Timothy Noah. The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It. Bloomsbury Press, 2012, pp. 264, $25.00 In August 2012, a Pew Social & Demographic Trends report indicated that the American middle class has fallen on tough times. Among its interesting findings is that more self-described members of the middle [...]
Timothy Noah. The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It. Bloomsbury Press, 2012, pp. 264, $25.00
In August 2012, a Pew Social & Demographic Trends report indicated that the American middle class has fallen on tough times. Among its interesting findings is that more self-described members of the middle class blame Congress than they do President Obama for their perceived difficulty in maintaining their standard of living. Most alarming, and one which likely will have an impact on this year’s elections, is the fact that median net worth took a nosedive during the Great Recession, plunging from $152,950 to $93,150. Furthermore, whether today’s college graduates, many of whom are underemployed and are living back at home with their parents, will achieve the trappings of middle class status anytime soon remains uncertain. One suspects we may be witnessing the emergence of the American equivalent of Japan’s Lost Generation.
Fortunately, however, we might comfort ourselves by knowing that the United States remains a land rich in opportunity much as it was in the past, unique among nations in its lack of a rigid class structure and its social mobility. But we’d be deceiving ourselves. In The Great Divergence, Timothy Noah of The New Republic posits that, since 1979, there has been a “particularly extreme” divergence in income inequality in the United States. Noah synthesizes the work of economists, political scientists, and sociologists to argue that income inequality has increased, and that this is not good for American society. In the book’s final chapter, he advocates specific actions and policies that he believes would help reverse this trend. His suggestions are largely politically progressive proposals, including increasing taxes on the super-rich, bolstering the federal workforce, and breaking up the too-large-to-fail banks. While there are likely some conservative-libertarian policy wonks that would be amenable to his proposal to break up the large banks, few would likely support Noah’s proposal to revive organized labor.
The author takes the title of the work comes from a phrase used by Paul Krugman, an outspoken advocate for Keynesian stimulus, in his 2007 book, The Conscience of a Liberal. Noah defines the Great Divergence as a socio-economic phenomenon as one not primarily involving the poor. Rather, it “is about the difference between how people lived during the half century preceding 1979 and how they lived during the three decades after 1979.” The story he tells, however, is not just about income inequality; it is about diminishing access to the top. According to Noah, over the past several decades, opportunities for upward social mobility have not increased.
Unlike some pundits who rehash talking points, Noah commendably cites ample scholarship to support his claim. In The Great Divergence, the reader learns that the United States now offers its citizens less intergenerational economic mobility than northern and western European nations. (I would venture, however, that the United States still allows for greater social mobility for children of first-generation immigrants than do Scandinavian and other western European countries.) Noah also highlights an intriguing sociological finding which indicates that Americans tend to overestimate the degree to which American society fosters upward socio-economic mobility.
Notable within the pages of The Great Divergence then is the fact that Noah challenges Paul Ryan for an October 2011 speech in which the Wisconsin Congressman contrasted what he perceived to be American social mobility with a rigid European welfare state class structure. Ryan, according to Noah, “had it exactly backward.” In truth, European countries now offer more social mobility than the United States. While Noah penned his study of income inequality prior to Mitt Romney’s choosing Ryan as his running mate, The Great Divergence takes on a more salient political implication in this new found context.
So what caused the Great Divergence? According to Noah, the Great Divergence did not result from prejudice against African-Americans or women. The failure of the American educational system to meet the demand for higher skilled workers is part of the story, as is trade with low-wage nations such as China and the increase of business lobbying in Washington. The decline of organized labor also played a role. Noah also refers to the rise of extremely wealthy (“stinking rich,” in his parlance) as a “separate and distinct phenomenon” that can be thought of as “the Great Divergence, Part 2.” The last several decades have been witness to the emergence of what are, in essence, new social classes within the top 1%, namely the top 0.1% and the top 0.01%. Wall Street, according to Noah, played a substantial role in the emergence of these extremely wealthy individuals. Top income shares are rising faster in the United States than in other developed countries.
Overall, Noah may succeed in persuading the reader in that income inequality not only is on the rise and that it is problematic for society. He is less convincing in his policy proposals to remedy the situation. To be fair, he does rightly acknowledge that many of his proposals, many of which are further to the left than President Obama, are not “politically salable today.” Noah could have bolstered his work, and perhaps the reception to it, had he offered a list of concrete and specific policies that would both reverse income inequality and be palatable to a large slice of the American electorate. The work also suffers from the fact that it is largely a summary of other scholars’ work, much of it very technical, making it less accessible to a general audience that it deserves to be.
