The Origin of Poverty and Our Biases Today

The four-county area centered around Durham, where I live, along with Chapel Hill, North Carolina is possibly the most highly acclaimed in the nation when you take into the breadth of the accolades it has earned as an MSA and those of its individual cities.

It also has the distinction of being the 20th MSA with the widest gap between rich and poor, according to the blog 24/7 Wall St.  The wealthiest half of households earn more than half (53.5%) of all income earned here while the poorest 20% earn just 3%.

The wealthiest 5% have one of the highest household incomes in the nation for that percentile.

In the book I mentioned yesterday about the history of capital and related inequality, French economist Thomas Piketty notes that worldwide, the poorest half of the population still owns nothing, while the middle class now owns between a quarter and a third of total wealth.

He continues to explain that “the wealthiest 10% now own two-thirds of what there is to own.”  Apparently, it was even worse a century ago.  Anyone interested in closing this gap needs to read Capital in the Twenty-First Century.

It may not sound like a page-turner but it is.  In a very easy to understand way, Dr. Piketty weaves historical events and data with paradigm shifts.

In part, income equality is rooted in the shift from land to things like profits, dividends, interest, rents.

In other words, income generated from capital and what Piketty calls “the  long-term evolution of the relative roles of inheritance and savings in capital formation.”

When inheritance rather than work and savings begins to predominate, “the past tends to devour the future.”

I’ve written before that Durham’s poverty rate took root in the late 1940s and early 1950s when the number of jobs plateaued but the community continued its rapid growth, in large part, due to it historical role as a magnet for those looking for work.

This was also a period when Durham economy began to rapidly transform from tobacco and textile manufacturing to education, research and development and high tech industries.

Despite efforts to re-educate the workforce, many who had come here for blue collar work and failing to see the paradigm shift, merely went home and waited for the next call-back to the factories as they had done for generations during layoffs.

Some have now become disconnected from society altogether while those who did shift gears found primarily low-wage jobs.  By 1960, 1-in-3 Durham County residents lived in poverty as did 40% of North Carolinians overall.

All the while, Durham’s economy skyrocketed but with jobs requiring far more education.  While much lower now than in 1960 when the economic transformation took hold, poverty still haunts nearly one-in-five residents in the City of Durham.

Last year a scientific opinion poll of Americans asked, “When people are poor, do you think that’s more likely to be because they had fewer opportunities or because of individual failings?”

Overall, 30% said “personal failings,” including 17% of Blacks and 30% of Hispanics, as did 48% of Republicans and Conservatives as well as 41% of those with household incomes over $100,000.

But 44% of Americans said “fewer opportunities,” including well more than half of minorities and those making under $40,000 as a household and including 36% of households making $100,000 plus, 28% of Conservatives and 23% of Republicans.

Americans were also asked, “When people are poor, do you think that’s more likely to be because good jobs aren’t available, or because they have a poor work ethic?”

Overall, 28% cited poor work ethic including 21% of Blacks and 33% of Hispanics as well as 49% of Republicans, 44% of Conservatives, 35% of those with household incomes over $100,000 and 24% of those making $40,000 or less.

But 47% of Americans said it is because good jobs weren’t available including 33% of Conservatives, 21% of Republicans and 42% of households making over $100,000.

When asked how some people became wealthy, 52% of Americans chalked it up to having more opportunities compared to 31% who believed they worked harder including 50% of Republicans but only 36% of Conservatives and 33% of those with incomes over $100,000.

Nearly 60% of Republicans believe unemployed people could find jobs if they really wanted to, a view also held by 51% of Conservatives as well as 53% with incomes over $100,000 and 35% of those making less than $40,000.

Interestingly a new study in Germany finds that more-trusting people on average have an increase in income over those who are cynical.

No community that I know of is more determined or does more to eliminate poverty than Durham. Hopefully, this will be useful perspective, both macro and micro, for those on the front lines.

“Capitalist Civil Servants – Public spirited and Self-restrained.”

One sunny afternoon last summer some friends and I rented a pontoon boat and traveled down the spectacular St. Lawrence River. The more-like-a-lake river carves the northeast neckline of the United States straddling its border with Canada.

Without stopping, we turned around for the return trip by circling the seven-acre Dark Island near Chippewa Bay.  The island is home to a 28-room castle and outbuildings built in the early 1900s as a  island “hunting” retreat by Frederick Bourne as a surprise for his wife and family.

