We’ve all seen the grim signs. At the personal level, more and more families are losing ground as they struggle to reach, or remain, in the middle class. At the national level, sluggish economic growth isn’t producing good new jobs for our young people, or preserving good jobs for mid-career workers. The two—growing inequality and anemic growth—are intimately connected.

This issue of the Washington Monthly examines the effects of this long-brewing but only recently recognized crisis—and sets out some concrete solutions. Working with the Washington Center for Equitable Growth, the magazine takes a comprehensive look at how slow growth and inequality are combining to threaten the current and future livelihoods of children, students, young workers, families, and retirees. Brief articles will take you through the life cycle of U.S. families, showing that at every stage—from early childhood through education and working years to retirement—the two goals of human development and economic growth work together. And in each article, we offer specific policy proposals that could well make life better for U.S. families now and create a more vibrant future for the economy as a whole.

But first, let’s take an overall look at the problem.

Figure 1: Share of the nation’s total personal income going to the top 1 percent wealthiest Americans.

More and better economic research now documents that high and growing economic inequality is affecting our nation’s economic growth, and even its stability. Some of the newest research uses large microeconomic data sets to understand how the distribution of income affects the mechanisms that propel economic growth—mechanisms that Americans across generations must rely on as they try to start healthy families, raise children, get ahead in their careers, and retire in comfort. The economic story that is emerging doesn’t look promising—high inequality seems to be associated with less economic growth and more instability.

Certainly, inequality is associated with less family economic security. Case in point: Differences in wealth became even starker than income differences over the past four decades, with the top 5 percent of wealth holders distancing themselves from the rest of society by orders of magnitude. Just before the Great Recession, the average member of the top 5 percent was worth $1.57 million, compared to an average net worth between $95,500 and $360,000 for each member of the middle class, and a paltry $6,700 for those in the bottom 25 percent.

In order to understand what is going on in our economy, we have to look first at the specific channels through which inequality affects economic growth and stability and then at what’s changed over the past half century. Rising income inequality, for example, crimps the customer base that supports businesses large and small. And the growing inequality of wealth makes it harder for fledgling entrepreneurs to bring good ideas to the market. Similarly, the education achievement gap between the children of the wealthy and the rest of us is widening, and will lead to future declines in productivity. These trends do not bode well for new U.S. generations as they enter the workforce and begin to save for retirement.

Two sets of numbers tell us what’s happening to American families. The first is from economists at the Equality of Opportunity Project, including Raj Chetty and Nathaniel Hendren from Harvard and Emmanuel Saez and Patrick Kline from the University of California, Berkeley. They analyzed data from the Internal Revenue Service and other sources providing mobility data and a variety of other useful measures for the U.S. Their finding? Mobility nationwide between the 1970s and today is essentially flat—in essence, more and more of us wind up not realizing the American Dream of moving up the economic ladder from the rung on which we were born.

The second set of numbers details the sharp rise in income inequality over this same period. UC Berkeley’s Saez documents the share of pretax income going to the top 1 percent of U.S. taxpayers; the number has risen from almost 9 percent in 1970 to 20 percent in 2012, the last year for which complete data is available. The nonpartisan Congressional Budget Office shows that over roughly the same period, the share of so-called transfer income—the percentage of after-tax government funds directed at alleviating the consequences of inequality among low-income families—fell from 54 percent to 40 percent.

Rising economic inequality. Stagnant social mobility. The reason for both trend lines is clear: as the wealthiest among us have corralled more of the national income over the past forty years, this monied elite has used its growing power to carve out more and better ways to secure more and more of the nation’s wealth. And make no mistake: government policies are an important reason that average wages, adjusted for inflation, have remained flat, or even fallen, over these decades, while the top income earners have accumulated ever-rising wealth. Policies designed to emasculate unions amid rising global competition enable serial tax cuts for the very wealthy, unleash Wall Street to restructure our businesses while saddling them with massive debt—and then carry that lucrative financing model into the very heart of our economy, our home mortgage market—all contributed to growing economic inequality and anemic social mobility.

Harvard University economist Nathaniel Hendren calculates the so-called social costs of this rising income inequality, finding that more money accruing to the wealthy reduced income growth over the past four decade by an estimated 20 percent, for a total social cost of $400 billion in 2012. Social costs are calculated by measuring the value of a dollar’s worth of income to individuals across the income spectrum—a dollar being less important to a wealthy person compared to a low-income individual—to discern the impact of income inequality on income growth. Basically, as the wealthy vacuumed up more and more of the income gains in our economy, the rest of us had less and less to spend.

The American middle class, unfortunately, tried to cope by turning to debt. Economists Amir Sufi at the University of Chicago and Atif Mian at Princeton University have detailed the explosion of household debt over this same period, particularly in the run-up to the Great Recession of 2007-09, as average U.S. households borrowed to make up for depressed incomes. Except for the upper tier of Americans, families have had to borrow more to pay for their homes, their kids’ education, their health crises, and their fleeting emblems of prosperity: new cars, dishwashers, family vacations. More and more women entered the workforce over this period and families put in more hours at work, yet income gains were paltry and families struggled to keep pace with inflation. This sudden rise in debt among so many struggling families and the collapse of the housing bubble were at the root of the recession.

No wonder living the American Dream seems so unattainable today. Most of us are following in the footsteps of the Greatest Generation and the Silent Generation, who were born amid the tumultuous times of the Roaring Twenties, the Great Depression, and World War II and then, with their Baby Boomer children, experienced the Golden Age of postwar America. For members of Generation X (1965-1980), the Millennials (1981-2000), and the so-called Boomlets, or Generation Z (born in the twenty-first century), those golden years of opportunity and security are history.

These shocks to working- and middle-class families were not completely evident over the past four decades. Now, however, accumulating economic research allows us to examine the broad failures of economic policy over most of this period. The available evidence also allows us to examine how economic inequality and slower growth may well go hand in hand, and to ask whether more equitable economic growth—allowing more Americans to enjoy the fruits of progress—could well lead to more sustained, inclusive economic expansion.

This new research—studies grounded in facts that identify the real problems facing our society—could enable policymakers to reboot the American Dream for the majority, and not just for a tiny elite. These policies, the research shows, aren’t just good for families; they are fundamental to creating a strong, competitive economy.

The magazine you are reading—our special package on equitable growth—charts this research in the form of a trip across a generational arc of Americans: from the soon-to-be-born to the elderly, with stops along the way for primary and secondary students, college students, the young working class, today’s young families, and Baby Boomers heading into retirement.

At each step of the way, we examine new research that highlights

• the incredible importance of prenatal and early childhood health care and extremely early childhood education;
• the negative educational effects of economically segregated schools;
• the gaps in post-secondary education and workforce training programs that are depriving businesses of the skilled workers they need;
• the startling economic effects of growing work-life conflict in families;
• the steady increase of personal debt, crimping economic growth, and accelerating inequality; and
• the grim prospects for those nearing or entering retirement without enough savings to guarantee dignity in their final years, along with the fiscal unsustainability of the programs that underlie American retirement.

None of these outcomes, however, is predestined. Policies matter. In each section, we explore policy options that could reverse rising inequality, create more sustained economic growth, and restore social mobility.

Our proposals are grouped by their place in the generational progression—from prenatal care through the working years to retirement. They should be the start of a serious discussion in Washington and in statehouses across the country about fresh economic policies—no longer hamstrung by stale arguments about supply-side economics or the welfare state. New economic research on equitable growth is rendering moot the old rhetoric behind political stalemate.

It’s time we moved on. We know how to create an economy that works for everyone. Let’s get to work.

Return to “American Life: An Investor’s Guide.”

The post Introduction: What We’re Learning About Economic Equality and Growth appeared first on Washington Monthly.

According to prosecutors, Williams-Bolar, who lives in public housing in Akron, a once-booming industrial city that has fallen on hard times, illegally enrolled her two daughters in the affluent Copley-Fairlawn school district, a neighboring community in Summit County.

Williams-Bolar, desperate to get her girls out of Akron’s failing schools—on its 2013 state report card, the district had an overall grade of F on academic indicators—enrolled them in Copley-Fairlawn using her father’s address. Her father, whose home is in Copley and who pays taxes to the district, was also charged by prosecutors. The facts in the case came to light after the Copley-Fairlawn district spent more than $6,000 on a private detective to track the comings and goings of Williams-Bolar and her daughters.

While Copley-Fairlawn was trying to exclude low-income and disadvantaged students, however, the public school district in Montgomery County, Maryland, is doing just the opposite. The jurisdiction, which sits just north of Washington, D.C., is considered affluent, and indeed was listed by Forbes as the tenth-richest county in the United States, with a median household income of $92,213. But it also has growing pockets of poverty, particularly in the eastern regions that border neighboring Prince George’s County. Montgomery County, famous for its progressive politics, tried not one, but two approaches to lift up low-income students. The most recent progressive approach involved the allocation of school resources. In 2000, the district superintendent, Jerry Weast, decided to spend a boatload of extra money—$2,000 per pupil—to help students attending the district’s high-poverty schools. The system provided all-day kindergarten, reduced class sizes, and investment in teacher development, among other improvements. These interventions are all backed by considerable research.

At the same time, Montgomery County maintained its long-term commitment to another, very different experiment, one dating back to 1974. Concerned that poor and working-class families were being priced out of the county, officials pioneered “inclusionary zoning,” which allows for so-called scattered-site public housing—meaning that poor residents live throughout the county, including fairly affluent areas. Under the policy, 12.5 percent to 15 percent of developers’ new housing stock is required to be affordable to low-income and working-class families. Between 1976 and 2010, the program produced more than 12,000 moderately priced homes. The housing authority has the right to purchase one-third of moderately priced units for public housing.

Unlike the compensatory school spending approach, the housing model imposes few costs, either private or public. David Rusk, a national expert on such policies, says that inclusionary zoning results in “no overall cost to the developer.” Each development must set aside units for low- and moderate-income tenants, but at the same time, the county gives the developer a “density bonus”—meaning that a larger number of high-profit units can be built. Taxpayers, too, come out fine. While building new public housing units in high-poverty neighborhoods is typically cheaper because land prices are lower, under inclusionary zoning laws the housing authority buys the units at the reduced price charged for modest-income families—an amount linked to what is affordable to families making about half the area median income. According to the Center for Housing Policy, a nonprofit organization dedicated to increasing affordable housing options, inclusionary zoning expands housing at “little or no direct cost to taxpayers.”

By simultaneously taking these two separate approaches—integration and compensatory spending—Montgomery County created, without necessarily meaning to, a natural social experiment to test a question that had long perplexed education researchers. To wit: If you are a low-income student, are you better off in a lower-poverty school that spends less per pupil or a higher-poverty school that spends more?

In normal circumstances that question is hard to answer because the kinds of poor families who find themselves living in more-affluent neighborhoods or going to more-affluent schools tend to have characteristics—more education, better connections, and so on—that make them not representative of low-income families generally. But that problem all but disappeared in Montgomery County, because residents there who apply for public housing are assigned homes on a random basis while most students in the county are assigned to schools in their neighborhoods.

Heather Schwartz, a researcher now at the RAND Corporation, was given access to student-level data in order to capitalize on this rare natural experiment. According to her groundbreaking 2010 study, Housing Policy Is School Policy, published by the Century Foundation, the spending programs did help boost achievement for some students, but the integration program provided far greater academic gains for poor children.

Tracking the elementary school careers of 858 Montgomery County students in public housing from 2001 to 2007, Schwartz found that “over a period of five to seven years, children in public housing who attended the school district’s most-advantaged schools (‘green zone’) far outperformed in math and reading those children in public housing who attended the district’s least-advantaged (‘red zone’) elementary schools.” On average, poor students attending “green zone” schools performed 9 points better in math and 8 points better in reading than public housing students attending the district’s “red zone” elementary schools.

Moreover, Schwartz’s research revealed that public housing students attending low-poverty schools began to catch up with their well-to-do classmates—cutting in half the initial achievement gap in mathematics, for example. Because students in the Schwartz study lived in low-poverty neighborhoods and attended low-poverty schools, one question that arises is whether it was the advantaged neighborhood or the school that mattered. Schwartz found that roughly two-thirds of the positive effect was attributable to attending a lower-poverty school, and one-third to living in a lower-poverty neighborhood.

“Of course this improvement all took time,” cautions Schwartz. “It’s not ‘bam,’ where you’re in kindergarten and by third grade you’re showing dramatic improvement. It’s much more gradual. … It took a whole elementary career where by the fifth and sixth grades you saw the achievement gap significantly narrowed.”