In conclusion, one can think of The Great Divergence as a plea to the American public to recognize that income inequality is a problem. It is also to acknowledge that social mobility is no longer operating the way in which it used to. I would contend that the frustration that many Americans feel with Washington in many ways reflects the fact that the system is not producing the same results as it did for people’s parents and grandparents. Income inequality currently is a topic of concern among the country’s economists, political activists, and pundits. Whether it will be a broadly discussed national concern remains to be seen. It would be heartening to see at least one moderator in the upcoming presidential debates ask each of the candidates where they stood on the topic of income inequality.
Jonathan Eric Lewis (c) 2012
Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00 Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance [...]
Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00
Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance at the news would lead most observers to conclude that this country faces some entrenched, systemic, and nearly unsolvable economic problems. In June 2012 alone, news outlets have reported that the trade deficit is at its highest in the past three years, employment for 16-to-19 year olds is at the lowest level since the Second World War, and that foreclosures are on the rise. All of this data hardly inspires optimism about America’s ability to recover from the Great Recession. In addition, there is a growing worldwide perception that China is a stronger economic power than the United States.
Despite this doom and gloom, however, one economics writer has chosen to see past the constant pessimism that seems to pervade the nation’s policy discourse. In Better, Stronger, Faster, Daniel Gross (Yahoo! Finance) seeks to challenge what he perceives as the conventional wisdom that the United States is in a state of economic decline. According to Gross, many on the political left and right, as well as those in the center, have succumbed to economic declinism. While Keynesians consider President Obama’s response to the economic crisis as too passive, the Tea Party sees the current occupant as the White House as a socialist. All the while, academics published works detailing how American glory days are over.
Gross refuses to accept the narrative of American decline and challenges it at every turn. Indeed, the vast majority of the information presented in Bigger, Stronger, Faster is intended to build the case against declinism. The title of the author’s most recent work is an allusion to The Six Million Dollar Man, the 1970s television show in which doctors rebuilt the character Steve Austin, an injured astronaut, as the world’s first bionic man. In the show’s opening credits, it was stated that the doctors could rebuild the wounded Austin, played by Lee Majors as better, stronger, faster.
“And like Steve Austin,” writes Gross, “the U.S. economy can bounce back from its catastrophic wipeout. In fact, the process has already started.” This is the central thesis of Gross’s work, and one which he goes to great lengths to support. He marshals a vast array of evidence in the form of both statistics and anecdotal observations. Significantly, in his point of view, when trying to understand why things may not be as bad as they first appear, American Exceptionalism matters. “The reality-based case for optimism rests in large measure on an understanding of America’s core competencies and competitive advantages; attitudes, habits, and capabilities that, even in this age of globalization remain unique.” In the American context, adaptability is key.
Gross delineates three internal factors that, in his estimation, lend credence to his argument against declinism: policy decisions, including the bailouts and stimulus, which, in the author’s estimation, succeeded in preventing a second Great Depression and laying the groundwork for a recovery; the speed by which the private sector responded to the crisis by restructuring; and a move toward efficiency. That said, Gross considers that external forces matter even more than internal ones. “And while these efforts [government policy decisions, business restructuring, and efficiency] were vital and useful, the main forces that have helped propel growth came from external sources, not internal ones.” The United States, Gross reminds us, ranks first in foreign direct investment (FDI) and is the world’s top exporter, including in service exports.
In the book’s conclusion, Gross does rightfully concede that the United States does indeed face some daunting challenges. “There’s no question,” he writes, “the United States has a very long way to go to make up for the lost ground in the economy at large, in housing, and in jobs.” But he also contends that the United States has experienced “a huge comeback.” There is nothing necessarily inaccurate about Gross’s thesis that we are on our way to an economic recovery.
Better, Stronger, Faster does provide ample evidence against the declinist faith. But the more salient question might be what the American economy would look like today but for the Great Recession? Coming back from the brink of disaster is one thing; having avoided the debacle in the first place is a different thing entirely.
