Wednesday, September 25, 2013

ECONOMIC INEQUALITY AND THE FAILURE OF ELITES

 
By Ronald Fox

America’s most powerful and wealthy elites have always shaped our politics, economy and culture, sometimes for the good, and sometimes, not so good. The worst behavior of American elites has occurred historically when income has been highly concentrated at the top of the economic hierarchy: around the turn of the 20th Century when corrupt, robber barons dominated the American economy, in the last few years leading up to the Great Depression, and, from the late 1970s to the present. Elites were at their best when income inequality was only modestly skewed. The period from the end of World War II up to the late 1970s was a golden era in the United States. With the effective tax rate for the highest income earners over 50%, and government spending as a percentage of GNP high, the economy grew, wages multiplied, economic opportunities flourished, and most Americans shared in the steadily growing, national prosperity. Economic inequality was the lowest since the Progressive Era.

This period also brought out the very best in elite behavior. The upper class took seriously the responsibility that comes with their power and visibility. They were engaged in community life and committed to public service; they tried to be good citizens. They enjoyed the good life, but often railed against conspicuous consumption. In their money-making ventures, they relied on an innate wisdom and savvy in their investment choices and in choosing the people with whom they worked. They tended to choose people like themselves, with breakaway independence of mind, wisdom, good judgment, empathy, imagination, and, to be sure, intelligence, though this was not the main thing they looked for. Upward mobility in America guaranteed the elite strata would be cross-fertilized with young minds bringing new ideas. Yes, they accumulated great wealth, but their share of the nation’s wealth was only modestly greater than the majority of working class wage earners. To be sure, the elites I’m describing were not all angels, but in comparison to those leading America today, their behavior was exemplary.

This idealized picture began to change in the late 1970s. The income share of the super rich began to increase dramatically, ultimately reaching levels reminiscent of the Gilded Age and the Great Depression. The gains have concentrated at the very top. The farther up the income scale one goes, the better people are doing, with the richest 0.01 enjoying the greatest income increase. In 2012 income inequality in the U.S. reached a new high.  America is now the most economically unequal industrial democracy. At the same time, life at the top has grown a great deal uglier than in the previous three decades.  Ostentatious displays of great wealth are shamelessly paraded. Stories of elite greed, law-breaking, fraud, mendacity, arrogance, and contempt for the less fortunate appear with regularity. The wisdom and sound judgment previously associated with elite rule has been replaced by recurring examples of destructive decisions and despicable behavior. What has happened to produce such a change?

Millions of Americans believe that as long as there is opportunity for people to move up and transform their lives, inequality is not a social problem to worry about. But, what happens to a society if opportunities to move up are blocked; that is, if inequality is not matched by social mobility? Herein lies the social problem inequality is posing for the U.S. today: inequality has reached staggering proportions, especially as it relates to the share of national income of the top one percent of income earners, but social mobility has substantially slowed. A recent study found that 42% of children born into poverty in America will remain in poverty as adults.  America's "relative mobility" now ranks below that of France, Germany, Sweden, Canada, Finland, Norway and Denmark--countries that have linked "equality of opportunity" to "equality of outcome."

Christopher Hayes, in his recent book, Twilight of the Elites: America after Meritocracy, sees this situation as an inevitable outcome of a meritocratic society. He argues that the inequality produced by a meritocratic system will eventually grow large enough to subvert mechanisms for mobility; that is, unequal outcomes will impede equal opportunity. Individuals who climb up the wealth ladder will strive to preserve their status. As he puts it, they will pull the ladder up behind them. He refers to this phenomenon as the “Iron Law of Meritocracy,” paraphrasing from 19th Century social theorist, Robert Michel’s, “Iron Law of Oligarchy.” Such is the reality of contemporary America: rising inequality and declining social mobility. It is a recipe for serious trouble.

Economic opportunity in America is closely associated with wealth. Peers and progeny of the wealthy have a leg up on the competition, especially in a culture like ours that places such a great premium on education. They can afford the expensive private tutors, test preparation courses, and other learning resources, which facilitate acquiring the test scores necessary to get into the best private schools, followed by the most prestigious universities, then the top graduate and professional programs. An elite education has become virtually a necessary condition for acquiring a high paying job and moving up the career ladder. This hierarchal system perpetuates the rule of the wealthy few.

There is little doubt that those who ascend to elite status are highly intelligent and educated. The American meritocracy values smartness, to the extent of according it cult status. But while smartness is necessary for elite competence, it is not a sufficient condition. Far less valued in the elite meritocratic system today are such virtues as judgment, wisdom, empathy, integrity, and strong ethics. The absence of these virtues in economic elite decision-making circles can result in disastrous decisions. Under these circumstances, even the brightest minds are subject to errors in judgment. At each step of the layered system of opportunity, privilege is rewarded and protected, resulting, in an entrenched, self-perpetuating, wealthy upper class, insulated from the checks and balances, competition, sanctions and accountability those lower in the social strata routinely face. This insulation increases the likelihood of poor decisions. It also perpetuates failure.

Recent American history is replete with examples of destructive elite decisions causing great social harm, most of which have gone virtually unpunished. A CEO leading a company to near ruin may get dismissed, but he’s usually ushered out the door with bonuses in tack and a large severance settlement, only to be hired later by another company searching for a highly educated, “best and brightest.” Excessive risk taking and outright fraud by top executives in large financial institutions bring about a national economic collapse, causing millions of people their jobs and life savings, and no one is held to account. The executives get their wrists slapped and the failed companies, in the end, get bailed out by taxpayers because they're too big to fail. Later legal action may result in fines, but these are usually a pittance compared to the company’s assets. Rising inequality has led to countless similar examples of disastrous elite decisions for which they face little consequence.

Immunizing elites from actual sanctions for failing at their duties protects incompetence, making a mockery of the link between performance and reward that is integral to free market theory. Failing to prosecute white collar criminals for malfeasance, breeds public disrespect for the law. Why should average citizens be law-abiding when elite leaders appear above the law? A system that reflexively protects elite transgressions, guarantees failure, rule-breaking, and all sorts of abhorrent behavior; as such, it fuses the worst features of meritocracy and bureaucracy. As long as smartness is rarified to the exclusion of other virtues, bad decisions un-sanctioned, and mechanisms for mobility subverted by extreme, entrenched inequality, we can expect elite failure to continue, and likely worsen.    









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