Economists speak in unison about the value of investments in human capital. Those made to help low-income kids learn better are especially important because they lead to greater economic growth and lower social costs—specifically, reduced expenditure on the criminal justice system and welfare programs. Interventions for low-income students can also make real the American promise of equal educational opportunity and reduce income inequality. The great question has always been: Which sorts of investments in education give the greatest bang for the buck? The Schwartz study suggests that if we want to really have growth with equity, we should be putting more money and energy into economic integration in schooling and housing.

The Montgomery County study is consistent with the groundbreaking work of the Equality of Opportunity Project, in which researchers from Harvard and the University of California, Berkeley, tried to sort through why poor children in some regions of the country had a greater likelihood of moving up the income ladder than poor kids in other regions. Having lower levels of economic segregation was a key factor in successful areas. The authors noted that, among other factors, “areas in which low income individuals were residentially segregated from middle income individuals were also particularly likely to have low rates of upward mobility.”

The new findings are consistent with a half century of research in education which concludes that being born into a low-income family often imposes educational hardships, and that being stuck in a school where most of your classmates are poor poses a second, independent, disadvantage.

While press reports routinely highlight high-poverty schools that beat the odds and succeed, such schools are, in fact, exceedingly rare. Majority middle-class schools are twenty-two times as likely to be high performing as are majority low-income schools, according to a study by Tulane University economist Douglas Harris. That’s partly because low-income students are less likely to have good health care and adequate nutrition. But concentrations of poverty pose an additional burden. Low-income fourth graders given a chance to attend low-poverty schools are two years ahead of low-income students attending high-poverty schools on the National Assessment of Educational Progress in mathematics.

Critics properly note that students from the most motivated low-income families may be more likely to end up in low-poverty schools, but careful studies using randomized lotteries such as the one used in Montgomery County also find positive outcomes for students who attend middle-class public schools.

Why should it matter whether your classmates are wealthy or poor? National research suggests that three main factors are at play: peers, parents, and teachers. Students learn a great deal from one another, and it is an advantage to be in a school where classmates come to school with larger vocabularies and are more likely to do homework and attend class regularly—qualities more likely to be found, on average, among middle-class students. It’s an advantage to be in a school where parents are actively involved in school affairs. Because middle-class parents are more likely to have flexible work schedules, have access to cars, be in two-parent families, and have had positive experiences during their own schooling, they are more likely to be members of the PTA or to volunteer in class than low-income parents, who have a different reality and more challenges.

Moreover, more-affluent parents, as one Harvard University researcher put it, are the proverbial “squeaky wheel,” advocating on behalf of their children to ensure that they get the best teaching available. And finally, exactly to that point, if life were fair, high-poverty schools would get the strongest teachers because disadvantaged students need them most, but substantial evidence suggests that the opposite occurs, as veteran teachers avoid high-poverty environments.

Having a high percentage of poor students in a school—especially above 75 percent—is detrimental both to those students and to the middle-class students who also happen to go there. According to research, the academic achievement of both groups declines in schools where 50 percent or more of the students are eligible for free or reduced-price lunch.

By the same token, because the numerical majority sets the tone in a school, having a minority of poor students doesn’t have any measurable negative effects on the academic achievement of the more-affluent students. But it does have a substantial positive effect on the poor students, who tend to absorb the higher aspirations and stronger study habits of the dominant middle-class culture while also benefiting from the better teaching and higher levels of parental involvement in the school.

There’s even something in it for the middle-class kids in such schools, in that they learn to work with people different from themselves, a skill highly valued by employers in the twenty-first-century workplace.

Addressing economic segregation will also disproportionately benefit African American and Latino children, who are most likely to suffer the effects of attending poor-quality, high-poverty schools. On average, more upper-middle-class black and Latino families (those with incomes above $75,000) live in high-poverty neighborhoods than lower-income whites (those making less than $40,000 a year). Simply put: even poor whites tend to live in middle-class neighborhoods. The extra burden associated with growing up in concentrated poverty that many African American and Hispanic students face helps explain why there is still an achievement gap between minority and white students of similar socioeconomic status.

While disproportionately benefiting students of color, most integration efforts now focus explicitly on class rather than race, for two reasons. First, in the 2007 U.S. Supreme Court decision in Parents Involved in Community Schools v. Seattle, the justices struck down a racial integration plan as a violation of the Fourteenth Amendment. Plans that focus on a student’s socioeconomic status (often, his or her eligibility for free or reduced-price lunch) are, by contrast, perfectly legal.

Moreover, the social science research has long concluded that the academic benefits are associated with avoiding high-poverty, as opposed to predominantly black or Latino, school environments. African American children benefited from desegregation, researchers found, not because there was a benefit associated with being in classrooms with white students per se, but because white students, on average, came from more economically and educationally advantaged backgrounds.

All-black schools that included the sons and daughters of doctors and lawyers and teachers alongside the offspring of less-advantaged parents often provided excellent educational environments because the economic, not racial, mix drives academic strength. (See sidebar) In the 1970s, working-class black students in Charlotte, North Carolina, posted strong academic gains when they attended schools with middle-class whites. By contrast, in Boston, Massachusetts, an effort beginning in 1974 to integrate low-income and working-class black students with low-income and working-class white students yielded no significant gains in academic achievement.

Boston’s desegregation plan was not only an academic failure, it also created a storm of violent white backlash and massive white flight from the city’s public schools, spawning a political cloud over integration that continues to haunt school officials. If there is a social science consensus that socioeconomic integration benefits students, there is an equally durable political consensus that there is not much that can be done without provoking parental backlash.

But growing evidence suggests that this political analysis is outdated. To begin with, school officials today emphasize public school choice—magnet schools and charter schools—to accomplish integration, having long rejected the idea of compulsory busing that gave families no say in the matter. In Hartford, Connecticut, for example, magnet schools with special themes or pedagogical approaches often have long waiting lists of white middle-class suburban families who are seeking a strong, integrated environment.

While many charter schools further segregate students, some are consciously seeking to bring students of different economic and racial groups together. The Denver School of Science and Technology, for example, uses a lottery weighted by income or geography to ensure a healthy economic mix in its seven middle schools and high schools.

These policies are needed more than ever, as our society is growing more segregated by income and more diverse racially and ethnically. For the first time, a majority of public school students are nonwhite. And the number of students eligible for subsidized lunch has grown to nearly half (although census data suggests that the real eligibility number is lower).

The rapidly changing demographics of the country may offer a political opening, as parents recognize that if they want their children to thrive in an increasingly diverse society, students need to learn to interact with classmates from a variety of backgrounds. In a 2013 study, researchers Allison Roda and Amy Stuart Wells from Columbia University found that white, advantaged parents in New York City were interested in sending their children to diverse schools and were troubled by segregation, but they wanted more quality integrated school options from which to choose. Likewise, a 2013 study from the Thomas B. Fordham Institute found that about one in five parents place learning “how to work with people from diverse backgrounds” among their top educational preferences for their children.

Today, more than eighty school districts, from Cambridge, Massachusetts, to Raleigh, North Carolina, to Champaign, Illinois, promote socioeconomic integration, almost always relying on choice. These districts educate more than four million students nationally. Likewise, more than 400 jurisdictions employ a complementary inclusionary zoning strategy, like the one used in Montgomery County, Maryland, to ensure that low-income and working-class families have access to housing in good neighborhoods with strong public schools.

Of course, addressing segregation between schools does not, by itself, bring about equal educational opportunity. Researchers also raise important concerns about segregation within school buildings.

Harvard professor Ronald Ferguson, a renowned education expert who holds a doctorate in economics from MIT and is the founder of the Achievement Gap Initiative at Harvard, notes, “Even schools that are highly mixed [economically] can ration resources to students who are more affluent.” He says that in one racially and income-integrated Ohio high school where he recently served as a consultant, the more well-to-do students comprised the lion’s share of those in Advanced Placement and honors classes, which were on the second floor of the school, while the rest of the student body was taking classes on the building’s first floor—that is, the students were physically segregated from each other. This separation played out in many ways both overt and subtle, including through stark differences in the learning experience.

“There were two different environments in the same school,” says Ferguson. In first-floor classrooms, “kids were leaning backward” in their seats, away from the teachers giving lessons, and “guys were walking the hallways” and causing disruptions while classes were in session. “On the second floor they were leaning toward the teacher who was in front of the class” explaining classwork and engaging students, and “no one was in the hallways.”

Ferguson says that affluent parents, who are often white, are “made nervous” when the conversation is about closing achievement gaps. “They want to know the implication for their kids. Will resources be taken away from their kids and directed to poor kids so they can catch up?” Recalling his experience at the Ohio mixed-income school, Ferguson says, “The district had a debate about even having the word ‘equity’ in its mission statement.”

Ferguson notes that even when there is economic integration, teaching quality is the key. “What I find is that there is often a quality of instruction-allocation imbalance.” He says that students need teachers who are “up to the challenge” and committed to helping “kids who are struggling.” Achieving what he calls “excellence with equity” requires “resource allocation that is universal and inclusive” and the ability to “persuade everybody that we can help everybody.”

How do we shift the conversation so that, in Ferguson’s words, the goal is “world-class achievement levels for kids of all backgrounds”? Some parents recognize that in a country that will soon be majority-minority, it’s important to educate all children equally. But most parents are always going to care most deeply about their own children, so integration programs must be structured so that parents vividly see that their own children can benefit. For example, in Spanish-English dual-language immersion programs, dominant Spanish speakers can help English speakers learn Spanish, and vice versa. In the St. Louis area, a cross-district integration program brings greater funds to suburban districts, money that benefits all students in the schools.

And what can be done about the very real problem of superficially integrated school buildings that have segregated classrooms? According to researcher Michael Petrilli of the conservative Fordham Institute, some schools, such as the economically and racially diverse Bethesda-Chevy Chase (B-CC) High School in Maryland, are successfully able to avoid tracking and segregation. In The Diverse Schools Dilemma: A Parent’s Guide to Socioeconomically Mixed Public Schools, Petrilli notes that mixed-ability classes at B-CC work well because teachers engage in what is known as “differentiated instruction,” where students are given assignments of varying levels of difficulty within the same classroom. He writes, “B-CC continues to excel academically while also making the most of its rich diversity.”

Charter schools are another source of important experimentation about how to make economically mixed schools with wide ranges of achievement work well. Sold in part as benefiting low-income students, charter schools, paradoxically, are increasing economic segregation, because philanthropists and legislatures have provided incentives for charter schools who maximize the number of poor and minority students they enroll.

But there are a small number of charter schools that are bucking that trend and offering innovative lessons. At High Tech High in San Diego, teachers place an emphasis on collaborative learning in heterogeneous classes. All students are challenged, given their incoming achievement levels, but those who start further ahead go into greater depth on homework assignments than others. At Community Roots Charter School in Brooklyn, school leaders create cultures that encourage integration within classrooms. Rather than papering over differences, students are invited to tell their family stories with an eye to making everyone feel welcome. The school also creates opportunities for students of different backgrounds to interact on the weekends through school-organized gatherings. As our nation becomes increasingly more diverse, this sort of experimentation becomes more important.

Sixty years after the U.S. Supreme Court declared in Brown v. Board of Education that separate schools for black and white students were inherently unequal, our schools still suffer from racial segregation. That historical curse is intensified by economic segregation. Today, economically disadvantaged students of all races are increasingly segregated from their middle- and upper-middle-class peers. The reality is that, even though we have spent billions of dollars on reform efforts over the past six decades, too many of our schools are still failing our children.

Kelly Williams-Bolar sought her own solution, and paid the price. She was found guilty on two felony counts of illegally enrolling her daughters in the affluent neighboring school district, and sentenced to five years in prison. The judge in the case, however, reduced her jail time to ten days plus three years of probation, in recognition of the fact that she had no previous criminal record and was going to school to be a nurse.

The real crime, of course, is that any parent would have to go to such lengths to get a quality education for her children. Certainly, it would be easy to give into the fatalism that typically arises when arguments are made for economic integration or for doing more to help low-income students do better academically. Many people are convinced that nothing works: we pour money into reform efforts, and schools are still failing; economic integration is impractical because our metro areas, especially the suburbs, increasingly segregate people by income; the upper and middle classes don’t want to rub elbows with the poor; and busing didn’t work.

But the Montgomery County experience and similar examples of economic-academic integration around the country seriously erode all these excuses. It’s not 1974. We’ve figured out better ways of educating our children to high and equal standards. And when there’s a strong enough will to do it, it can be done.

Return to “American Life: An Investor’s Guide.”

The post The New Segregation appeared first on Washington Monthly.

One study, for example, finds that children’s test scores in early elementary school largely explain the variation in their adult wages. Specifically, children who scored in the bottom 25 percent in these tests earned 20 percent less at age thirty-three than their counterparts who scored in the top 25 percent. The upshot is that on the day children arrive at kindergarten, one can already reasonably predict how much each will earn as an adult.

