Saturday, December 22, 2007

Economic Success and Campaign '08

What does the personal economic success of John Edwards and Mitt Romney tell us about American politics at the end of 2007? The New York Times offers some ideas:

By the final weeks of 1984, well before either turned 40, John Edwards and Mitt Romney had already built successful careers. But the two men were each on the verge of an entirely new level of financial success.

Mr. Edwards, then making a nice salary as a lawyer at a small North Carolina firm, spent early December staying at the Inn on the Plaza in downtown Asheville. Scattered around his room were legal documents relating to his first big malpractice case, a lawsuit filed by a man named E. G. Sawyer, confined to a wheelchair after his doctor had overprescribed a drug. On Dec. 18, at the courthouse opposite the hotel, a jury awarded Mr. Sawyer $3.7 million.

In Boston, Mr. Romney had risen to become a vice president at Bain & Company, an upstart management consulting firm, and had recently been chosen to run a spinoff investment firm known as Bain Capital. He spent the end of 1984 flying around the country — in coach class, to save money and to show his investors how serious he was about turning a profit — visiting companies and deciding whether to invest in them.

In the decade that followed, Mr. Edwards would win one big verdict after another, and Mr. Romney would oversee a series of hugely profitable investments.

Like thousands of other Americans in a global, high-technology economy in which government was pulling back and wealth was being celebrated, Mr. Edwards and Mr. Romney used talent, hard work and — as both have suggested — luck to amass multimillion-dollar fortunes. They became a part of a rising class of the new rich.

Whether this class is a cause for concern — whether it deserves some blame for the economic anxiety felt by many middle-class families — has become a central issue in the 2008 presidential race. And Mr. Edwards and Mr. Romney are basing their candidacies in large measure on the very different lessons each has taken from his own success.

“Some people come from nothing to being wildly successful and their response is, ‘I did this on my own,’” Mr. Edwards said in an interview. “I came to a different conclusion. I believe that I did work hard, and I think people should work hard, but I think my country was there for me every step of the way.”

Today, he added, “the problem is all the economic growth is going to a very small group of people.”

Mr. Romney, by contrast, talks about the ways that his experiences at Bain showed him how innovative and productive the American economy can be and, particularly, how free markets can make life better for everyone.

“There is a model of thought among the Democrats — that the amount of money, the amount of wealth in a nation, is a fixed amount,” he said in an interview. “And that if Bill Gates and Warren Buffett are making a lot of money, that just means somebody else is not able to make as much. That happens to be entirely false.”

The two men represent a clear divide between the Democratic and Republican parties over whether the government should redistribute more wealth, from the rich downward, now that economic inequality is greater than it has been since the 1920s.

Mr. Romney and Mr. Edwards also represent a divide among the affluent themselves. Many of the new wealthy — the great majority, in all likelihood — see their success as a sign of this country’s economic strength. Yet there is also a minority — including Mr. Buffett and Mr. Gates’s father, who have both opposed eliminating the estate tax — worried about inequality.
Read the whole thing.

Romney supports open economies, with the free movement and capital and trade. He sees government providing an institutional-legal framework for the individual in society to achieve upward mobility:

“Sometimes I get frustrated when I hear politicians say there are two Americas,” Mr. Romney said this month during a campaign stop at a general store in Windham, N.H., referring to the theme of Mr. Edwards’s 2004 campaign. “I don’t believe there are two Americas.”
John Edwards, on the other hand, is today's most prominent Democratic populist. He sees government as regulator of "economic fairness." Edwards thus supports raising taxes on income beginning at $200,000 annually.

The problem for Edwards and tax-and-spend liberals generally is that economic data do not support their claims of fundamental economic unfairness, and their subsequent calls for tax redistribution.
As the Wall Street Journal noted this week:

Last week the Congressional Budget Office joined the IRS in releasing tax numbers for 2005, and part of the news is that the richest 1% paid about 39% of all income taxes that year. The richest 5% paid a tad less than 60%, and the richest 10% paid 70%. These tax shares are all up substantially since 1990, and even somewhat since 2000. Meanwhile, Americans with an income below the median -- half of all households -- paid a mere 3% of all income taxes in 2005. The richest 1.3 million tax-filers -- those Americans with AGIs of more than $365,000 in 2005 -- paid more income tax than all of the 66 million American tax filers below the median in income. Ten times more.

