THE MIDDLE CLASS: INCOME, WEALTH AND SOCIAL MOBILITY

Michael Kurth Thursday, January 23, 2014 0
THE MIDDLE CLASS: INCOME, WEALTH AND SOCIAL MOBILITY

President Obama and the Democrats are fond of talking about the need for government to “build the middle class.” Building the middle class is an easy sell in America, because we are a middle-class society built on middle-class values. We are known around the world for our blue jeans, not pleated pants and cravats; football and rock concerts, not ballet and the opera; hot dogs and beer, not caviar and champagne; and pickup trucks and minivans, not Bentleys and Rolls Royces.

But the key to the development of our huge middle class is free enterprise and wealth creation, not government programs based on market intervention and wealth redistribution.

Since colonial times, Americans have abhorred the social rigidity of Europe, with its kings, queens and noble aristocracy; courtly manner; and “high” and “low” language. Perhaps there is no better expression of this than Emma Lazarus’ sonnet “The New Colossus,” inscribed on the Statue of Liberty:

“Keep, ancient lands, your storied pomp!” cries she with silent lips. “Give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!”

That is why the colonists, after winning their independence from England, chose to establish a government with limited authority to interfere in peoples’ lives. The founding fathers understood that government power is most likely to be used to protect the position and privilege of the wealthy, while denying opportunity to the common man. They had read Adam Smith’s book, The Wealth of Nations, which was first published in 1776, and believed in the invisible hand that Smith said would lead people, driven by their own self-interest, to do that which would benefit others the most … if government would just allow them their liberty.

It was free enterprise that created the “American dream” of going from rags to riches and led Ralph Waldo Emerson to write:

“If a man has good corn or wood, or boards, or pigs to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods.”

Egalitarians who cite statistics on the unequal distribution of income and wealth in America usually ignore one very important factor: social mobility.  The rich and the poor are generally not the same generation after generation.  In fact, most of us move back and forth though the income strata within our lifetimes: We start out in our twenties near or below the poverty level, then move upward in our thirties through fifties, before moving back down after we retire in our sixties.

Social mobility is what we should be concerned with, not income disparity. Is the American dream still alive? Joshua Rauh, professor of finance at Stanford School of Business, and Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago, examined the Forbes list of the 400 wealthiest people in the U.S. in 1982, comparing it to the list in 2011. They found that 60 percent of the people on the 1982 list came from wealthy families, compared to just 32 percent in 2011.

Where did today’s moguls come from? In 1962, Sam Walton opened his first Walmart in Rogers, Arkansas; to become successful, he had to out-compete retail giants like Sears, Pennys and K-mart. In 1976, Steve Jobs and Steve Wozniak started selling mail order kits for making a computer the size of a typewriter from Jobs’ garage; they had to take on computer giant IBM in order to make Apple the largest company in the world. Bill Gates (Microsoft), Larry Ellison (Oracle), Michael Bloomberg, Jeff Bezos (Amazon), Larry Page and Sergey Brin (Google), and Mark Zuckerberg (Facebook) are also among the top 20. In fact, most of the wealthiest Americans come from middle class backgrounds, and they built their companies themselves.

So why is the middle class shrinking? The two most important characteristics for success in America are education and middle-class values learned at home, such as honesty and hard work. Elementary and secondary education were once the sole domain of local government, but in 1960 the federal government used the “space race” to justify pumping enormous sums of money into these schools, and shortly thereafter, teacher organizations morphed into militant unions, the Department of Education was set up to channel federal funds and the mandates that always accompanied them, education became bureaucratized, students were taught the art of answering multiple-choice questions, and parents lost control of their neighborhood schools. More students now graduate from high school, but the market does not value their expertise at choosing among A, B, C or D. So, while the earnings of the college educated continue to rise, the earnings of those with only a high school degree are falling.

The wealthy are doing fine. But redistributing wealth from the successful to the unsuccessful destroys incentives and encourages dependency. Any effort to build the middle class must start with real school reform and the elimination of needless licensing and regulations that protect the politically well-connected while stifling entrepreneurship and closing economic opportunity to the average person.

But, somehow, I don’t think that is what the Democrats have in mind.