These findings have real implications for the investments we need to make to sustain a strong economy and to support today’s youngest Americans—Generation Z, or those born in the twenty-first century. (This cohort is smaller than the Millennial generation but still growing, and it is even more racially and ethnically diverse.) Human capital—the level of education, skills, and talent in our workforce—is a main driver of economic growth, so in order to ensure that we have a healthy, productive workforce and a thriving economy in the decades to come, we must begin by developing human capital during early childhood through education and other enrichment activities.

Yet we already know that the older members of Generation Z in the United States are falling behind their teenage peers in other developed economies. The most recent data findings from the new Programme for International Student Assessment, the most-cited international educational ranking, finds that out of thirty-four developed countries, U.S. teenagers rank seventeenth in reading, twenty-first in science, and twenty-sixth in math.

Nothing is more important to the future of our nation than preparing our youngest generation to meet the unpredictable economic challenges of the 2020s and 2030s. Yet rising economic inequality and unstable economic growth define our society today, and this inequality and instability start from the very day a child is born. Many low- and middle-income families face extraordinary challenges to providing the care and education their children need to thrive in school and in the twenty-first-century workplace.

How can we better prepare our nation’s youngest generation for success? Investments in K-12 schooling, college, and graduate education are important, but lasting investments need to be made earlier in a child’s life. According to University of Chicago economist James J. Heckman, educational and enrichment investments during early childhood yield the highest return in human capital compared to other investments over time. Why? Because as the brain forms, children learn cognitive skills such as language and early math concepts, but also “soft” skills such as curiosity, self-control, and grit. These are critical for later academic success as well as valued traits in workers. By the time a child enters kindergarten, the difference in school readiness is already well established, and the gap widens by less than 10 percent between kindergarten and high school.

Early learning is enhanced by what happens in preschool, but the two factors that most explain the gaps in school readiness are parenting styles and home learning environments. Yet many parents are unaware of the importance of early brain development and of the tremendous impact they can have on their very young children’s learning through simple actions such as talking, reading, and singing to and with them. Even if parents are aware of the importance of these activities, they may have difficulty carving out time at home with their children as they juggle jobs and the family’s other physical and emotional needs. Today, more children than ever are raised in single-parent families or in homes where both parents work. Parents today are constantly balancing work and family care, often without access to family-friendly workplace policies to support them.

If parents are unable to provide enriching home experiences, children can gain valuable developmental and learning support in quality child care and preschool settings. Unfortunately, about half of U.S. children receive no early childhood education, many because their parents simply cannot afford it. In 2011, the average cost for a four-year-old in full-time professional child care ranged from about $4,000 to $15,000 a year. This can put a major strain on the budgets of low- and middle-income families. Low-income families pay around $2,300 a year per child for care for children under age six—about 14 percent of their income. Families in the middle average $3,500 a year—6 percent to 9 percent of their income. Professional families pay about $4,800 a year—3 percent to 7 percent of their income.

Low-income families who are able to pay for child care often find that the care they can afford is merely a safe place for their child while they are at work, but offers poor or mediocre support to help their child in the critical stages of early childhood development. The limited spots in high-quality programs often go to more-affluent children, whose families can afford expensive care.

As a result, children have different enrichment experiences and are not starting from the same point early on in life. One famous study—often referred to as the “thirty million word gap” study, by professors Betty Hart and Todd R. Risley—found that children living in poverty hear thirty million fewer words by age four than higher-income children. Hearing words directly translates into learning words. On average, a child from a low-income family knows 500 words by the age of three, compared with 700 words for a child from a working-class family and 1,100 for a child from a professional family. In recent years, not only has this study been replicated, but researchers have found that already by age two, there is a six-month gap in language proficiency between lower-income and higher-income children.

In order to have a productive workforce and thriving economy tomorrow, we need to invest in our children today. There are viable policy solutions that could expand early childhood education and enrichment opportunities to all children, rather than just a select few at the top. First, voluntary home visits by child development professionals could increase awareness among working-class parents of how they can foster their children’s development at home, such as talking, reading, and singing to their children before bedtime. Home visiting programs are taking off under the Maternal, Infant and Early Childhood Home Visiting Program, established in 2010, and evaluations examining their effectiveness on parent and child outcomes are showing promising results.

Second, it is important to expand access to high-quality affordable early childhood education programs, which better prepare children for school, putting children more than a year ahead in mathematics and other subjects. Low-income families would greatly benefit from expanded access to quality child care, Early Head Start, and high-quality preschool programs.

Lastly, parents can only be better first teachers of their children if they have the time to be with them. Policies such as workplace flexibility, paid family and medical leave, and paid sick days could help all working parents better manage work and family obligations and spend more time with their children. Today, professional workers are the most likely to have access to these policies, often considered additional employee “perks” by employers.

The importance of investing in early childhood matters for our economic competitiveness. The United States should be making smart economic investments in early childhood to ensure that all children have an equitable start before their first day of school. All Americans need our youngest ones to succeed as adults, no matter their family background and income level, for the American Dream to continue in the twenty-first century and beyond.

Return to “American Life: An Investor’s Guide.”

The post Unequal at the Start appeared first on Washington Monthly.

The Center for Retirement Research at Boston College estimates that 53 percent of working-age households in 2010 were at risk of being unable to maintain their current standard of living in retirement, making the outlook for many Baby Boomers and younger Americans far more challenging than it is for most current retirees. In 2013 among American households headed by someone between the age of fifty-five and sixty-four, half had a net worth of less than $166,000—including home equity and money held in retirement accounts such as 401(k)s and individual retirement accounts (IRAs). The median net worth of such households, adjusted for inflation, declined by 14 percent between 2010 and 2013, according to Federal Reserve data, despite an officially recovering economy and a roaring stock market. Meanwhile, the percentage of Americans with retirement accounts continues to fall, slipping below 50 percent last year.

Unless measures are taken now, increasing economic insecurity and inequality among the coming generations of elderly Americans will harm not only millions of individuals but also the performance of the economy as a whole. To be sure, there is a small but growing class of Americans who will do extraordinarily well in retirement, reflecting a long era during which those at the top of the income scale were growing much richer. But for most Americans the trend is the opposite.

Many will need to give up on dreams of turning their skills and experience into productive new ventures later in life. They will volunteer less in their communities and places of worship. They will hang on to jobs even as ailing health diminishes their productivity. They will cut back their consumption of everything from health care to travel, thereby reducing the economic demand needed to create jobs for younger Americans. They will turn increasingly to public programs and private charity to help pay their utility and household bills. They will move in with their children and have to rely on them for financial assistance, even as younger Americans increasingly struggle with their own economic security challenges, such as rapidly rising student debt.

The retirement crisis has little to do with the financing of old-age social insurance programs. Social Security can be rendered even more secure with minor changes to its tax base. Rising health care costs do pose a challenge to the financing of Medicare as well as private health insurance, but all evidence suggests that policy—in this case measures enacted under the Affordable Care Act—can have a positive influence in slowing the growth of health care prices without compromising health care quality. Rather, the mortal threat to a dignified retirement is the stagnating or falling real earnings of most workers, combined with their massive debt and loss of secure ways of savings for retirement such as defined-benefit pensions.

The growing economic problems of most American families during their working years foreshadow their coming struggles in old age. As America’s manufacturing base shrank and unions lost much of their bargaining power in the 1970s and ’80s, many late-wave Baby Boomers, particularly among the majority who never went to college, wound up working for far lower real wages and health and retirement benefits than the previous generation of workers had enjoyed in the 1960s and ’70s. Workers consequently found it more and more difficult to prepare for the costs associated with retirement.

That pattern of widespread shaky wages and disappearing benefits among all but the most affluent of each new generation gathered momentum as the members of Generation X came of age. This age group will be particularly vulnerable in retirement not only due to stagnant real wages and reduced or nonexistent pensions, but also because many of them borrowed heavily, often on predatory terms, to buy houses at what turned out to be at or near the top of the market. According to the Federal Reserve, every cohort of Americans born between 1930 and 1995 is now more indebted than were people who were the same age in 2000, but Gen Xers have seen the comparatively largest increases in debt. One study by the Fed labels Americans born between 1965 and 1980 “Generation Debt,” by virtue of their now owing 60 percent more than did Americans who were the same age in 2000.

This pattern of growing economic instability and rising inequality across the generations finds its culmination in today’s young adults. Millennials are not only substantially more likely than were Gen Xers at the same time in their lives to be encumbered by large student debts, they are also starting out with even lower real wages. The median family headed by someone under the age of thirty-five earned 20 percent less in 2013 than its Gen X counterpart did in 2001, raising the prospect of America having two “lost generations” in a row.

Compounding these trends has been a steep decline in the share of Americans who are covered by retirement plans at work—either traditional defined-benefit pensions that pay a lifetime benefit or retirement savings accounts that accumulate a lump sum based on their financial luck and acumen. One reason is the rise of long-term unemployment and the growing share of contingent or contract workers who receive no benefits. Yet even among wage and salary workers, pension coverage continues to decline. In 2001, approximately 51 percent of wage and salary workers were part of a retirement plan. That was low to begin with, especially considering that the labor market boom of the 1990s made 2001 a relatively good year for benefits. Today, the share of wage and salary workers covered by pension plans has fallen to 45 percent.

Worse, even among those companies that still offer pensions to their workers, there has been a profound shift away from traditional defined-benefit pensions to so-called defined-contribution accounts such as 401(k)s. These accounts require individuals to assume all the responsibilities of managing their money for retirement and thus leave workers with the downside risk of their savings going south. They also require individual participants to make complicated investment decisions even as they wind up losing much of the value of their investments to high fees charged by brokers and mutual funds. Unlike traditional pensions, defined-contribution plans also do not guarantee benefits for life—or, indeed, guarantee any benefits at all. This means that participants in these plans still run the risk of outliving their savings even if their investments turn out well—a risk that can only be mitigated by purchasing expensive annuities from life insurance companies.

Without appropriate policies to reduce inequality and promote opportunity, America’s changing demographics also threaten to worsen America’s retirement crisis. Due to falling birth rates and increased longevity, there will be fewer workers going forward to support each retiree. Still more challenging is the changing composition of the workforce, which includes rising numbers of single parents, as well as members of racial and ethnic groups suffering today from higher-than-average rates of unemployment, disability, and early mortality, as well as lower-than-average educational attainment, earnings, and savings.

In 2010, communities of color comprised more than 36 percent of the U.S. population, and they are projected to make up the majority of the nation’s population by around 2043. Relieving tensions between work and family, as well as shrinking racial and ethnic gaps in economic and health outcomes, can ultimately improve the nation’s overall productivity and create the new wealth needed to finance an aging society. But creating a win-win proposition for members of all generations will not come about without serious broad-scale changes in policy to promote real economic security during working years and in retirement across the board.

We also need specific changes in policies directly affecting provision for retirement, starting with Social Security. Despite much alarmist talk, the financial challenges facing the program are quite modest, even as it becomes, with the erosion of other forms of retirement savings, an increasingly essential pillar of support in old age for more and more Americans. According to the latest annual report by Social Security’s trustees, the cost of its main pension and disability fund, under “intermediate range” assumptions, will rise as a percentage of GDP from barely short of 5 percent today to just 6 percent in 2090.

Nonetheless, Social Security does face a modest funding gap that needs to be addressed. Fortunately, the shortfall between taxes and benefits will remain at less than 1 percent of GDP through 2025, according to the trustees’ latest projection, and will not reach even 1.7 percent of GDP by the time today’s kindergartners are in their eighties, which means closing this long-term deficit is a manageable task.

One key step to do that is to make Social Security’s tax base broader and more progressive. Today, the system is financed by a regressive payroll tax that imposes a far higher marginal tax rate on low- and middle-income workers than on the affluent. Under current law, for example, any wages earned above $117,000 in a given year are exempt from payroll taxes.

Raising or eliminating the payroll tax cap on earnings alone will substantially improve Social Security’s finances. If combined with other measures to boost the income of future workers, broadening the tax base for Social Security could also make it possible to raise benefits for the most needy elders.

Helping American families better prepare for retirement also requires substantially overhauling private retirement savings. The federal government currently spends more than $150 billion offering tax incentives to save for retirement, but the largest benefits go to those least in need. That’s because the value of these tax subsidies depends on the saver’s tax bracket, with high-income Americans getting the most benefits, and low-income Americans the least and in many cases no benefits at all. Those in the highest tax brackets get an immediate value of 39 cents for each dollar they save. In contrast, low-income earners who may have a marginal tax rate of 10 percent receive only a quarter of the value from the tax incentive, and those who don’t earn enough to owe federal income taxes receive no benefit from the savings incentives meant to help them prepare for retirement.