For the political left and most of the media, this means only that the rich are getting richer, so of course they're paying more taxes. And it is true that the top earners have increased their share of total income. Yet, as the nearby table shows, the rich showed more rapid gains in reported income shares in the 1990s than in the first half of this decade. The share of the richest 1% jumped to 20.8% of total income in 2000, from 14% in 1990, but increased only slightly to 21.2% in 2005. This makes it hard to pin their claim of "rising inequality" on the Bush tax cuts, though the income redistributionists are trying. By this measure, the Clinton years were far worse for "inequality"....

The IRS statistics also tell a story a more complicated economic story than the media claim. First, American continues to be a society of upward income mobility. Over the past decade, millions of Americans have joined the once highly exclusive club of six- and seven-figure earners. Some 304,000 Americans earned more than $1 million or more in annual income in 2005, compared to 110,00 in 1996 and 176,000 in 2000. Because there is no cap on the top income share, this increase in millionaires pushes the top income (and taxes paid) share higher. The number of millionaire households in net worth also increased to nine million in 2006, up from six million in 2001, according to TNS, a global market research firm.

Liberals decry this as proof of a new "gilded age." But we'd say these gains are a sign that more Americans are joining the ranks of the truly affluent.
Obviously there are significant problems today, with market instability from the sub-prime fallout a concern on the minds of many citizens and policymakers.

Actually, I think Edwards is right to focus attention on economic dislocation among large numbers of people in the country, and especially the issue of persistent povery among certain demographic groups. Yet I don't don't see a high-tax, protectionist economic agenda - one likely to be adopted not by a Democratic administration in 2009 - as the way to move forward in opening opportunity to an even larger number of Americans.

One thing we might do is focus on policies supporting positive individual-level attributes as they contribute to upward mobility.
Here's what Brink Lindsay said about the wealth gap earlier this year:

Much of the increase in measured inequality has nothing to do with the economic system at all. Rather, it is a product of demographic changes. Rising numbers of both single-parent households and affluent dual-earner couples have stretched the income distribution; so, too, has the big influx of low-skilled Hispanic immigrants. Meanwhile, in a 2006 paper published in the American Economic Review, economist Thomas Lemieux calculated that roughly three-quarters of the rise in wage inequality among workers with similar skills is due simply to the fact that the population is both older and better educated today than it was in the 1970s.

It is true that superstars in sports, entertainment and business now earn stratospheric incomes. But what is that to you and me? If the egalitarian left has been reduced to complaining that people in the 99th income percentile in a given year (and they're not the same people from year to year) are leaving behind those in the 90th percentile, it has truly arrived at the most farcical of intellectual dead ends.

Which brings us back to the real issue: the human capital gap, and the culture gap that impedes its closure. The most obvious and heartrending cultural deficits are those that produce and perpetuate the inner-city underclass. Consider this arresting fact: While the poverty rate nationwide is 13%, only 3% of adults with full-time, year-round jobs fall below the poverty line. Poverty in America today is thus largely about failing to get and hold a job, any job.

The problem is not lack of opportunity. If it were, the country wouldn't be a magnet for illegal immigrants. The problem is a lack of elementary self-discipline: failing to stay in school, failing to live within the law, failing to get and stay married to the mother or father of your children. The prevalence of all these pathologies reflects a dysfunctional culture that fails to invest in human capital.

Other, less acute deficits distinguish working-class culture from that of the middle and upper classes. According to sociologist Annette Lareau, working-class parents continue to follow the traditional, laissez-faire child-rearing philosophy that she calls "the accomplishment of natural growth." But at the upper end of the socioeconomic scale, parents now engage in what she refers to as "concerted cultivation" -- intensively overseeing kids' schoolwork and stuffing their after-school hours and weekends with organized enrichment activities.

This new kind of family life is often hectic and stressful, but it inculcates in children the intellectual, organizational and networking skills needed to thrive in today's knowledge-based economy. In other words, it makes unprecedented, heavy investments in developing children's human capital.

For Lindsay, the policy recommendations that follow from this center on educational institutions, specifically creating more competition in the delivery of educational services.

I doubt, however, that educational choice alone will be enough to help families feel they aren't falling further behind. Tax policies should promote a full employment economy, and we can help those at the lower rungs of the income ladder with a generous earned-income tax credit. Open markets through trade integration will also keep the U.S. economy connected to global economic developments, with new sources of human and economic capital continuing to provide the dynamism for robust growth.