TCS Daily


Security, Inequality and the Entrepreneurial Imperative

By Nick Schulz - April 30, 2007 12:00 AM

Sens. Charles Schumer and James Webb have done the country a favor. They recently commissioned an economic report to determine the extent to which workers' incomes vary from year to year, and whether or not that variability has been rising over time.

The two Senators are puzzling over what seems to be a rising sense of insecurity among the American middle class. Let's put aside for the moment whether or not Americans feel more uneasy and simply assume they do. Sens. Schumer and Webb thought rising income variability might be the answer and asked the Congressional Budget Office to find out. As it turns out, it's not.

The CBO determined that "since 1980, the trend in year-to-year earnings variability has been roughly flat." This is a finding, they report, that is "consistent with results of existing studies."

It's true the CBO finds "a significant number of workers experience substantial variability in their total wage earnings from year to year." But nothing out of the ordinary over the last two and a half decades. It's safe to conclude for the moment that increased volatility does not explain the rising sense of unease.

So if America's middle class feels more insecure, what explains it?

Another culprit is rising income inequality. It's true that income inequality has risen in recent years. As such, some in the middle class may feel they are being left behind. To the extent that rising inequality is a problem, and in order to know what should be done about it, we have to know what's driving it.

One explanation comes from economist Gary Becker who recently wrote that:

"There has been a general trend toward rising gaps between the earnings of more and less skilled persons... The main action came in the earnings of college graduates and those with postgraduate education. They both increased at a rapid pace, with the earnings of persons with MBA's, law degrees, and other advanced education growing the most rapidly. All these trends produced a widening of earnings inequality by education level...Rates of return on college education shot up during the past several decades due to the increased demand for persons with greater knowledge and skills."

Becker counterintuitively argues that "the foundation of the growth in earnings inequality of Americans has mainly been beneficial and desirable.

"Should not an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than unfavorable development? Higher rates of return on capital are a sign of greater productivity in the economy... The initial impact of higher returns to human capital is wider inequality in earnings (just as the initial effect of higher returns on physical capital is widen income inequality), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital."

The sensible response to concerns about rising inequality, then, is not to focus on leveling incomes to minimize inequality. It is instead to increase the number of people building their human capital, and the degree to which they build up that capital through serious education and learning of skills. From a political standpoint, this is tougher sell than bash-the-rich class warfare. But it does no one any favors to offer quick fixes that ignore the underlying dynamic at work.

There is a final point worth making about middle class insecurity. Carl J. Schramm, in his important book The Entrepreneurial Imperative, argues that "the less secure we are economically, the more secure we are economically."

He admits this is a "disquieting conundrum." Nevertheless, much of the economic dynamism and churn that swirls around us is generated by "entrepreneurs taking risks on many fronts and starting thousands of new businesses every day." It's this entrepreneurial activity that yields much of the significant technical change, new technologies and the productivity growth that drive living standards higher and higher. Ironically, without this churn and dynamism, middle class unease would most likely be more profoundly felt, since it would be rooted in economic stagnation.

Convincing Americans that their economic security is actually embedded in a kind of economic insecurity is, admittedly, a tough political sell. But it's made easier by the fact that America is a genuinely entrepreneurial society. This is one of the things that distinguishes the US from continental Europe and other parts of the globe.

Americans typically respond well to institutional and rhetorical prompts toward entrepreneurship. This is not a partisan point: two popular American presidents from both major political parties, John F. Kennedy and Ronald Reagan, pushed for an entrepreneurial imperative in American public life. It will be interesting to see which if any candidate in the 2008 race follows their lead.

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7 Comments

The System
I see a political system driven by the invalid metrics of wealth and certainty prevailing in America because the invalid metrics readily lend themselves to political demagoguery, which in turn lends political power to the demagogues.

If private property rights prevail and one measures equality by wealth's relative distribution among individuals and classes, then creating more wealth must create more inequality. That's why America's record-breaking, wealth creating, booming economy is a terrible thing to the left, who desire to hobble it by tying up private property rights in government red tape. Less wealth created means less inequality, which formula describes the path the left hew to in both gaining political power and abusing it.

Regarding certainty, risk-taking and private property rights are two necessary systemic prerequisites of entrepreneurialism, which in turn drives unforeseeable and dynamic economic change. This rapid change creates new technologies and economies which in turn create new states of wealth distribution and inequality at a pace that evades people's ability to adapt. As this carousel picks up speed, people get dizzy and want to get off, longing for the good old days when things were easy, foreseeable and certain. So they call for government to hobble the economy by tying up private property rights in government red tape, awarding power to the left to do just that. But the left always fails to restore certainty because laws simply can't achieve this aim. So instead, the left's new laws merely produce different kinds of economic volatility that in turn produce different economies producing different states of wealth and inequality. Worse, this all proceeds at no more an easy, foreseeable and certain pace than the alternatives.

Until people understand the logical problems lurking in their invalid metrics for wealth (relative instead of absolute measures) and certainty (a human ideal contrary to the way this universe actually works), then the system I described above will continue to cyclically distribute political power right-to-left-to-right-to-left out into the unforeseeable future, unless it doesn't.

Boring
Ok. I have to say it. TCS is getting Boring. Even the articles on CHO where a ho hum.

Stir the pot guys.

True...
...that Economic insecurity breeds economic security. This is shown again and again. Those who worry about rainy days, and thus save a rainy day fund. Those who worry about becoming disabled, and thus get a disability insurance policy (and save on their own). Those who worry about dying, and thus set up wills and trusts, and purchase insurance policies. Those who worry (!) about living too long, or social security going bankrupt, and set up and fund their own retirement accounts. Those who worry that their industry may move to China and thus go back to school to develop their educational skills. The list is endless.

Clearly, the insecurity that leads to action then leads to actual economic security. It makes perfect sense!! It's is true, however, that those who fail to act will suffer (as they always have). My response to that is, so what? I don't think that we should be forced to take care of someone just becuase they are lazy and procrastinate. Get off your @ss and get moving! Take charge of your own destiny!

Of course, Beanie and Eric will find ways to argue the complete opposite. Give it a shot, Beanie!

-Bob

Most jobs require fewer skills
It is a myth that jobs require more skills. The skills are built into the machines. Most of the jobs are serrvice jobs - servicing people or machines. But no one fixes broken stuff - defective modules are pulled and replaced. Compare the job of a sales clerk 50 years ago and today. These a clerk doesn't even have to know how to make change. Hand a clerk $10.39 on an $8.39 purchase and they are lost.

The difference is these days a person needs 2 years of college to get a high school education.

Skills needed: Leadership
The real skill lacking is leadership.

GM, Ford and Chrysler have proven their poor leadership as have many US corporations.

Leadership and systems engineering skills must certainly be in demand since I see it lacking in so many places in the USA.

It's Getting Easier
In the information age, it's getting easier to obtain skills. Simultaneously, most jobs are getting easier- thanks to user friendly technologies. I think automation is the future, and automation will make more jobs simpler to learn.

The changes that will occur during the next couple of decades will eliminate millions of jobs, and create millions of jobs. The labor force will adjust to the upcoming revolutionary changes relatively easily, since the new jobs won't be difficult to learn.

getting easier
I agree that it's getting easier, but doesn't that ignore the fact that many people nowadays are too lazy to bother learning something useful? Kids have been so spoild by either welfare, or brainwashed into thinking that learning technical stuff is beneath their dignity. That could have been one of the problems of the idiot who shot up all the kids at Virginia Tech. I guess he was an English major, so maybe what made him snap was the realisation that he'd never get a decent job with that.

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