A more efficient and fairer alternative would be to give every saver a fixed tax credit, say 20 percent, for every dollar they save. Such a tax credit also could be structured to give moderate-income earners a greater credit per dollar saved than higher-income earners. Turning existing tax deductions into progressive tax credits would better target existing savings incentives where they can do the most good for both individuals and the economy as a whole.

The same principle could be applied to the broad array of federal tax policies designed to help Americans build assets. These range from the mortgage interest deduction and the preferential tax treatment of capital gains and dividends, to assets held in IRAs and tax-advantaged college savings plans. All told, these and other tax expenditures related to asset building came to over half a trillion dollars in 2013, yet almost none of this money reaches low- and moderate-income households, and the lion’s share goes to the affluent.

Congress should also simplify and better regulate the myriad tax-advantaged retirement vehicles it has created over the years. Today, workers must navigate a confusing labyrinth of different types of tax-favored savings vehicles, from Roth and conventional IRAs to SEPs, Keoghs, HSAs, MSAs, and 457 plans, to mention a few. Congress should streamline the numerous preferred savings vehicles intended for retirement, education, and health care into a single tax-advantaged savings vehicle with one set of rules. Greater simplicity would make it easier for people to save and thus increase both the number of savers and the amount they save.

At the same time, Congress needs to more rigorously regulate the financial services industry so that savers are not hit by high fees on their accounts that are often incompletely and confusingly disclosed. More generally, better regulation of Wall Street could change the pattern of recurring financial bubbles that leave retirees at risk of being stranded just when they need to tap into their lifetime savings.

The economic and demographic trends facing the country have caused some observers to predict an outbreak of generational warfare. But such predictions are based on a frame of analysis that ignores the increasing interdependence of all generations and the common stake of all Americans in restoring economic opportunity and fostering equitable growth.

Return to “American Life: An Investor’s Guide.”

The post Discounted Seniors appeared first on Washington Monthly.

Those who strive not to think about this issue suggest that this is just about the “politics of envy.” Those who discuss the issue are accused of fomenting class warfare. But as we have come to grasp the causes and consequences of these inequities we have come to understand that this is not about envy. The extreme to which inequality has grown in the United States and the manner in which these inequities arise undermine our economy. Too much of the wealth at the top of the ladder arises from exploitation—whether from the exercise of monopoly power, from taking advantage of deficiencies in corporate governance laws to divert large amounts of corporate revenues to pay CEOs’ outsized bonuses unrelated to true performance, or from a financial sector devoted to market manipulation, predatory and discriminatory lending, and abusive credit card practices. Too much of the poverty at the bottom of the income spectrum is due to economic discrimination and the failure to provide adequate education and health care to the nearly one out of five children growing up poor.

The growing debate about inequality in America today is, above all, about the nature of our society, our vision of who we are, and others’ vision of us. We used to think of ourselves as a middle-class society, where each generation was better off than the last. At the foundation of our democracy was the middle class—the modern-day version of the small, property-owning American farmer whom Thomas Jefferson saw as the backbone of the country. It was understood that the best way to grow was to build out from the middle—rather than trickle down from the top. This commonsense perspective has been verified by studies at the International Monetary Fund, which demonstrate that countries with greater equality perform better—higher growth, more stability. It was one of the main messages of my book The Price of Inequality. Because of our tolerance for inequality, even the quintessential American Dream has been shown to be a myth: America is less of a land of opportunity than even most countries of “old Europe.”

The articles in this special edition of the Washington Monthly describe the way that America’s inequality plays out at each stage of one’s life, with several articles focusing in particular on education. We now know that there are huge disparities even as children enter kindergarten. These grow larger over time, as the children of the rich, living in rich enclaves, get a better education than the one received by those attending schools in poorer areas. Economic segregation has become the order of the day, so much so that even those well-off and well-intentioned selective colleges that instituted programs of economic affirmative action—explicitly trying to increase the fraction of their student body from lower socioeconomic groups—have struggled to do so. The children of the poor can afford neither the advanced degrees that are increasingly required for employment nor the unpaid internships that provide the alternative route to “good” jobs.

Similar stories could be told about each of the dimensions of America’s outsized inequality. Take health care. America is unique among the advanced countries in not recognizing access to health care as a basic human right. And that means if you are a poor American, your prospects of getting adequate, let alone good, medical care are worse than in other advanced countries. Even after passage of the Affordable Care Act (ACA), almost two dozen states have rejected expanding vitally needed Medicaid, and more than forty million Americans still lacked health insurance at the beginning of 2014. The dismal statistics concerning America’s health care system are well known: while we spend more—far more—on health care (both per capita and as a percentage of gross domestic product) than other countries, health outcomes are worse. In Australia, for instance, spending on health care per capita is just over two-thirds that in the United States, yet health outcomes are better—including a life expectancy that is a remarkable three years longer.

Two of the reasons for our dismal health statistics are related to inequalities at the top and the bottom of our society—monopoly profits reaped by drug companies, medical device makers, health insurers, and highly concentrated provider networks drive prices, and inequality, up while the lack of access to timely care for the poor, including preventive medicine, makes the population sicker and more costly to treat. The ACA is helping on both accounts. The health insurance exchanges are designed to promote competition. And the whole act is designed to increase access. The numbers suggest it’s working. As for costs, the widespread predictions that Obamacare would cause massive health care inflation have proven false, as the rate of increase in health care prices has remained comparatively moderate over the last several years, showing once again that there is no necessary trade-off between fairness and efficiency. The first year of the ACA showed significant increases in coverage—far more significant in those states that implemented the Medicaid expansion than in those that refused to do so. But the ACA was a compromise, leaving out dental and long-term extended care insurance.

Inequities in health care, then, are still with us, beginning even before birth. The poor are more likely to be exposed to environmental hazards, and mothers have less access to good prenatal care. The result is infant mortality rates that are comparable to some developing countries alongside a higher incidence of low birth weight (systemically correlated with poor lifetime prospects) than in other advanced countries. Lack of access to comprehensive health care for the 20 percent of American children growing up in poverty, combined with lack of access to adequate nutrition, makes success in school even less likely. With the cheapest form of food often being unhealthy carbohydrates, the poor are more likely to face problems of childhood diabetes and obesity. The inequities continue throughout life—culminating in dramatically different statistics on life expectancy.

All well and good, you might say: it would be nice if we could give free health care to all, free college education to all, but these are dreams that have to be tamed by the harsh realities of what we can afford. Already the country has a large deficit. Proposals to create a more equal society would make the large deficit even larger—so the argument goes. America is especially constrained because it has assumed the costly mission of ensuring peace and security for the world.

This is nonsense, on several counts.

The real strength of the United States is derived from its “soft power,” not its military power. But growing inequality is sapping our standing in the world from within. Can an economic system that provides so little opportunity—where real median household income (half above, half below, after adjusting for inflation) is lower today than it was a quarter century ago—provide a role model that others seek to emulate, even if a few at the very top have done very well?

Moreover, what we can afford is as much a matter of priorities as anything else. Other countries, such as the nations of Scandinavia, have, for instance, managed to provide good health care to all, virtually free college education for all, and good public transportation, and have done just as well, or even better, on standard metrics of economic performance: incomes per head and growth are at least comparable. Even some countries that are far poorer than the United States (such as Mauritius, off the east cost of Africa) have managed to provide free college education and better access to health care. A nation must make choices, and these countries have made different ones: they may spend less on their military, they may spend less on prisons, they may tax more.

Besides, many of the distributional issues are related not to how much we spend but who we spend it on. If we include within our expenditures the “tax expenditures” buried in our tax system, we effectively spend a lot more on the housing of the rich than is generally recognized. Interest deductability on a mega-mansion could easily be worth $25,000 a year. And alone among advanced economies, the United States tends to invest more in schools with richer student bodies than in those with mostly poor students—an effect of U.S. school districts’ dependence on local tax bases for funding. Interestingly, according to some calculations, the entire deficit can be attributed to our inefficient and inequitable health care system: if we had a better health care system—of the kind that provided more equality at lower cost, such as those in so many European countries—we arguably wouldn’t even have a federal budget deficit today.

Or consider this: if we provided more opportunity to the poor, including better education and an economic system that ensured access to jobs with decent pay, then perhaps we would not spend so much on prisons—in some states spending on prisons has at times exceeded that on universities. The poor instead would be better able to seize new employment opportunities, in turn making our economy more productive. And if we had better public transportation systems that made it easier and more affordable for working-class people to commute to where jobs are available, then a higher percentage of our population would be working and paying taxes. If, like the Scandinavian countries, we provided better child care and had more active labor market policies that assisted workers in moving from one job to another, we would have a higher labor force participation rate—and the enhanced growth would yield more tax revenues. It pays to invest in people.

This brings me to the final point: we could impose a fair tax system, raising more revenue, improving equity, and boosting economic growth while reducing distortions in our economy and our society. (That was the central finding of my 2014 Roosevelt Institute white paper, “Reforming Taxation to Promote Growth and Equity.”) For instance, if we just imposed the same taxes on the returns to capital that we impose on those who work for a living, we could raise some $2 trillion over ten years. “Loopholes” does not adequately describe the flaws in our tax system; “gaps” might be better. Closing them might end the specter of the very rich almost proudly disclosing that they pay a tax rate on their disclosed income at half the rate of those with less income, and that they keep their money in tax havens like the Cayman Islands. No one can claim that the inhabitants of these small islands know how to manage money better than the wizards of Wall Street; but it seems as though that money grows better in the sunshine of these beach resorts!

One of the few advantages of there being so much money at the top of the income ladder, with close to a quarter of all income going to the top 1 percent, is that slight increases in taxes at the top can now raise large amounts of money. And because so much of the money at the top comes from exploitation (or as economists prefer to call it, “rent seeking”—that is, seizing a larger share of the national pie rather than increasing its size), higher taxes at the top do not seem to have much of an adverse effect on economic performance.

Then there’s our corporate tax rate. If we actually made corporations pay what they are supposed to pay and eliminated loopholes we would raise hundreds of billions of dollars. With the right redesign, we could even get more employment and investment in the United States. True, U.S. corporations face one of the higher official corporate tax rates among the advanced countries; but the reality is otherwise—as a share of corporate income actually paid, our federal corporate taxes are just 13 percent of reported worldwide income. By most accounts, the amount of taxes actually paid (as a percentage of profits) is no higher than the average of other advanced countries. Apple Inc., Google Inc., and General Electric Co. have become the poster children of American ingenuity—making products that are the envy of the rest of the world. But they are using too much of that ingenuity to figure out how to avoid paying their fair share of taxes. Yet they and other U.S. corporations make full use of ideas and innovations produced with the support of the U.S. government, starting with the Internet itself. At the same time they rely on the talent produced by the country’s first-rate universities, all of which receive extensive support from the federal government. They even turn to the U.S. government to demand better treatment from our trading partners.

Corporations argue that they would not engage in so much despicable tax avoidance if tax rates were lower. But there is a far better solution, and one that the individual U.S. states have discovered: have corporations pay taxes based on the economic activity they conduct in the United States, on the basis of a simple formula reflecting their sales, their production, and their research activities here, and tax corporations that invest in the United States at lower rates than those that don’t. In this way we could increase investment and employment here at home—a far cry from the current system, in which we in effect encourage even U.S. corporations to produce elsewhere. (Even if U.S. taxes are no higher than the average, there are some tax havens—like Ireland—that are engaged in a race to the bottom, trying to recruit companies to make their country their tax home.) Such a reform would end the corporate stampede toward “inversions,” changing a corporation’s tax home to avoid taxes. Where they claim their home office is would make little difference; only where they actually do business would.

Other sources of revenue would benefit our economy and our society. Two basic principles of taxation are that it is better to tax bad things than good; and it is better to tax factors in what economists call “inelastic supply”—meaning that the amounts produced and sold won’t change when taxes are imposed on them. Thus, if we taxed pollution in all of its forms—including carbon emissions—we could raise hundreds of billions of dollars every year, and have a better environment. Similarly, appropriately designed taxes on the financial sector would not only raise considerable amounts of money but also discourage banks from imposing costs on others—as when they polluted the global economy with toxic mortgages.

The $700 billion bank bailout pales in comparison to what the bankers’ fecklessness has cost our economy and our society—trillions of dollars in lost GDP, millions of Americans thrown out of their homes and jobs. Yet few in the financial world have been held accountable.

