere, literally.

Enrico Moretti looks at The New Geography of Jobs. I’d previously touched on this point lightly in an OP I did on immigration. My contention was that diversity and or places which had diverse populations made up of different races were demonstrably better off than those that didn’t and I pointed to some studies (coincidentally written by other Italians) that backed it up. Of course mere genetic diversity isn’t the whole picture (although I suspect it helps) but most important is something akin to critical mass. Once there are enough of the right kinds of smart and dynamic thrill seeking entrepreneurial types in a community the multiplier effect of wealth skyrockets. Moretti breaks America into three distinct groups. The first is the brain hubs like Silicon Valley and Seattle. Next are the post-industrial cities like Detroit (and no I won’t keep picking on Pittsburgh) and Buffalo. Finally there are those in the middle that could go either way (Ok, I’ll put Pittsburgh here). In this excerpt from his book he rather strikingly makes the case that /where/ you live will have more to do with your success than almost any other factor.

For someone like David Breedlove, a highly educated professional with solid career options, choosing Visalia over Menlo Park was a perfectly reasonable decision in 1969. Today it would be almost unthinkable. Although only 200 miles separate these two cities, they might as well be on two different planets.

The divergence of Menlo Park and Visalia is not an isolated case. It reflects a broader national trend. America’s new economic map shows growing differences, not just between people but between communities. A handful of cities with the “right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages. This divide—I will call it the Great Divergence—has its origins in the 1980s, when American cities started to be increasingly defined by their residents’ levels of education. Cities with many college-educated workers started attracting even more, and cities with a less educated workforce started losing ground. While in 1969 Visalia did have a small professional middle class, today its residents, especially those who moved there recently, are overwhelmingly unskilled. Menlo Park had many low-income families in 1969, but today most of its new residents have a college degree or a master’s degree and a middle- to upper-class income. Geographically, American workers are increasingly sorting along educational lines. At the same time that American communities are desegregating racially, they are becoming more segregated in terms of schooling and earnings…

The changes taking place in the United States can be seen around the globe. New economic powerhouses are displacing old ones. What used to be tiny, barely visible dots on the map have turned into thriving megalopolises with thousands of new companies and millions of new jobs. Nowhere are these changes more obvious than in the Chinese city of Shenzhen. If you have not heard of it, you will. It is one of the fastest-growing cities in the world. In just three decades it has gone from being a small fishing village to being a huge metropolis with more than 10 million residents. In the United States, a fast-growing city like Las Vegas or Phoenix may triple or quadruple in size over a thirty-year period. Shenzhen’s population has grown by more than 300 times in the same period. In the process, Shenzhen has become one of the manufacturing capitals of the world.

Domestically the Wall Street Journal article on Moretti’s book focuses on mobility, as in Grapes of Wrath type mobility, moving from the dustbowl to the opportunity of a better life in California. For the unskilled this is a risky proposition today (as it was in the 30’s) because the call for unskilled labor has if anything diminished dramatically since then. This has created a problem especially for the unskilled which is two-pronged and difficult to dissociate. Among Americans, however, there are large differences, with some groups much more willing to move than others. At the time of the Great Migration in the 1920s—when more than two million African-Americans abandoned the South for industrial centers in other regions—less-educated individuals were more likely to migrate in search of better lives. Today, the opposite is true: The more education a person has, the more mobile he or she is. College graduates have the highest mobility of all, workers with a community-college education are less mobile, high-school graduates are even less and dropouts are the least mobile of all.

The Catch-22 is you won’t get ahead if you don’t leave, and you’re least able to leave (and get ahead) if you’re uneducated. Also from the WSJ: This distinction between causes is important because it suggests a policy reform that could end up helping those workers whose lack of mobility isn’t a choice. The unemployment-insurance system is essentially the same now as when it was introduced in the 1930s. What is striking is that the system doesn’t provide any incentive for workers to look for jobs in locations with better labor markets. If anything, it discourages mobility from high-unemployment areas to low-unemployment ones, because the former have falling costs of living and the latter have rising costs. An unemployed worker in Detroit has limited incentives to move to, say, Chicago, a more expensive city but one where the labor market is stronger.

I had noticed previously that many LoOG commenters and contributors seem to be unemployed. In the ideal universe (where none seem to live) we would live wherever we liked and as Here and Now puts it, “Remember author Thomas Friedman’s argument that the world was flat, and where you lived didn’t matter, because with e-mail, cell phones, and the Internet, you could do business all over the world? Berkeley economist Enrico Moretti pretty much says “that is so 10 years ago!” I personally invested a lot of personal “blood and treasure” trying to buck this trend, along with other like-minded investors and entrepreneurs. Moretti is right, the critical mass just isn’t there until (at least in high tech) there are a minimum of 2 dozen similar companies in relatively close proximity. Phillipe Khan took Borland to the sleepy burgh of Scotts Valley between San Jose and Santa Cruz. It just didn’t work; once he’d moved the company they lost their momentum and drive. Their fast paced dynamic culture was ruined. I live in a similar place, with several nearby universities but insufficient high tech companies for employees with itchy feet to move to without disrupting their families. We have plenty of smart people mind you, mostly in medicine, but I have no one to talk algorithms and chip design with, whereas I could chat up random people in “the Valley” on those subjects at a Pho restaurant and could likely have a business plan on a cocktail napkin by the end of lunch. Critical Mass rules. Now that I’ve solved this problem I’m looking forward for other interlocutors to resolve intelligence distribution inequalities and educational outcomes.