We have been hearing a great deal about income inequality in recent days, particularly from Senator Bernie Sanders. Part of this interest is fueled by many examples of excess at the top.
J.P. Morgan Chase, after a year immersed in scandal, decided to award its chief executive, Jamie Dimon, $20 million in compensation for 2013. This amount was seventy-four per cent higher than the $11.5 million he earned in 2012.
Under his leadership, J.P. Morgan suffered a series of major legal setbacks, including a record $13 billion settlement with the Justice Department. J.P. Morgan, under Dimon’s leadership, paid this amount to resolve allegations that the bank knowingly sold faulty mortgage securities that contributed to the nation’s financial crisis. Other senior executives at the bank got lush compensation packages as well.
Wall Street, which played fast and loose with the nation’s economy, was bailed out by U.S. taxpayers. Middle class Americans, in effect, subsidized the very rich, men and women such as the J.P. Morgan Chase executives. This is hardly free enterprise at work, as some imply; instead, it is a form of socialism for the rich.
What would Adam Smith or Milton Friedman think of the concept of “too big to fail?” They might have a name for it. But it wouldn’t be free market capitalism. The excessive salaries earned by those who presided over failed institutions, which taxpayers rescued, is certainly a legitimate cause for concern.
Still, wretched excess by a few at the top has little to do with our larger economic problems. It is important that we understand the real challenges we face. In particular, the notion that income inequality in itself is unfair is a subject that was addressed at the very beginning of our country by the Founding Fathers.
In his Second Treatise, John Locke, the philosopher who most significantly influenced the thinking of the Founding Fathers, stated that, “The great and chief end… of man’s uniting into commonwealths and putting themselves under government is the preservation of their property…. Every man has a property in his own person. This nobody has any right to but himself. The labor of his body and the work of his hands, we may say, are properly his. Whatsoever, then, he removed out of the state that nature hath provided and left it in, he hath mixed his labor with it, and joined to it something that is his own, and thereby makes it his property.”
Those who today advocate an “equal” distribution of property claim that, in doing so, they are simply applying the philosophy of the Founders to matters of economic concern. Nothing could be further from the truth.
In The Federalist Papers, James Madison clearly deals with this question. He wrote that, “The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interest. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results.”
A Massachusetts circular of 1768, drafted by Samuel Adams, stated, “It is an essential unalterable right in nature, grafted into the British Constitution, as a fundamental law, and ever held sacred and irrevocable by the subjects within the realm, that what a man has honestly acquired is absolutely his own, which he may freely give, but cannot be taken from him without his consent.”
What the Founders would think of Wall Street dealmakers, hedge fund managers and others who seem to manipulate wealth rather than create it, is a separate question. Those in our current political debate may have a point in challenging the excesses of the very rich, but the question of income inequality has causes beyond such excesses, which also deserve to be addressed.
One important factor impeding economic progress on the part of millions of Americans is family breakdown. Children’s chances for success are harmed by the internal dynamics of deteriorating rates of marriage more than they are harmed by any activities of the rich. At the present time, seventy-two per cent of black American children and fifty-three per cent of Hispanic children are born to unmarried women, as are forty per cent of all births. A majority of all mothers under thirty are not living with the fathers of their children.
Oren Cass of the Manhattan Institute notes that,
By one measure, opportunity and mobility are thriving in America. Children born into the lowest income quantile have almost exactly equal chances of arriving in any of five income quintiles as adults. There is only one catch: Their parents must be and stay married.
Children whose parents never marry face poor prospects: More than half remain in the bottom quintile, ten times the share that reaches the top. Tragically, this latter scenario is becoming the norm. America’s ‘lower class,’ for lack of a better term, is undergoing an unprecedented social collapse that threatens to destabilize core American principles.
The data on marriage, parenting, employment, civic engagement and basic values show a widening and sometimes accelerating gap between classes. This form of inequality is far more consequential than income inequality because strong families and communities, unlike high incomes, are the cornerstones of a free and fair society.
The cycle of social decay begins when parents-to-be fail to form stable marriages. In Our Kids, Harvard political scientist Robert Putnam shows that poor children in one-parent families face stresses and traumas others do not. They are up to five times more likely to face abuse and violence, addiction, and the death or imprisonment of a parent.
Those experiences, along with unstable caregiving, impair learning and the development of “executive functions” such as concentration, self-discipline, and problem-solving. By the time they reach school, seventy-two per cent of middle class children know the alphabet, compared with nineteen per cent of poor children.
A study by Richard Reeves and his colleagues at the Brookings Institution shows that of people growing up in the lowest income quintile with two parents, only seventeen per cent land in the bottom quintile as adults and twenty-three per cent in the second quintile, while twenty per cent and nineteen per cent land in the top three quintiles respectively. The distribution is almost even, with the odds of remaining at the bottom actually lowest.
Raj Chetty of Harvard’s Equality of Opportunity Project finds that the fraction of children with single parents is the best predictor of upward economic mobility.
Any serous discussion of economic inequality must move beyond the familiar left and right-wing clichés. It is not the “rich” or the “system” which accounts for the lack of upward mobility on the part of some, but their own lifestyle and behavior, in particular, the dramatic increase in out-of-wedlock births and the absence of a father in the home. How to change this self-destructive behavior is certainly a legitimate subject for further examination.
Beyond all of this, the advocacy of “equality of condition,” rather than equality under the law and equality of opportunity, is also a serious misunderstanding of the American political philosophy. The fact that liberty and equality are contradictory concepts was clear in the colonial era, but has become less clear in today’s world.
In his classic work, Democracy in America, Alexis De Tocqueville lamented the fact that it was likely that the desire for equality in democratic societies would, in the end, bring an end to liberty. He wrote that,
I think that democratic communities have a natural taste for freedom, left to themselves they will seek it, cherish it, and view any privation of it with regret. But for equality, their passion is ardent, insatiable, incessant, invincible. They call for equality in freedom, and if they cannot obtain that, they will call for equality in slavery. They will endure poverty, servitude, barbarism—but they will not endure aristocracy.
The twin problems of income disparity and the stagnation of the middle class are certainly worthy of careful examination. Too much of our political rhetoric, on all sides, tends to downplay the complex factors at work in order to come up with simple “solutions,” which are unlikely to have positive results since they seem to purposely misunderstand the real and complex dynamics at work.
We can hardly blame a handful of billionaires, however objectionable their role in our political process may be, for the problems we face. And they will not be resolved by the Republican mantra of “lower taxes,” or the Democrats’ call to “tax the rich.” That, however, seems all that our current political process is prepared to deliver.
Republished with gracious permission of the Fitzgerald Griffin Foundation (November 2015).
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Editor’s note: The featured image is “Protectors of our Industries” published by Puck, courtesy of Wikimedia Commons.