He didn’t invent what Chrystia Freeland, the editor of Thomson Reuters calls “the smartphone” of that era, but at the time Bourne was stepping down from the helm after turning Isaac M. Singer’s sewing machine company into the world’s first global corporation.  His castle is known by the name of one of its towers, which bears Singer’s name, and now privately-owned and operated as a tourist feature.

Obviously during the first “Guilded Age” as it is now during the second one today, a common way to climb into the 1% was to work for the 1%, something noted in Freeland’s exceptional book entitled Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else.  However, as the Smartphone does today, the sewing machine also empowered the middle class and eventually low-income households.

First released three months ago, despite its sensational title and the alarming quotes made by many of its subjects, Freeland’s even-handed book is exactly what she hoped it would be and, and in my opinion, a must-read:

“This book is, therefore, an attempt to understand the changing shape of the world economy by looking at those at the very top: who they are, how they made their money, how they think, and how they relate to the rest of us…

This book takes as its starting point the conviction that we need capitalists, because we need capitalism – it being, like democracy, the best system we’ve figured out so far.”

Freeland recounts a remarkable speech by Franklin D. Roosevelt in San Francisco on September 23, 1932, just months before he would be elected to his first term as President of the United States.

In that speech, which rivals the eloquence and depth of Dr. Martin Luther King’s “I Have a Dream” speech delivered thirty years later, FDR lays out how important it was that the “heads of finance and industry instead of acting each for himself, must work together to achieve the common end…lest a rising tide of misery, engendered by our common failure, engulf us all.”

The plutocracy of that day took heed.  As Freeland notes, from 1932 to 1976, “hired-gun CEOs” transformed into “capitalist civil servants – public spirited and self-restrained.”

During that period, CEOs were even paid a little less and the middle-class exploded, while the S&P 500 returned 7.6% while “America’s GDP quintupled.”  What many refer to as a culture of restraint meant that during the first three decades of my life, as Freeland notes, “the U.S. economy grew at a faster, more consistent rate than ever before, and American companies were ascendant around the world.”

Then, as the specter of Marxism and Communism declined, the current age of “winner-take-all” and “legalized corruption” took hold, an aspect warned against by Adam Smith, the “father of capitalism” in what he considered his more superior work published in 1759, The Theory of Moral Sentiments.

As an example of this abrupt transition Freeland notes that “In the early 1970s CEOs earned less than thirty times what the average worker made; by 2005, the median chief executive made 110 time what the average worker did.”

At the time of FDR’s speech to the Commonwealth Club, the top 10% of earners were taking home 45% of all income.  That fell to 33% from WWII through the subsequent three decades of spectacular economic growth and expansion of the middle class.

That incredible period of restraint and growth ended  in the 1970s when these special interests turned instead to securing special treatment from government in what experts call “legalized corruption.” By 2006 the top 10% was raking in 50% of all income for themselves, more than they had in 1928 prior to the Great Depression.

By 2006, the year before the Great Recession began, the top 10% was capturing 50% of all income and the top 1% was taking three-quarters of all income growth between 2002 and 2006.

All of this, in my opinion, is to reiterate what FDR said so well eighty years ago [paragraph broken up for ease of online reading]:

“We have learned a great deal of both in the past century. We know that individual liberty and individual happiness mean nothing unless both are ordered in the sense that one man’s meat is not another man’s poison.

We know that the old "rights of personal competency," the right to read, to think, to speak, to choose and live a mode of life, must be respected at all hazards.

We know that liberty to do anything which deprives others of those elemental rights is outside the protection of any compact; and that Government in this regard is the maintenance of a balance, within which every individual may have a place if he will take it; in which every individual may find safety if he wishes it; in which every individual may attain such power as his ability permits, consistent with his assuming the accompanying responsibility.”

Tracking Down Happiness

I know it isn’t true but I like to believe that everyone’s memories of when they were the age of my grandsons, 6 and 8, are some of the happiest of their lives, as were mine.

The happiness about which I speak is more “what psychologists call a trait, not a state – a person’s typical emotional experience, not fleeting responses to events” as described by Dr. Richard J. Davidson in his new book The Emotional Life of Your Brain, co-authored with Sharon Begley.

Unfortunately, when I was the age of my grandsons back in the 1950s, happiness, as it has been scientifically measured from year to year across the entire population, peaked in America.  That’s a tidbit from The Politics of Happiness: What Government Can Learn from the New Research on Well-Being, by former Harvard University president Derek Bok.

In an effort to really put today’s headlines about disparity in context though, I go back 100 years.