If we required the banks to pay but a fraction of the costs they have imposed on others, we would then have further funds to undo some of the damage that they caused by their discriminatory and predatory lending practices, which moved money from the bottom of the economic pyramid to the top. And by imposing even slight taxes on Wall Street’s speculative activities via a financial transactions tax, we would raise much-needed revenue, decrease speculation (thus increasing economic stability), and encourage more productive use of our scarce resources, including the most valuable one: talented young Americans.

Similarly, by taxing land, oil, and minerals more—and forcing those who extract resources from public land to pay the full values of these resources, which rightly belong to all the people, we could then spend those proceeds for public investments—for instance, in education, technology, and infrastructure—without resulting in less land, less oil, fewer minerals. (Even if they are taxed more, these resources won’t go on strike; they won’t leave the country!) The result: increased long-term investments in our economy would pay substantial future dividends in higher economic productivity and growth—and if the money was spent right, we could have more shared prosperity. The question is not whether we can afford to do more about our inequality; it is whether we can afford not to do more. The debate in America is not about eliminating inequality. It is simply about moderating it and restoring the American Dream.

Return to “American Life: An Investor’s Guide.”

The post Conclusion: Slow Growth and Inequality are Political Choices. We Can Choose Otherwise. appeared first on Washington Monthly.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.

The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector’s yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits—meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent. This isn’t just the decline of profits in other industries, either. Between 1980 and 2006, while GDP increased five times, financial-sector profits increased sixteen times over. While financial and nonfinancial profits grew at roughly the same rate before 1980, between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew sixteen times.

This trend has continued even after the financial crisis of 2008 and subsequent financial reforms, including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial profits in 2012 were 24 percent of total profits, while the financial sector’s share of GDP was 6.8 percent. These numbers are lower than the high points of the mid-2000s; but, compared to the years before 1980, they are remarkably high.

This explosion of finance has generated greater inequality. To begin with, the share of the total workforce employed in the financial sector has barely budged, much less grown at a rate equivalent to the size and profitability of the sector as a whole. That means that these swollen profits are flowing to a small sliver of the population: those employed in finance. And financiers, in turn, have become substantially more prominent among the top 1 percent. Recent work by the economists Jon Bakija, Adam Cole, and Bradley T. Heim found that the percentage of those in the top 1 percent of income working in finance nearly doubled between 1979 and 2005, from 7.7 percent to 13.9 percent.

If the economy had become far more productive as a result of these changes, they could have been worthwhile. But the evidence shows it did not. Economist Thomas Philippon found that financial services themselves have become less, not more, efficient over this time period. The unit cost of financial services, or the percentage of assets it costs to produce all financial issuances, was relatively high at the dawn of the twentieth century, but declined to below 2 percent between 1901 and 1960. However, it has increased since the 1960s, and is back to levels seen at the early twentieth century. Whatever finance is doing, it isn’t doing it more cheaply.

In fact, the second damaging trend is that financial institutions began to concentrate more and more on activities that are worrisome at best and destructive at worst. Harvard Business School professors Robin Greenwood and David Scharfstein argue that between 1980 and 2007 the growth in financial-industry revenues came from two things: asset management and loan origination. Fees associated either with asset management or with household credit in particular were responsible for 74 percent of the growth in financial-sector output over that period.

The asset management portion reflects the explosion of mutual funds, which increased from $134 billion in assets in 1980 to $12 trillion in 2007. Much of it also comes from “alternative investment vehicles” like hedge funds and private equity. Over this time, the fee rate for mutual funds fell, but fees associated with alternative investment vehicles exploded. This is, in essence, money for nothing—there is little evidence that hedge funds actually perform better than the market over time. And, unlike mutual funds, alternative investment funds do not fully disclose their practices and fees publicly.

Beginning in 1980 and continuing today, banks generate less and less of their income from interest on loans. Instead, they rely on fees, from either consumers or borrowers. Fees associated with household credit grew from 1.1 percent of GDP in 1980 to 3.4 percent in 2007. As part of the unregulated shadow banking sector that took over the financial sector, banks are less and less in the business of holding loans and more and more concerned with packaging them and selling them off. Instead of holding loans on their books, banks originate loans to sell off and distribute into this new type of banking sector.

Again, if this “originate-to-distribute” model created value for society, it could be a worthwhile practice. But, in fact, this model introduced huge opportunities for fraud throughout the lending process. Loans—such as “securitized mortgages” made up of pledges of the income stream from subprime mortgage loans—were passed along a chain of buyers until someone far away held the ultimate risk. Bankers who originated the mortgages received significant commissions, with virtually no accountability or oversight. The incentive, in fact, was perverse: find the worst loans with the biggest fees instead of properly screening for whether the loans would be any good for investors.

The same model made it difficult, if not impossible, to renegotiate bad mortgages when the system collapsed. Those tasked with tackling bad mortgages on behalf of investors had their own conflicts of interests, and found themselves profiting while loans struggled. This process created bad debts that could never be paid, and blocked attempts to try and rework them after the fact. The resulting pool of bad debt has been a drag on the economy ever since, giving us the fall in median wages of the Great Recession and the sluggish recovery we still live with.

And of course it’s been an epic disaster for the borrowers themselves. Many of them, we now know, were moderate- and lower-income families who were in no financial position to borrow as much as they did, especially under such predatory terms and with such high fees. Collapsing home prices and the inability to renegotiate their underwater mortgages stripped these folks of whatever savings they had and left them in deep debt, widening even further the gulf of inequality in this country.

Moreover, financialization isn’t just confined to the financial sector itself. It’s also ultimately about who controls, guides, and benefits from our economy as a whole. And here’s the last big change: the “shareholder revolution,” started in the 1980s and continuing to this very day, has fundamentally transformed the way our economy functions in favor of wealth owners.

To understand this change, compare two eras at General Electric. This is how business professor Gerald Davis describes the perspective of Owen Young, who was CEO of GE almost straight through from 1922 to 1945: “[S]tockholders are confined to a maximum return equivalent to a risk premium. The remaining profit stays in the enterprise, is paid out in higher wages, or is passed on to the customer.” Davis contrasts that ethos with that of Jack Welch, CEO from 1981 to 2001; Welch, Davis says, believed in “the shareholder as king—the residual claimant, entitled to the [whole] pot of earnings.”

This change had dramatic consequences. Economist J. W. Mason found that, before the 1980s, firms tended to borrow funds in order to fuel investment. Since 1980, that link has been broken. Now when firms borrow, they tend to use the money to fund dividends or buy back stocks. Indeed, even during the height of the housing boom, Mason notes, “corporations were paying out more than 100 percent of their cash flow to shareholders.”

This lack of investment is obviously holding back our recovery. Productive investment remains low, and even extraordinary action by the Federal Reserve to make investments more profitable by keeping interest rates low has not been able to counteract the general corporate presumption that this money should go to shareholders. There is thus less innovation, less risk taking, and ultimately less growth. One of the reasons this revolution was engineered in the 1980s was to put a check on what kinds of investments CEOs could make, and one of those investments was wage growth. Finance has now won the battle against wage earners: corporations today are reluctant to raise wages even as the economy slowly starts to recover. This keeps the economy perpetually sluggish by retarding consumer demand, while also increasing inequality.

How can these changes be challenged? The first thing we must understand is the scope of the change. As Mason writes, the changes have been intellectual, legal, and institutional. At the intellectual level, academic research and conventional wisdom among economists and policymakers coalesced around the ideas that maximizing returns to shareholders is the only goal of a corporation, and that the financial markets were always right. At the legal level, laws regulating finance at the state level were overturned by the Supreme Court or preempted by federal regulators, and antitrust regulations were gutted by the Reagan administration and not taken up again.

At the institutional level, deregulation over several administrations led to a massive concentration of the financial sector into fewer, richer firms. As financial expertise became more prestigious than industry-specific knowledge, CEOs no longer came from within the firms they represented but instead from other firms or from Wall Street; their pay was aligned through stock options, which naturally turned their focus toward maximizing stock prices. The intellectual and institutional transformation was part of an overwhelming ideological change: the health and strength of the economy became identified solely with the profitability of the financial markets.

This was a bold revolution, and any program that seeks to change it has to be just as bold intellectually. Such a program will also require legal and institutional changes, ones that go beyond making sure that financial firms can fail without destroying the economy. Dodd-Frank can be thought of as a reaction against the worst excesses of the financial sector at the height of the housing bubble, and as a line of defense against future financial panics. Many parts of it are doing yeoman’s work in curtailing the financial sector’s abuses, especially in terms of protecting consumers from fraud and bringing some transparency to the Wild West of the derivatives markets. But the scope of the law is too limited to roll back these larger changes.

One provision of Dodd-Frank, however, suggests a way forward. At the urging of the AFL-CIO, Dodd-Frank empowered the Securities and Exchange Commission to examine the activities of private equity firms on behalf of their investors. At around $3.5 trillion, private equity is a massive market with serious consequences for the economy as a whole. On its first pass, the SEC found extensive abuses. Andrew Bowden, the director of the SEC’s examinations office, stated that the agency found “what we believe are violations of law or material weaknesses in controls over 50 percent of the time.”

Lawmakers could require private equity and hedge funds to standardize their disclosures of fees and holdings, as is currently the case for mutual funds. The decline in fees for mutual funds noted above didn’t just happen by itself; it happened because the law structured the market for actual transparency and price competition. This will need to happen again for the broader financial sector.

But the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can’t just be strip-mined for a small sliver of capital holders; we’ll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.

Return to “American Life: An Investor’s Guide.”

The post Frenzied Financialization appeared first on Washington Monthly.

First, unlike the prices of gasoline, shoes, or movie tickets, people’s wage rates are the bases of their living standards. Impersonal markets may assign wages to particular “low productivity” people that are so meager that they can’t support themselves, let alone their families. More generally, even when abject poverty is not the issue, market wages may lead to levels of inequality that many in society find intolerable. In such cases, governments may wish to intervene with measures such as minimum wages that are “above market” or so-called tax-and-transfer programs that raise after-tax net wages relative to pretax gross wages, such as the Earned Income Tax Credit.

Second, real wage growth (after accounting for inflation) has been abominable for most American workers for decades. Worse yet, what little wage growth there has been was concentrated at the very top. Wages at the median of the earning distribution and below have fallen or barely risen in thirty-five years. Figure 1 shows the dismaying “staircase” pattern of real wage growth by decile that has characterized the U.S. labor market since 1979—the approximate start of the Age of Inequality. At the 10 percent point of the wage ladder (counting from the bottom), real wages actually declined about 6 percent over thirty-three years. At the 50 percent point (the median), real wages rose a scant 5 percent. Even at the 90 percent point, the real wage increase was less than 1 percent per year. In stark contrast, real wage growth at the top 1 percent point—not shown here because it would be, literally, off the chart—was up 154 percent in thirty-three years.

Third, economists’ standard explanation of how wages are determined—the idea that each worker’s wage equals the value he or she adds to the production process—does not take us far in explaining what has happened to wages. Output per hour in the non-farm business sector (“labor productivity”) rose 93 percent over the thirty-three years covered by Figure 1, for a compound annual growth rate of 2 percent, but real compensation per hour (which includes fringe benefits) rose just 38 percent, a mere 1 percent per year. So even ignoring rising wage inequality, average American workers lost about 1 percent per year in wages relative to their productivity.

Markets are not supposed to work that way. Productivity is supposed to be rewarded in the pay packet. Indeed, markets did just that during the “golden age” of shared prosperity, 1947 to 1973. Doing the same calculation for those twenty-six years shows that labor productivity rose 2.8 percent per year while real hourly compensation rose 2.6 percent.

Figure 1: The Steep Staircase of U.S. Income Inequality: Cumulative growth in real wages (after accounting for inflation), 1979-2012, by decile

The entire postwar history of labor’s productivity and compensation is summarized in Figure 2, which shows a widening gap between compensation and productivity since the early 1970s. The divergence is actually pretty minor through 1979, but grows large thereafter. Furthermore, research by U.S. Bureau of Labor Statistics economists Susan Fleck, John Glaser, and Shawn Sprague shows that until the turn of the twenty-first century much of the growing gap between real compensation and productivity was accounted for by differences in “deflation,” that is, in how economists adjust wage and production data for inflation. Thereafter, labor’s share started to erode. But the story is, in some sense, even worse than Figure 2 indicates because part of the rising compensation was merely to cover the increasing costs of health insurance, not to improve living standards.

Figure 2: The Late 1970s Mark the Beginning of the Age of Inequality in the United States: Productivity and real hourly compensation (after accounting for inflation) in the non-farm business sector, 1947-2012

This analysis of America’s wage problem suggests several questions for policy: How can we raise the productivity of labor, especially that of relatively low-skilled labor? How can we close the gap between labor’s productivity and the compensation workers receive? How can we raise wages after taxes and transfers (net wages) relative to wages before taxes and transfers (gross wages)?

