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April 26, 2024

The inequality dilemma

For our readers who do not regularly monitor Morning Joe on MSNBC, we thought it might be interesting to draw attention to a video clip that has been circulating widely over the past week. On April 23, Scott Galloway, a marketing professor at NYU, went on the air to discuss his new book The Algebra of Wealth.

We have not had the opportunity to review the book, but many of his comments seem to have struck a chord with the public. Galloway focuses on the dysfunctionality and anger of younger generations today. He builds his arguments off a graphic used in the MSNBC segment that shows a declining percentage of the population outperforming their parents economically.

Source: Opportunity Insights

The graphic was actually taken from a group called Opportunity Insights. Opportunity Insights is a Harvard-affiliated group of researchers focused on public policy related to social mobility.

The purpose of the graphic is to support the speaker’s broader claim that younger generations in the United States are suffering—economically but also in a more general sociological sense—and that this is a direct result of policy decisions. He lays emphasis on the tax code, which he believes heavily favors the super-wealthy.

We took the time to figure out what the underlying data presented in the graphic actually showed. Interestingly, the graphic first appeared in an academic paper delivered in 2016, which means it is not terribly current. (So before anyone uses it to blame yet another problem on Trump, it was produced before he was inaugurated!)

There is in fact a thorough explanation of the data behind the graphic available on the group’s website, along with an array of supporting documentation. What the researchers did was break the U.S. population into various cohorts and then compare these cohorts across generations. Average incomes are adjusted for inflation.

Our interpretation is that this data is essentially another way of presenting rising income inequality, which the group also offers as the main takeaway of the study.

We conclude that absolute mobility has declined sharply in America over the past half century primarily because of the growth in inequality. If one wants to revive the “American Dream” of high rates of absolute mobility, one must have an interest in growth that is shared more broadly across the income distribution. - Opportunity Insights

There is a bit of a statistical sleight of hand going on here. If a smaller segment of the population (such as the top 10%) is earning a growing proportion of total national income, this will inevitably push down the median income.

When framing the discussion as “earning more than their parents,” what they are actually looking as it the median income of one generation versus another. The researchers are not actually looking at individual American families (which raises another complication—the impact of immigrants on the data). They are speaking broadly about population cohorts.

The researchers acknowledge that even if real income growth for younger generations were much higher (like it was in the decades following World War II), the percentage “earning more than their parents” would not be terribly different. The main driver of the results is the distribution of income.

Even a casual look at chart raises issues. The data itself is at least 8 years old. It’s worth observing as well that the vast majority of the reported decline took place between children born in 1940 and the mid-1960s.

It makes perfect sense that a child born in 1940 would normally do much better financially when he was 25 years old in 1965, versus his father who was perhaps born in 1910 and would have spent his early adulthood surviving the Depression (or if born later, fighting the Axis powers overseas).

Any graph with a pronounced downward trend is eye-catching when flashed on a television screen. But the vast majority of the reported decline relates to a generation of Americans who are now in their mid-eighties versus those who are now in their mid-sixties. Perhaps they can all fight about it in the retirement community! This has little to do with the current generation of workers.

While Galloway’s graphic is manipulative, we are nonetheless very sympathetic to the plight of young people today and to the broader claim that the Baby Boomers who control public policy do so in a self-serving way. A very entertaining and thought-provoking book on this topic was written several years ago called A Generation of Sociopaths: How the Baby Boomers Betrayed America by Bruce Cannon Gibney. Excellent beach reading!

At the same time, we do need to be very careful around income inequality claims. These typically translate into calls for some form of wealth taxes, which Galloway seems to be advocating. While even Europeans now realize wealth taxes are counterproductive and ineffective, Democrats are warming to it.

Former Senator Phil Gramm (a Ph.D. economist who was a professor at Texas A&M back in the sixties and seventies) wrote a book on this topic in 2022 called The Myth of American Inequality: How Government Biases Policy Debate. He carefully parses the data and picks apart many of the prevailing claims about “rising inequality” that circulate nowadays. Dan Crenshaw did a memorable interview with Senator Gramm about a year ago.

Gramm emphasizes the role of transfer payments and taxes when looking at income distribution data. The inescapable truth, however, is that asset-owners have indeed done extremely well for themselves over the past several decades.

The S&P 500 has compounded at approximately 11% annualized over the last 40 years. That represents a 4,200+% total return. This certainly has helped skew the averages in favor of those who have had the means to get in on the ride.

If a strong stock market is the core problem, this raises the question: would Americans as a whole be better off if the U.S. stock market had not done so well? To a large extent, the inequality people are complaining about is a direct result of American companies performing well.

Professor Galloway’s segment likely got a lot of attention also because of another observation he made. He noted how the pandemic policy response especially favored asset-owners.

Let’s have covid relief and flush the markets and take assets way up because the million people dying would be bad, and [it] would be tragic if I got less wealthy and doing it on [the younger generation’s] credit card. - Scott Galloway

This brings us back to Vimal Gor’s framework for understanding monetary policy in our discussion above. In the same article in the Australian Financial Review, he writes:

Expanding central bank balance sheets offers a discreet method to reduce the debt level while bolstering the nominal prices of assets, thereby safeguarding the interests of the influential Baby Boomer demographic, which holds significant political power. In short, everyone wins—apart from, of course, the asset-poor Gen Ys, Zs and As. - Vimal Gor, 4/21/2024

Income inequality that is driven by innovation and genuine value-creation is one thing. It is generally better to live in a country that has a lot of billionaire tech entrepreneurs than one that does not. This is why millions of people are trying to immigrate into America.

But income inequality that is driven by money-printing and deliberate asset price inflation is quite another thing. If Vimal is correct, this could be a politically dangerous new normal.

Make sure your kids buy stocks—early and often.

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