During the declining years of President Theodore Roosevelt’s life, a statistician at the University of Wisconsin, Dr. Willford Isbell King published a fascinating retrospective entitled The Wealth and Income of the People of the United States.

In part, Dr. King analyzed statistics available in 1913.  This was the year after the “anti-trust-enforcing” President lost a third-party bid to regain the White House.  It was the latter part of what we now call The Progressive Era.

It was also in the wake of the Gilded Age of super-rich such as Rockefeller, Mellon, Carnegie, Flagler, Rogers, Morgan, Vanderbilt , Astor and Duke.  It also marked the end of a 60 year period of natural devastation in America including two-thirds of the deforestation that has taken place over the last 400 years.

Dr. King computed back then that the richest 1 percent accounted for 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income, according to Timothy Noah, author of The Great Divergence.

Noah and Matt Yglesias have conducted a insightful multi-part virtual dialogue this week on Slate about why we should care about the divergence.

I’m intrigued by why we seemed happier in the 1950s according to scientific measures.  Coming out of the Great Depression and WWII, we shared a sense of common purpose and we didn’t mind paying higher taxes in exchange for the common good and policies not for the wealth and big business as they do today but out of determination to grow the middle class.

I get that. I also understand and agree with the TED speech Tuesday by Harvard conducted that reveal that money per se doesn’t bring happiness but it is closely associated with using it to help others.

We seem to have replaced the incessant debate about “nature” or “nurture” that was so prevalent back when I went to college in the late ‘60s/early ‘70s with one today about whether growing gaps in equality between groups are driven by “economics” or a break-down of “culture.”

It is hard to argue with author Richard Heinberg, who wrote The End of Growth: Adapting to Our New Economic Reality when he blogged about Bok’s book, wondering why our overall happiness has declined while:

“During the past 35 years, per capita income has grown almost 60 percent, the average new home has become 50 percent larger, the number of cars has ballooned by 120 million, and the proportion of families owning personal computers has gone from zero to 80 percent.”

I also understand and accept in part the premise of Charles Murray’s recent book Coming Apart which points to cultural issues.

But these two choices are far too blunt to provide a lens through which to understand what we do going forward.  I became a devote of the late  James Q. Wilson when asked in the mid-1990s by the Durham Crime Cabinet to  report on his then well-proven Broken Windows approach to reducing and curbing criminal behavior.

Today, nearly every community dabbles at an aspect or two of the Broken Windows theory, as Durham does, but those who have adopted it as an overarching strategy understand what Wilson grasped, that some social ills, such as crime, are not just individual choices but what columnist David Brooks terms as part of a “social psychology.”

I highly recommend a reading of Wilson’s 1985 14-page essay The Rediscovery of Character: Private Virtue and Public Policy.  Viewed through the retrospective of someone like Wilson who had passionately advocated for pieces of our social safety net provides a much clearer view that the solution is probably both/and not either/or.

Reweaving The Source Of My Motivation!

I’m really not certain now what motivated me to go to college. “Memory doesn’t actually retrieve information. It reweaves it,” according to a new book I’m almost finished reading by David Brooks.

I remember my parents, one of whom finished high school and the other who dropped out at age 16, being insistent that I go to college. As did both sets of grandparents, none of whom had gone to college and only one of whom graduated from high school.

While I was certainly surrounded by supportive influences, I suspect from statistics that Brooks cites that applying household income averages today to my family back then, I’d have only a 1 in 10 chance of graduating by age 24.

But I did and at a time (1972) when there was little or no premium to your income if you did. But today is different.

Brooks cites statistics that a family with a graduate degree today makes an average of $93,000, a college degree $75,000, a High School diploma $42,000 and a drop-out $28,000.

It isn’t all about money, though. According to Brooks, researchers in a Minnesota study followed 180 children and their families over three decades. They were able with 77% accuracy to predict if a child would drop out of high school by 42 months of age based on social and emotional factors.

If you want to read a fascinating book about those social and emotional factors, read The Social Animal – The Hidden Sources of Love, Character, and Achievement by David Brooks.

It reminded me why my parents were emphatic that I not only attend college but graduate but it wasn’t all about income.

Having never been there themselves, my parents and grandparents saw college as a means to broaden my horizons, expose me to many different kinds of people and cultures, teach me to critically think, expose me to ideas and innovation and an architecture for making ethical decisions, deepen my compassion and empathy, hone my self-discipline and work ethic and fuel my ambition.

It also fostered my love of learning and exploration that is now making retirement so deliciously rich and rewarding.