Let’s try to answer each of these questions in turn.

Raising the productivity of labor

There aren’t many mysteries here. A nation raises the productivity of labor by equipping its workers with more and better capital, by improving the technology of production, and by giving them more skills and training—starting, the evidence clearly shows, with pre-kindergarten.

The first method, boosting capital formation, has been the bedrock of U.S. economic growth policy (to the extent we have had any) for decades, leading to the creation of all sorts of tax incentives for saving and investment. The ratio of gross private domestic investment, which includes business investment and home building, to overall gross domestic product is highly cyclical, but it shows some modest upward trend since 1979 (marred by a huge collapse during the Great Recession of 2007-09), thus making a small contribution to productivity growth. (See Figure 3.)

Figure 3: Postwar U.S. Capital Formation Mostly Rose Faster than GDP: The ratio of investment to gross domestic product, both adjusted for inflation, 1947-2012

Yet wages do not seem to have benefited much from the “success” in boosting capital formation. As we saw in the two earlier figures, real wage growth was anemic to negative except at the very top.

The second method, improving technology, has traditionally been the biggest source of growth in labor productivity and wages. But some observers, most prominently the coauthors of The Second Machine Age, Massachusetts Institute of Technology economists Erik Brynjolfsson and Andrew McAfee, have claimed that, in contrast to history since the Industrial Revolution, recent technological developments may be hostile to labor’s best interests. Only time will tell if forthcoming innovations in information technology will lead to faster or slower wage growth, but few economists expect technology to be a big game changer in labor’s favor in the short term.

The most direct approach to helping labor is, of course, to increase education, training, and workplace skills—especially for the lower 90 percent of wage earners. We have known for years that the financial returns to formal education, as measured by increased earnings, are high—perhaps even higher than the returns to capital. Economists usually view that fact as suggesting underinvestment in education because enough such investment would have beaten down the financial returns. A few pertinent facts are well known:

• We are miles away from offering all American children high-quality pre-K education, even though research speaks with one voice on how important this is to their future development. The rich make sure their children get what they need; poor children often need what they don’t get.
• The quality of our K-12 education system lags behind those of many other advanced (and some not so advanced) countries. It is also highly unequal, offering much-higher-quality education in higher-income areas.
• As a nation, we invest shockingly little in vocational training and apprenticeships, two aspects of education that would greatly benefit workers near and below the middle. Apprenticeships in the United States cover just 0.2 percent of the labor force, compared to 2.2 percent in Canada, 2.7 percent in the United Kingdom, and 3.7 percent in Australia.
• While some of our colleges and universities are still the best in the world, we no longer lead the world—or even come close—in the fraction of our young people who go to college. The college graduation rate in the United States is now below the average of all developed nation members of the Organisation for Economic Co-operation and Development.

Each of these observations and others offer a lever where policy could help raise the productivity of the lower 90 percent of our workforce. In virtually all cases, the expected returns on such investments are high even if we count only the incremental earnings and ignore human dignity or any other benefits from greater equality. Yet while the potential returns are high, so are the up-front costs—which may be why myopic political decisionmaking shortchanges the future by underinvesting in education.

Closing the gap between productivity and wages

Furthermore, education is supposed to work by raising productivity, which in turn leads to higher wages. But the latter link has been partially broken, and we don’t fully understand why. Part of the reason for the yawning gap between (faster) productivity improvements and (slower) wage gains is that non-wage fringe benefits (especially for health insurance) have grown much faster than wages. But the cumulative gap between productivity and compensation, which includes benefits, is still large and growing. Can (or should) government policy do anything about this?

No one has a full answer, but a few things would almost certainly help. First, we can raise the minimum wage, which has languished at $7.25 per hour for five years. The current proposal, which is dead in Congress, would boost it to $10.10 in three steps over three years. According to recent estimates from the Congressional Budget Office, doing so would directly help about sixteen million low-wage workers—netting out of those who lose their jobs. (Relative to the consensus emerging from many studies of the effects of raising the minimum wage, the CBO’s job-loss estimate seems a bit high to me.) Beyond that, we know that some workers whose wages are near the minimum wage would see their pay rates increase when the minimum wage goes up because employers are either bound to or want to maintain a differential above the minimum wage.

The lagging minimum wage is one important reason why wages around the tenth percentile of the workforce have failed to keep pace even with stagnant median wages. But it certainly doesn’t explain wage stagnation relative to productivity at the median and above. For that, we must look elsewhere for culprits.

The growing gap between compensation and productivity strongly suggests that labor’s bargaining power has fallen relative to that of capital. Why? One important reason is the entry of China, India, and the former Soviet Union into the global economy. This was (and still is) an earth-shattering series of events that effectively doubled the world’s labor force while raising the global capital stock very little. Such a gigantic shock to the global ratio of labor to capital would be expected to reduce wages and raise profits, probably quite a lot—which seems to be what has happened. Unfortunately, there aren’t any good policies to counteract market forces that powerful.

Another force that has probably reduced labor’s bargaining power during the Age of Inequality, the decline of unions, may have been aided and abetted by both government policies and increased business hostility toward unions. Employers, for example, have intensified their anti-union efforts in National Labor Relations Board certification elections. The decline in the rate of private-sector unionization since 1983 is dramatic and almost unbroken. (See Figure 4.) While we lack direct measurements of bargaining power, it is natural to assume that a 60 percent shrinkage in the unionization rate (from 16.8 percent to 6.7 percent), sustained over three decades, indicates a substantial erosion of bargaining power. That same logic, of course, suggests a policy for boosting wages—empowering unions by making it easier to organize—or at least trying to arrest their decline.

Figure 4: The Decline of Private-Sector Unions: The rate of U.S. private-sector unionization, 1983-2013

I have saved the best option, in terms of likely effectiveness, for closing the gap between productivity and wages for last: speeding up the rate of economic growth and tightening labor markets. It’s not a panacea, to be sure, but running a high-pressure economy is the surest way to boost the demand for labor—often for labor at all skill levels. And steep competition for labor is probably the surest route to higher real wages; firms will pay more for labor when they have to. Lately, with so much slack in labor markets, they haven’t had to.

It is no coincidence that the one recent period in which ordinary workers enjoyed wage increases and inequality stopped rising was the late 1990s, when labor markets grew very tight. Some people mistakenly believe that running the U.S. economy at that high pace will mostly benefit foreign workers as imports flood the nation. But even in today’s globalized economy, imports are under one-sixth of GDP. The rest is “Made in America.”

Figure 5 displays a snippet of evidence in support of the idea that tight labor markets boost real wage growth. It shows changes in inflation-adjusted compensation per hour (measured vertically) and the unemployment rate (measured horizontally) between 1948 and 2013. The scatter of data is clearly downward sloping, meaning that lower unemployment has been associated with faster wage growth. (For the statistically trained, the correlation coefficient is -0.41.)

Figure 5: Tighter Labor Markets Foster Real Wage Growth: Unemployment and changes in compensation, including benefits, after adjusting for inflation, 1948-2013

To assist the eyeball, the chart also displays what is called a “regression line” that fits the data. It has an estimated slope of -0.39 (with standard error 0.11), which implies that a 1 percentage point lower unemployment rate for a year would raise the growth rate of real compensation by about 0.4 percent. If you recall that the observed gap between real compensation growth and productivity growth has been about 1 percentage point per year, it’s clear that labor market slack has been no trivial matter.

Reducing slack in the labor market also tends to result in more equal gains across the wage spectrum. Figure 6 shows a clear positive association between the national unemployment rate and the change in the so-called Gini Coefficient—the most popular measure of inequality—from the previous year. The Gini Coefficient ranges between 0 (perfect equality) and 1 (perfect inequality), and the vertical axis of Figure 6 records “Gini points.” If the Gini ratio rose from 0.410 to 0.415, for example, that would be +5 Gini points. The correlation here is +0.31. Notice that just about every observation with falling income inequality comes when unemployment is below 6 percent.

Figure 6: High Unemployment Breeds Rising Inequality: The rate of unemployment and the change in income inequality, as measured by the Gini Coefficient, * 1968-2012

Thus there is good reason to believe that running an economy with a tight labor market would both narrow the gap between wages and productivity and equalize the income distribution. In recent years, however, the labor market has had lots of slack, and the U.S. government has pursued fiscal policies that move our economy further away from full employment—thereby counteracting the Federal Reserve’s strenuous efforts to do the opposite. Congress, for example, has rejected proposals to invest more in infrastructure or engage in other job-creation programs, while also cutting back sharply on discretionary spending.

Raising net wages relative to gross wages

The final way policymakers can boost wages is to enable workers, especially those on the lower rungs of the wage ladder, to take home more money after paying taxes and receiving transfers in the form of government benefits. It’s simple arithmetic—but difficult politics. An employer pays some gross wage to attract the labor he or she wants to hire. But the government taxes some of this away before it reaches the worker. In some cases, however, the government also augments the worker’s earnings with a tax credit or a transfer payment. So the net wage, after taxes and transfers, could be either higher or lower than the gross wage. For most of us, of course, it must be lower; we are net taxpayers. But if it wants to, the government can make low-wage workers come out ahead—receiving more in transfers than they pay in taxes.

We do this now in the United States in two main ways. First, low-income households were largely removed from the federal income tax rolls via tax cuts enacted under Presidents Bill Clinton and George W. Bush. For a family of four in 2014, personal exemptions and the standard deduction make the first $28,000 of income free of federal income tax. But low-income workers still pay federal payroll taxes—from the first dollar of earnings.

Second, the Earned Income Tax Credit provides transfer payments (via refundable tax credits) to low-income earners. But, oddly, its current structure subsidizes having children more than it subsidizes work. Today’s EITC is actually fairly generous to couples with children. A family of four in 2013, for example, received an effective wage subsidy of 40 percent on its first $13,430 of labor income, leading to a maximum tax credit of $5,370. For couples filing jointly, that credit started to phase out (at a 21 percent marginal rate) once earnings passed $22,870 and was entirely gone once earnings reached $48,373. Thus even families (of four) earning around the nation’s median income received at least some small benefits. If that same couple was childless, however, the wage subsidy rate was a mere 7.6 percent on the first $6,370 of earnings, which implied a puny maximum EITC benefit of $487—less than $10 a week.

It would not be difficult—again, leaving politics aside—to restructure this program to make it a true tax credit for earning income rather than for having children, that is, a wage subsidy. Both President Obama and Congressman Paul Ryan have proposed a first step in that direction by boosting the credit for childless workers. It would be a small step, to be sure; more should be done. But Congress has shown no intention of enacting the Obama-Ryan proposal.

Let me briefly recapitulate my analysis of ways to boost the wages of American workers, especially low- and moderate-income workers:

• Provide quality pre-K education for children whose families could not otherwise afford it.
• Improve the K-12 grade school system, especially in low-income areas.
• Provide much more vocational education and apprenticeship programs.
• Raise the minimum wage.
• Tilt the playing field in favor of, rather than against, unions.
• Run a high-pressure economy via a more stimulative fiscal policy.
• Increase the generosity of the Earned Income Tax Credit, especially for workers with no children.

It’s not exactly an exotic list, bubbling with surprises. But if Congress would enact it, American workers, and especially the most needy American workers, would get a raise.

Return to “American Life: An Investor’s Guide.”

The post Petrified Paychecks appeared first on Washington Monthly.

Work hours have risen, at least for those in the middle and upper-middle class. Between 1977 and 2002, dual-earner married couples with children saw their combined working hours shoot up by an average of ten hours a week, from eighty-one to ninety-one. By 2005, fully one-third of U.S. employees reported feeling chronically overworked. Today, adults employed full time in the United States work an average of forty-seven hours per week, with nearly 40 percent of full-time workers reporting that they work at least fifty hours a week.

Low-wage and hourly workers face a different set of time pressures. They routinely encounter highly unpredictable scheduling practices with last-minute work assignments, impromptu cancellations of work shifts without pay, or the chaos of being “on call,” committed to working shifts for which they might or might not be needed.

All of this—combined with increasing pressures for more time-consuming and intensive parenting than was the norm for previous generations—contributes to an overwhelming sense of overload and lack of control. In November 2012, nearly three-quarters of respondents polled by the National Partnership for Women & Families said that they, their neighbors, and their friends experienced hardship in balancing high and often inflexible work demands with the equally high yet unpredictable responsibility of caring for family members at least somewhat often, and nearly 40 percent said they experienced such conflict “all the time” or “very often.” University of Minnesota sociologist Erin L. Kelly and her co-authors found that approximately 70 percent of Americans now report “some interference between work and non-work.”

