The End of Horatio Alger

“I know perfectly well that men in a race run at unequal rates of speed. I don’t want the prize given to the man who is not fast enough to win it on his merits, but I want them to start fair.”

Teddy Roosevelt

horatio algerIn economic terms, a fair start is about equal opportunity. There’s no more enduring version of that particular ideal than the rags-to-riches story codified into the American Dream by Horatio Alger, Jr. during the Gilded Age of Andrew Mellon, John D. Rockefeller, Cornelius Vanderbilt, Andrew Carnegie, and the rest of the 19th Century Robber Barons. If they can do it, so can the rest of us, given enough vision, determination, hard work, and moral virtue — that was Alger’s message. And according to Roughrider Teddy and politicians like him, government’s job is to guarantee equal opportunity for all, then get out of the way and let the race to riches begin.

These days, however. it seems as though the notion of a fair start is a thing of the past — so says Richard V. Reeves in his book Dream Hoarders, which we looked at briefly last time. Reeves begins by confessing that his disenchantment over the demise of the Horatio Alger ideal will no doubt seem disingenuous because he didn’t grow up American and is now a member of the Red Velvet Rope Club himself:

As a Brookings senior fellow and a resident of an affluent neighborhood in Montgomery County, Maryland, just outside of DC, I am, after all, writing about my own class.

I am British by birth, but I have lived in the United States since 2012 and became a citizen in late 2016. (Also, I was born on the Fourth of July.) There are lots of reasons I have made America my home. But one of them is the American ideal of opportunity. I always hated the walls created by social class distinctions in the United Kingdom. The American ideal of a classless society is, to me, a deeply attractive one. It has been disheartening to learn that the class structure of my new homeland is, if anything, more rigid than the one I left behind and especially so at the top.

My new country was founded on anti-hereditary principles. But while the inheritance of titles or positions remains forbidden, the persistence of class status across generations in the United States is very strong. Too strong, in fact, for a society that prides itself on social mobility.”

Reeves also wrote a Brookings Institute monograph called Saving Horatio Alger: Equality, Opportunity, and the American Dream, in which he said the following:

Vivid stories of those who overcome the obstacles of poverty to achieve success are all the more impressive because they are so much the exceptions to the rule. Contrary to the Horatio Alger myth, social mobility rates in the United States are lower than in most of Europe. There are forces at work in America now — forces related not just to income and wealth but also to family structure and education – that put the country at risk of creating an ossified, self-perpetuating class structure, with disastrous implications for opportunity and, by extension, for the very idea of America.

The moral claim that each individual has the right to succeed is implicit in our “creed,” the Declaration of Independence, when it proclaims “All men are created equal.”

There is a simple formula here — equality plus independence adds up to the promise of upward mobility — which creates an appealing image: the nation’s social, political, and economic landscape as a vast, level playing field upon which all individuals can exercise their freedom to succeed.

Many countries support the idea of meritocracy, but only in America is equality of opportunity a virtual national religion, reconciling individual liberty — the freedom to get ahead and “make something of yourself” — with societal equality. It is a philosophy of egalitarian individualism. The measure of American equality is not the income gap between the poor and the rich, but the chance to trade places.

The problem is not that the United States is failing to live up to European egalitarian principles, which use income as a measure of equality. It is that America is failing to live up to American egalitarian principles, measured by the promise of equal opportunity for all, the idea that every child born into poverty can rise to the top.

There’s a lot of data to back up what Reeves is saying. See, e.g., this study from Stanford, which included these findings:

  • Parents often expect that their kids will have a good shot at making more money than they ever did.
  • But young people entering the workforce today are far less likely to earn more than their parents when compared to children born two generations before them, according to a new study by Stanford researchers.
  • A new study co-authored by Stanford economist Raj Chetty describes an economic portrait of the fading American Dream; growing inequality appears to be the main cause for the steady decline

Reeves and Stanford’s researchers aren’t the only ones who feel that way. We’ll hear from a couple others next time.

Why We Can’t Talk About Economic Inequality

see no evil

“It is not just the super-rich who don’t like to talk about rising income inequality. It can be an ideologically uncomfortable conversation for many of the rest of us, too. That’s because even — or perhaps particularly — in the view of its most ardent supporters, global capitalism wasn’t supposed to work quite this way.”

plutocratsThat’s from Plutocrats:  The Rise of the new Global Super Rich and the Fall of Everyone Else, Chrystia Freeland (2012). The book reads like an extended academic version of People Magazine meets CNN meets The New York Times, and could only have been written by someone who logged years on the insider track and took lots of notes.

Turns out that’s precisely who Chrystia Freeland is. She’s a Canadian writer, journalist, and politician. She worked in a variety of editorial positions at the Financial Times, The Globe and Mail, and Thomson Reuters, was elected to the Canadian Parliament in 2013 (the year after the book came out), and was appointed Canada’s Minister of Foreign Affairs earlier this year. She’s a Harvard grad, a Rhodes Scholar, and was named one of Toronto’s 50 most influential people by Toronto Life Magazine in 2015.

The book takes names and tells stories, and is awash in dates and times and statistics. Reading it all the way through can be a bit of a slog, and I wonder how many people actually do — I confess, I skimmed a lot. I quote it here because it does a great job of capturing the lessons of my last two posts:  1) most of us haven’t updated our understanding of economics since Econ 101, and 2) we don’t like talking about economic inequality. Beginning with the quote above, the book provides a useful overview of how those two things are related. (These quotes are particularly re: income inequality, but apply to capital inequality as well.)

“Until the past few decades, the received wisdom among economists was that income inequality would be fairly low in the preindustrial era–overall wealth and productivity fairly small, so there wasn’t that much for the elite to capture– then spike during industrialization, as the industrialists and industrial workers outstripped farmers (think of China today). Finally, in fully industrialized or postindustrial societies, income inequality would again decrease as education became more widespread and the state played a bigger, more redistributive role.”

(This theory was articulated by Nobel Prize winning economist Simon Kuzmets, and can be plotted in what has become known as the Kuzmets curve. According to Wikipedia, Kuzmets won the award in 1971 “for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development.”)

Continuing with Plutocrats:

“Until the 1970’s, the United States… was also an embodiment of the Kuzmets curve. The great postwar expansion was also the period of what economists have dubbed the Great Compression, when inequality shrank, and most Americans came to think of themselves as the middle class.

“But in the late 1970’s, things started to change. The income of the middle class started to stagnate and those at the top began to pull away from everyone else. The shift was most pronounced in the United States, but by the twenty-first century, surging income inequality had become a worldwide phenomenon, visible in most of the developed Western economies, as well as in the rising emerging markets.

“The switch from the America of the Great Compression to the America of the 1 percent is still so recent that our intuitive beliefs about how capitalism works haven’t caught up with the reality. In fact, surging income inequality is such a strong violation of our expectations that most of us don’t realize it is happening.”

We’ll look at some inequality stats next time.