In my estimation, Gross, in his zeal to prove the declinists wrong, somewhat overstates his case. Although he does acknowledge the debt and the deficit, he gives them short shrift. In addition, nary a word is said about the plight of the Millennials, many of who are in debt, are living back at home with their parents after graduation from college, and have bleak job prospects outside of unpaid internships. The American economy may have recovered better, stronger, and faster, but this means very little to those saddled with tens, if not hundreds, of thousands of dollars in non-dischargeable student loans.
In conclusion, Better, Stronger, Faster is a largely accessible and an engaging study that seeks to combat the pervasive narrative that the United States is in economic decline. Whether one agrees with the author’s thesis is perhaps situational, in the sense that a graduate-educated, gainfully employed technology professional in Silicon Valley would agree that things are getting better, while an underemployed college graduate in the Sun Belt saddled with student debt would think Gross highly mistaken. Whatever the case may be, the debate about whether or not America is in economic decline likely will continue to rage throughout the next year.
Jonathan Eric Lewis (c) 2012
Finance as a Positive Force
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95 The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street [...]
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95
The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street movement, which condemned the capitalist system, signified that large segments of the American populace are not happy with Wall Street and investment professionals. As the economy has shown signs of improvement, the public anger has seemed to lessen. That said, it is still too soon to tell whether the news about J.P. Morgan’s losses will have the effect of rejuvenating the public’s distrust of Wall Street and of finance, in general.
In Finance and the Good Society, Robert J. Schiller (Yale University) argues that the world of finance, in its best incarnation, has the potential to improve peoples’ lives. “What I want most for my students . . . to know is that finance truly has the potential to offer hope for a more fair and just world, and that their energy and intelligence are needed to help serve this goal.” Schiller is cognizant of the problems in our current financial system. The solution to these problems, however, is not to castigate financial capitalism as a system for producing wealth, or to denigrate the profession of finance in which many Americans make their living.
The financial crisis, contends the author, cannot easily be blamed “on a sudden outbreak of malevolence” on the part of those employed in the financial sector. The causes of the crisis can be traced to “fundamental structural shortcomings in our financial institutions,” rather than to greed or dishonesty. Schiller further posits that the post-crisis legislation and regulations have not solved our financial system’s real problems. That said, he does not think the answer to our current woes is to restrain finance.
In fact, he believes the opposite to be true. “It seems a paradox that the very financial system that is the facilitator of some of our greatest achievements can also implode and create such a disaster. Yet the best way for society to proceed is not to restrain financial innovation but instead to release it.” In order to reduce the likelihood of future financial crises, contends Schiller, we need “better financial instruments, not less activity in finance.” Indeed, as he rightly acknowledges, there does not appear to be a realistic alternative to financial capitalism.
An expanded and further democratized financial system will allow more people to benefit from finance’s ability to improve people’s lives. Indeed, Schiller, as the title of the book suggests, believes that finance can help build a good society. Finance, he argues, is “the science of goal architecture—of the structuring of the economic arrangements necessary to achieve a set of goals and of the stewardship of the assets needed for that achievement.”
Finance, which is not a goal in itself, can help allow for the creation of the good society, a philosophical notion regarding an aspiration goal for an egalitarian society in which all people are valued. The implication is that finance should not be synonymous with greed. Rather, it is a mechanism which, when working correctly, allows for prosperity. As examples, Schiller cites the funding of a new medical research project and the construction of a new subway system as two goals that finance can help achieve.
Finance and the Good Society is divided into two distinct parts. The first, “Roles and Responsibilities,” details the various careers in finance. He devotes chapters to, among other careers, chief executive officers, lawyers and financial advisers, and regulators. The book’s second section, “Finance and Its Discontents,” borrows its title from Sigmund Freud’s 1930 work, Civilization and its Discontents, in which the famed Austrian-Jewish psychologist noted that many seemed to be discontented with civilization as it existed, but that ultimately it was not so easily improved. Schiller contends that we cannot go back to a simpler time; we can only move forward.
While there is a plethora of interesting material in Finance and the Good Society, there remains something uneven about the work as a whole. Perhaps this is due to the fact that the book is divided into thirty distinct chapters, some of which are only several pages long. It could also be due to the (overly?) ambitious nature of the book, in which Schiller interweaves finance with history and philosophy. For instance, in his discussion of speculative bubbles, he posits China’s Great Leap Forward to have been an “investment bubble that took place in the absence of financial markets” and that “World War I was in a sense a bubble.” These arguments, while thought provoking, are ultimately unconvincing.