The troublesome level of stress weighing on parents from work-family conflict is generally considered a private matter—a personal problem of the sort best addressed by yoga, relaxation exercises, or going out to coffee with friends. And yet a considerable body of research now indicates that, in fact, it should be considered a public health issue. Work-family conflict has been linked to mental and physical health problems, including the risk of heart disease, high blood pressure, poor sleep, depression, obesity, and addictive behaviors such as smoking and excessive alcohol consumption. It has also been associated with lower satisfaction with family, marriage, work, and life, generally.

The consequences for our economic growth and prosperity are alarming. Work-family conflict impairs worker productivity, commitment, and engagement, and increases turnover and absenteeism. Women in particular, who still disproportionately serve as the primary caregivers in their families even as they’ve increasingly become sole or co-breadwinners, are all too often pushed out of the workforce by the inflexible demands of their jobs or forced to consider less remunerative work that upends or destroys promising career tracks. If women can’t work, earn, and spend to the full extent of their capabilities, then our national economic health suffers as a direct result of crimped or collapsing individual family budgets, lowered tax revenues, and lost productivity.

The health of our economy, then, as well as that of our families, will depend on finding ways to relieve destructive work-family conflict. But to do so we must directly confront the roots of this American epidemic, which are nestled in public policy decisions extending back over two generations. The face of the U.S. workforce and the shape of the American family have vastly changed over the past four decades, chiefly due to the movement of women into the paid workforce. In 1967, only roughly 28 percent of mothers were breadwinners or co-breadwinners, responsible for at least 25 percent of their family income. Today, 63 percent of all mothers make that essential contribution to their families’ economic situation. And there’s no going back. With income stagnant for all but the most wealthy over the past thirty years, and with incomes falling for low-income workers and many in the middle class, women’s earnings are absolutely essential for most families to make ends meet.

Yet despite this massive alteration in the landscape of home and work, our policies and expectations for employees haven’t much changed from the days of homemaker moms and sole-provider dads. The United States is the only industrialized nation that does not guarantee working mothers paid time off to care for a new child, and the only developed country that doesn’t guarantee paid sick leave. What nationally mandated leave we have—provided by the Family and Medical Leave Act of 1993—is unpaid, with qualification restrictions so onerous that 40 percent of all American workers are excluded from coverage. Forty-three percent of all adult workers lack a single paid sick day. And 44 percent of working Americans are unable to arrange their work schedules to meet their responsibilities at home.

This lack of access to workplace flexibility and support, particularly among middle- and low-income earners, means that most parents are fully exposed to the stressors that make work-family conflict most toxic—“high demand and low control,” as Rosalind B. King, program scientist for the Work, Family, Health, and Well-Being Initiative at the National Institute of Child Health and Human Development, puts it. “Changing working conditions is the best prevention strategy for the dilemmas faced by working families,” says King.

Recent studies seeking to measure the role of family-friendly workplace interventions in reducing work-family conflict and stress bear this out. In 2011, Erin Kelly, a sociologist at the University of Minnesota, and her colleagues published findings from a study of employees at Best Buy’s corporate headquarters who were involved in a program to change their office culture so that they were rewarded for results rather than face time. These employees, Kelly found, reported getting more sleep and having more energy, a greater sense of control over their schedules, and less work-family stress. The human resource executives at the company who designed the program also reported large reductions in voluntary employee turnover and substantially increased productivity. Dozens of other companies have since adopted Best Buy’s model.

Then there’s research by Maureen Perry-Jenkins, a professor of psychology at the University of Massachusetts Amherst, who shows that having the ability to take time off for a doctor’s appointment without fear of job or income loss led to less depression in mothers a year after their child’s birth. Stable hours and consistent pay and benefits, Perry-Jenkins also finds, appeared to be protective of mothers’ mental health, whereas the instability from ever-changing work schedules led to a lack of control, which was related to poorer mental health outcomes. Indeed, the mere perception of workplace support enhanced mothers’ mental health, says Perry-Jenkins. The effects held for fathers, too. Perceptions of greater child care support were linked to less depression in fathers, and mothers’ longer maternity leaves were linked to less anxiety in fathers over time.

Most of the published studies to date on the effects of workplace flexibility focus on voluntary employer-provided initiatives, which sadly are the only type of work-family policies available for most workers in the United States. The problem with relying upon such measures is, first, that they depend on the will and whims of chief executives—as Best Buy employees found, in early 2013, when a new CEO, Hubert Joly, did away with the popular practice—and, second, that they are least likely to be provided to the people who need them the most: low-income and hourly workers. More than 90 percent of high-wage employees report that their employers allow them to earn paid time off or to change their schedule if they have an urgent family issue. Less than half of private-sector workers in the bottom 25 percent of earners, however, can change their schedules under such circumstances, and only about half of middle-income workers have the right to these sorts of schedule changes.

The pattern holds steady for access to paid parental leave and paid sick days as well: 66 percent of high-wage workers have access to paid parental leave, compared with 11 percent of those who earn the lowest wages. Almost 80 percent of the highest-paid workers have access to earned sick time, but only 15 percent of the lowest-paid workers have the right to take paid time off if they or a family member get sick.

With implementation of family-friendly policies across the business landscape uneven, at best, the main way to truly alleviate toxic work-family stress for all working parents in the United States is through the universal protections of public policy, with provisions to ensure that employers cannot declare their workers “contract employees” who are exempt from workplace flexibility rules. Fortunately, the landscape for such measures has never been better.

Thirteen cities, among them Washington, D.C., New York City, Jersey City, Seattle, and, most recently, Patterson, New Jersey, now guarantee workers paid sick days, as do two states, Connecticut and California. In the past year, Rhode Island passed paid family leave legislation, joining California, New Jersey, and Washington State; advocates now have eyes on New York, Massachusetts, and Oregon to enact similar legislation. Vermont and San Francisco passed laws granting workers the right to request flexible work arrangements and predictable scheduling. In June, President Obama issued a memo that granted all federal employees the right to request flexible work arrangements.

National paid family leave—a policy idea that not so long ago was considered a pie-in-the-sky impossibility—is now poised to become a campaign issue in the 2016 presidential election. From an economic policy perspective, this public conversation could not be more timely. Between 1990 and 2010, our country fell from having the sixth-highest rate of female participation in the workforce among the twenty-two developed nation members of the Organisation for Economic Co-operation and Development to seventeenth on the list—a decline that economists Francine D. Blau and Lawrence M. Kahn at Cornell University suggest may be due to our lack of federal work-family policy.

To waste women’s resources is foolhardy. The Congressional Budget Office predicted last year that the flattening-out of women’s workforce participation will play a notable role in slowing down U.S. economic growth over the next decade. And the economists Heather Boushey, Eileen Appelbaum, and John Schmitt have calculated that, if women’s employment hadn’t risen the way it did from 1979 to 2012, our gross domestic product would have been roughly 11 percent lower at the end of that period.

For too many decades, children of professional working mothers were considered the victims of their mothers’ ambitions. Now, with the overwhelming majority of families dependent on women’s economic contributions—and our economy and future economic well-being on the line as well—it’s time for policymakers to consider that the best interests of children, their parents, society, and the economy are fully aligned. We know now that families’ mental, physical, and economic health depends not just on the presence but on the quality of parents’ work as well—how much control they have, and how much stress they bring home at the end of the day. In addition, relieving stress at home results in more productive employees in the workplace. American parents are overloaded to a breaking point. That’s a public health and economic risk we as a nation simply cannot afford.

Return to “American Life: An Investor’s Guide.”

The post Crunch Time appeared first on Washington Monthly.

My combined debt after leaving grad school was over $60,000. This time when I crossed the stage, the debt number felt crushing. For a few months after graduation, I was unemployed. Forced to move back into my childhood home for the first time since I was eighteen, I thought I had made a financial miscalculation.

Among the Millennial generation, this story is a common one. Outstanding student loan debt among all graduates now tops $1 trillion—more than credit card debt—with my generation particularly hard hit. The Federal Reserve recently reported that both the proportion of young families with student debt and the amount they’ve incurred have nearly doubled since 2001. In 2012, 60 percent of graduates from four-year colleges faced an average student loan balance of $26,500. Not surprisingly, delinquent payments are also on the rise, even as they are falling for all other types of debt. Ten years ago, student debt only accounted for about 3.5 percent of new delinquent balances on all debt. Now it accounts for over 14 percent.

These alarming numbers have led to stories in the media about how student debt may lead Millennials to delay getting married, having children, and buying houses and furniture. If that is the case, our demand-starved economy will be deprived of a much-needed jolt of purchasing that such “family formation” typically provides. So far, however, there’s not much evidence that more Millennial college grads are deferring home purchases compared to their peers a generation ago. Indeed, a recent Brookings study that looks at student loan borrowers shows that the extra earnings that come with a college degree have allowed college graduates under forty to manage their debts reasonably well. The reason is simple: college degrees generally provide students enough of a bump in income to cover the cost of paying back their loans.

Though I had a slow start, I eventually landed a job in Washington, D.C., and the debt burden has become more manageable over time. My post-secondary education eventually got me where I needed to go. This is true for many college graduates of my generation.

So what’s behind the soaring increase in student debt delinquency? Evidence suggests that the problem is students who attended college and accumulated debt but left without earning a degree. Students who haven’t graduated are more than four times as likely to default on their student loans as those who have, according to a study by the think tank Education Sector. Recent research from the economist Beth Akers shows that borrowers with less than $5,000 in student debt are the most likely to be late on payments. In fact, the more college debt a student incurs, the less likely he or she is to default. This may seem counterintuitive, but it’s not—a low loan balance is indicative of a borrower who didn’t complete school, and is therefore less likely to repay. According to Department of Education statistics, defaulters also tend to be older (the median age is thirty-eight), from low-income backgrounds, with poor financial literacy, and with no degree to show for their efforts. A disproportionate number of them attended for-profit colleges.

This is all evidence of a large crisis in American higher education: we have a big college completion problem. More than thirty-one million adults have earned college credit within the last twenty years but left without any post-secondary credential. By 2012, only 59 percent of students seeking a bachelor’s degree graduated within six years. For students seeking a certificate or degree at a two-year institution, the completion rate was 31 percent.

The Great Recession was tough on everyone in the labor market, but it hit those with less education the hardest, increasing the socioeconomic divide between those with a college degree and those without. In 2013, young adults with a four-year college degree were three times less likely to be unemployed as those with only a high school degree, and made on average twice as much per hour. Those with only some college, including two-year degrees, were about a third less likely to be unemployed. Even workers with a vocational certificate in, say, welding or IT services, which typically takes a year or less to earn, get paid on average 20 percent more than people with only high school diplomas, which translates to about $240,000 more in extra income over a lifetime.

The truth is that we are rapidly moving into a world in which anyone who aspires to a middle-class income, or close to it, needs some kind of post-secondary credential. According to research by Georgetown University, over half of the added jobs since the recession have gone to those who have a bachelor’s degree or better. By 2020, almost 57 percent of all jobs will require at least a post-secondary vocational certificate or higher. Yet our system of higher education and workforce training is not producing anywhere near enough degrees and credentials to fill the growing need, including post-secondary vocational certificates. At current graduation rates, the United States will fall five million credentials short of meeting labor market demands by 2020. This shortfall holds back our economy while exacerbating income inequality.

But this problem suggests an opportunity. If the United States can add the additional twenty million post-secondary-educated workers it needs by 2025, we will boost our gross domestic product by $500 billion per year. We will also strike a blow for income equality.

To reach these goals we have to do two things. First, we need to increase the numbers of low-income post-secondary graduates. Second, we need to help those with college credits but no degree to finally cross the finish line. This means wholesale reform of our higher education and workforce training systems.

The conventional wisdom is that college in America is the great class equalizer. But the truth is increasingly the opposite: higher education is fast becoming yet another perpetuator of inequality. The reason is not that lower-income Americans don’t aspire to college. In 2008, 55 percent of high school graduates from the poorest 20 percent of homes enrolled in college directly from high school, compared to 80 percent of students from the wealthiest 20 percent of homes. While this is a significant gap, it pales in comparison to the difference in college graduation rates. Four out of five twenty-four-year-olds in the upper quarter of the income scale hold four-year college degrees. In the bottom quarter, only one in ten does.

One reason for the difference in graduation rates is not surprising. Kids who grow up in poorer neighborhoods and attend troubled, less rigorous primary and secondary schools tend to start college less academically prepared and are thus more likely to drop out. But another reason is that these students, who have shown their mettle by graduating from the toughest high schools, are repaid for their efforts by getting channeled into the worst-performing colleges—costly for-profits that make false promises of employment in high-wage jobs, or lower-priced but under-resourced community colleges and regional four-year schools with high dropout rates.