In conclusion, Finance and the Good Society is a further edition to the vastly growing corpus of scholarly literature on the financial crisis and the role of finance in society. In many ways, this could prove to be an excellent introduction to the subject of finance for liberal arts-oriented undergraduates. This is particularly true given the fact that many current undergraduates may be skeptical of pursuing careers in finance.
Jon Lewis (c) 2012
Economic and Political Institutions Explain Prosperity
Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00 Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why [...]
Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00
Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why Nations Fail, Daron Acemoglu (Killiam Professor of Economics at the Massachusetts Institute of Technology) and James A. Robinson (David Florence Professor of Government at Harvard University) contend that none of the aforementioned factors adequately explains economic disparities between nations. The focus, they contend, should be on various nations’ economic and political institutions, specifically those that give people proper incentives, allow people to choose their careers freely, and engage in the democratic process.
Early in this engaging recent work, the authors take the case of the city of Nogales, divided by the U.S.-Mexico border, with a Nogales, Arizona and a Nogales, Sonora. Nogales is a metaphor for the authors’ thesis. Both cities have the same geography. Culturally, they aren’t all that different. What, then, explains the difference? Different economic and political institutions that provide individuals with different incentives do.
Similarly, the stark differences in the standards of living between the two Koreas, the totalitarian North Korea and the democratic, capitalist South Korea, can be explained by different economic and political institutions. “The economic disaster of North Korea, which led to the starvation of millions, when places against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.” After all, the institutions of communist North Korea are about as far as one can imagine from what one would expect to provide incentives for individuals to work, to invest productively, and to motivate people to prepare for the future.
The authors distinguish between inclusive, and extractive, economic and political institutions. Inclusive institutions allow for broad economic opportunities, promote secure property rights, and create inclusive markets, wherein people have economic opportunities to choose their own paths in life. They allow for mass participation in electoral democracy, allowing voters to replace their leaders. They also allow for technology and education. By contrast, extractive institutions do not allow for freedom. Rather, “such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.” Politics matters.
Inclusive institutions, along with some centralized form of state power and public services, will provide for greater prosperity than deeply fragmented polities in which leaders extract wealth from the population and deny them economic opportunities. Thus, political leaders of a nation may actually prefer extractive institutions because this would allow them, or their clan, to retain political power. This can be seen in nations in which a small elite uses highly non-democratic political institutions to control a country’s wealth.
“The central thesis of this book,” write the authors in Chapter 3, “is that economic growth and prosperity are associated with economic and political institutions, while extractive institutions typically lead to stagnation and poverty.” They qualify their thesis and note that this does not “imply that neither extractive institutions can never generate growth nor that all extractive institutions are created equal.” The Soviet Union, for instance, is an example of a nation that did grow under extractive institutions. Those who say that government can never foster rapid economic growth, even for decades, have a prime counterexample in the U.S.S.R. between the first Five-Year Plan in 1928 and the 1970s. This was done, of course, at a great cost to human life.
The authors wrote How Nations Fail for a general audience and contend that their work has real-world implications. After all, if geography is the determinant factor in shaping a nation’s prosperity, then why bother doing anything to change the status quo? If institutions matter as much as the authors believe, then one can’t change a poor country’s economic trajectory without first changing the country’s economic and political institutions.
Overall, the authors make a very convincing case for their thesis that institutions, rather than geography, culture, or ignorance of the best policies best explain why some nations fail, while others succeed. For those have been academically trained either as historians or as lawyers, much of the material will not be particularly groundbreaking. Those who devoted their careers to studying the Soviet Union, for instance, are well aware that economic and political institutions matter for understanding the country’s rapid economic ascent and industrialization, as well as its decline and ultimate collapse under its own weight. Furthermore, lawyers understand that property rights, as well as an impartial system to adjudicate property disputes, matter greatly in allowing for economic growth.
In conclusion, Why Nations Fail is a solid work of scholarship. It is particularly well written. The authors do an excellent job of demonstrating how political institutions can determine a country’s economic success or failure. Still, one is left wondering whether the world is simply too complex and history too fluid for any overarching thesis, or grand narrative, that attempts to explain why some nations fail. Maybe, in some cases, geography actually is the determinant factor. And maybe culture and religion aren’t as unimportant as the authors think. That said, the authors should be commended for writing a work that surely is to provoke considerable debate in the days and months ahead.
Jon Lewis (c) 2012