In addition, research from Georgetown University shows that black and Latino students attend the least selective higher education institutions, whereas white students increasingly enroll in the most selective, which spend twice as much on educating their students and have nearly twice the graduation rates—and this trend is only getting worse.

What can be done to turn things around? It would help, of course, if elite private schools recruited higher numbers of qualified lower-income and minority students and charged them prices they can afford. But such schools serve a small percentage of all college students. To really move the needle on graduation rates, we need the schools that already enroll the bulk of students, including poorer students—public universities, community colleges, and for-profits—to radically improve their performance.

If you doubt this is possible, consider Georgia State University in Atlanta. The school has 32,000 students, of whom 56 percent receive federal Pell Grants, 60 percent are nonwhite, and 30 percent are the first in their families to attend college. Yet from 2004 to 2012 the school boosted its graduation rate, as computed by the federal government, by 10 percentage points—from 41 percent to 51 percent. The increases in completion rates for students of color have been even more astonishing. According to Georgia State’s own figures (computed differently than the federal figure), the graduation rate of Latinos rose in the past decade from 22 percent to 66 percent; for blacks the rate rose from 29 percent to 57 percent.

GSU pulled this off by recognizing that to succeed, poor and minority students often need extra support. The school deploys academically successful upperclassmen to tutor struggling younger students. It also aggressively utilizes data systems called “predictive analytics” to keep track of individual students’ progress. The system alerts academic advisers whenever students show early signs of coming academic trouble. Those who fail to sign up for required classes, for instance, receive reminder calls. Students in good standing who are relatively close to graduation but miss the deadline to pay their tuition bill are no longer automatically dropped from courses, as in the past. Instead they are offered targeted grants to help them make their payments and get to commencement.

Another school bucking the trend is the University of Central Florida. UCF has pulled off a rare higher education hat trick: it has tripled in size, from 20,000 students in 1992 to more than 60,000 today, in order to serve more of its traditionally diverse, moderate-income students; it has raised its six-year graduation rate from 54 percent in 2003 to 65 percent in 2012; and it has increased its percentage of low-income and Latino students. How? Among other strategies, UCF has created unique partnerships with four area community colleges, whereby students at those colleges who successfully earn two-year associate’s degrees are guaranteed admission into UCF.

Georgia State and UCF are examples of what the New America Foundation calls “Next Generation Universities”—public institutions that have figured out new ways to promote better outcomes for economically and racially diverse students. Both schools have recently joined the University Innovation Alliance, a new consortium of eleven large public research universities committed to making high-quality college degrees accessible to a diverse body of students funded through support from the Gates, Lumina, and Kresge Foundations. Working together, these large universities will test new initiatives and share data, in hopes of helping many more students make it to graduation.

But while philanthropically funded partnerships like these are important, what’s most needed are new government policies that provide incentives for the higher education system to do a better job of graduating lower-income students. A growing number of states, for instance, have adopted so-called performance-based budgeting, whereby public universities are reimbursed not just based on the number of students they enroll but on how many receive degrees. When done right, performance funding can help those public institutions that disproportionately educate the state’s most vulnerable and disadvantaged students but often lose funding to the flagship campus.

Performance funding only works, however, if there is already significant base funding. As states have slashed their higher education budgets over the past two recessions, making higher education institutions fight over an increasingly paltry piece of the pie will do nothing to improve persistence and completion rates.

That’s why federal action is also needed. The federal government spends $167 billion on higher education, mostly through federally subsidized college loans, Pell Grants, work-study programs, and tuition tax credits and deductions. This money flows freely to colleges and universities with very few strings attached. There’s no requirement that schools keep tuition affordable, or improve their graduation rates, or make sure the degrees they confer lead to actual jobs.

That may be about to change. The Obama administration plans to unveil a proposal to have the Department of Education rate America’s colleges and universities on such measures as net price and graduation rate. The aim is to provide prospective college students with better information about their choices and thus put some market pressure on colleges to improve. To ratchet up the pressure even more, the administration wants congressional approval to tie federal higher education funding to those ratings. Meanwhile, lawmakers have introduced legislation that would make public how well on average the graduates of individual colleges and programs within those colleges do in their careers—whether they get and keep jobs, how much they earn, and so forth.

If these and other measures actually pass—and that’s a big “if”—it would go a long way toward holding the higher education system accountable for outcomes and, in theory at least, lead to the availability of more affordable, high-quality degrees.

So far we’ve been talking about students who seek a traditional four-year college diploma. But that’s only part of the story. For tens of millions of Americans, getting ahead means earning a two-year associate’s degree or some kind of industry or job-specific vocational credential. It is these folks, many of them poor or working class, who most often wind up not graduating while still having hefty student loans to pay off. They are the ones the current system has most egregiously failed. Getting more of them across the higher education finish line is one of the best ways we can advance the goal of equitable growth.

Fortunately, there is some action stirring in Washington on this front as well, though not nearly enough. This past summer Congress passed, and the president signed, legislation to streamline and improve the performance of a myriad of federally funded job training programs. That’s a significant and largely unheralded achievement. But because the funding is so small and is limited in scope, the law is of little help to young people who aren’t yet in the workforce, or to the millions of adults who have jobs but want to upgrade their skills in order to earn more.

The Obama administration has also proposed new standards for vocational programs at colleges. Under these so-called gainful employment rules, set to go into effect in 2016, programs will no longer be eligible to take federal student financial aid if, for example, too many of their borrowers default on their loans or the amount of income graduates have to use to pay their loans is too high. The aim of the rule is to weed out the most predatory vocational schools and programs. And while it applies to both nonprofit and for-profit colleges, the latter are likely to be hardest hit. Though only 10 percent of students attend for-profit colleges, they account for almost half the country’s student loan defaults. Not surprisingly, the for-profit college industry will fight like mad in court to weaken the rule (it succeeded in getting an earlier version killed).

But even if all these measures ultimately go into effect, vast gaps will remain in our workforce training system. That’s because America has never developed the kind of robust apprenticeship and skill-upgrading regimes that exist in countries like Germany, with its culture of close cooperation among companies, unions, and government. Perhaps we should build such a system—more funding for the nation’s career and technical schools would be a good start. But politically, it’s unlikely ever to happen in the U.S.

What America does have is the most extensive and richly endowed higher education system in the world. Parts of that system function pretty well as a de facto workforce training system. Many of the nation’s best community colleges, for instance, provide large numbers of relatively low-cost, high-quality two-year degrees and certificates, and have close connections with regional employers such that the skills being taught match the demands of the market.

What’s needed, argues Mary Alice McCarthy of the New America Foundation in a new report, is to improve and expand that higher education system to serve more working adults and young people looking to upgrade their skills. Accountability measures like the ones already discussed are crucial. So too is reform of the Higher Education Act, the main federal legislation determining which students and programs are eligible for financial aid. The problem with that law is that it leaves too many Americans and many promising programs out in the cold.

For instance, federal financial aid generally cannot be spent on post-secondary certificate programs that take less than a year to complete. But many certificate programs in high-demand fields—for, say, phlebotomy or computer-controlled machinery—can be completed in only a few months. Why should the federal government discriminate against education programs just because they get the job done quickly?

The law is also a drag on the spread of one of the most promising trends in higher ed: “competency-based” education. These are programs that measure student progress based on mastery of the subject matter rather than the amount of time spent in a classroom. This allows students who learn quickly or come to school already knowing some of the material being taught—typically those who have already taken some college classes or learned valuable skills on the job—to get their degrees and credentials quicker and at less cost. But because the federal government bases financial aid mostly on the credit hour (that is, time in class rather than actual mastery), colleges that want to move to a competency-based system have to jump through a lot of hoops to get their programs approved by the Department of Education. So far, only three programs have gotten approved to deliver financial aid through direct assessment of skills instead of seat time.

The Higher Education Act is due to be reauthorized. By rewriting it so a wider array of students can benefit from federal aid, while also strengthening accountability for results, Washington could create the workforce training system that would be, like our higher education system generally, the envy of the world.

For low-income Americans with no post-secondary credential, the path to the middle class ends all too soon. Unless we increase the achievement of credentials among members of the bottom half of the income scale, the United States stands to lose out on improving the nation’s economic growth and the equality of its citizens.

Return to “American Life: An Investor’s Guide.”

The post The Diploma Deficit appeared first on Washington Monthly.

Likewise, its students, who go by the collective moniker “Fighting Eagles,” outwardly mirror my former classmates. Back then, the school was 99 percent black. It was heavily black when it opened in 1965; it remains that way today. (With our Afros, dashikis, bell-bottoms, and platform shoes, the Class of ’71 exhibited a bit more style than today’s students. But to be fair, it’s tough for this generation of Eagles to stand out sartorially: they are saddled with the school district’s mandatory uniform—white or blue polo shirt; dark or tan cotton pants or skirt.) Two things, however, have dramatically changed since 1971: Kennedy’s economic mix and its academic profile.

Four decades ago, Eagles were the sons and daughters of doctors, lawyers, small-business owners, and white-collar professionals, factory workers, civil servants, and skilled craftsmen. In short, we were solidly middle class. But that’s no longer the case. Kennedy today is an extremely high-poverty school. According to the district, 100 percent of the school’s 823 students were “economically disadvantaged” in 2013. This drop in income, which reflects the neighborhood’s overall economic retreat, has been accompanied by a decline in academic outcomes. Kennedy’s most recent state report card? Fs across the board. That means that at least 75 percent of students can’t pass the state test at the minimum level in any area: mathematics, reading, science, social studies, and writing. Equally dismal was the school’s four-year graduation rate of 50.2 percent—though that was a significant improvement over the rate in 2010, 38.9 percent.

In the late 1960s and early ’70s, Kennedy was one of Ohio’s best high schools. Its graduation rates were in the upper 90th percentile; each year it counted among its ranks several National Merit Scholarship finalists; and it sent more than 51 percent of its graduates to four-year colleges, including Ivy League schools.

I spoke recently to several of my former teachers. They remembered a school community—administrators, teachers, and students—that strove to live up to the high bar set by Kennedy’s first principal, George E. Mills, the second black to be named a head of a Cleveland high school. In the school’s first decade, the Eagles won several statewide competitions in science, math, and music—along with a state track championship and two city football titles.

The seeds of our success in and out of the classroom started with our parents. One of my fellow Eagles, Dr. Ronald Ferguson (Class of ’68), is a renowned education expert at Harvard. He calls the parents of our era “assertive and aspirational” trailblazers. In the early 1960s, our dads and moms refused to accept the status quo; tenacious in fighting for the best opportunities for their children, they moved from other areas to the nearly all-white Lee-Miles neighborhood. In short order, the racial demographics of Lee-Miles shifted, and by 1965, when Kennedy opened, the neighborhood was predominantly black, although the economic mix remained solidly middle class. During this period our parents, who embraced education as a top priority, took part in protests and demonstrations to end Cleveland’s de facto school segregation, which had produced overcrowded black schools and other discriminatory policies.

School officials decided to address the issue of overcrowding, while sidestepping the volatile issue of integration, by embarking on a building spree in Cleveland’s black neighborhoods. The $3.5 million Kennedy, with the latest in science laboratory equipment and cutting-edge classroom design, was the fruit of that policy. Ferguson, whose research focuses on closing the academic achievement gap, notes that because Kennedy was state of the art, and because it was a low-poverty school, it attracted the district’s top teachers and administrators. That combination of dedicated teachers, top-flight resources, parental engagement, and an overwhelmingly middle-class student body was a recipe for success.

The next major demographic shift was much more gradual; the black families in that first wave moved to the more-affluent Cleveland suburbs. Just like the rest of the city, Lee-Miles became poorer. By 2013, based on Ohio Education Department calculations, 95 percent of Cleveland students were low income. Recent figures indicate that roughly 21 percent of the Lee-Miles population is below the poverty line; single mothers head 30 percent of the households. The majority of Lee-Miles’s school-age children live in these poor households.

That is not to say that Kennedy’s students and teachers today aren’t committed, but the obstacles they face are much more daunting. Cleveland, like so many struggling urban school districts, has been on a constant search for answers, willing to embrace almost any reform in a desperate bid to turn around its failing schools. This fall the district, armed with a $3 million private foundation grant, will divide Kennedy into three schools under one roof. Each school, with its own area of concentration, will be run separately and be rated separately by the state.

I wish the new Kennedy well. But unless they find a way to change the school’s economic mix—by putting poor kids in classrooms with more-affluent students—I am afraid this latest reform experiment will also fail to meet expectations. There is no need to keep reinventing the wheel when we already know what works: economic and academic integration.

Return to “American Life: An Investor’s Guide.”

The post Inequality slowly destroys a once-great black high school appeared first on Washington Monthly.