Much has been made during the Presidential Campaign of income inequality and the undue influence of the so-called 1%. The quantifiable facts on income inequality are stunning, and it’s true that this reality can and will have a serious impact on both the American economy and social structure.
Between 1979 and 2007, real household income among the top 1% of earners grew by 275% compared to 65% by the next 19% of earners. In 1976, the top 1% received 8.9% of all pre-tax income while in 2008 they received 21%. The net worth of the 400 wealthiest Americans rose from $507 billion in 1995 to $1.62 trillion in 2007 and is now at $1.37 trillion.
The dominant trend in politics is to blame this reality on the wealthy themselves. They have undue influence in Washington and have helped implement policies – the tax code, regulatory environment, earmarks – that aid the rich at the expense of the poor and the middle class. While this may have some merit, it fails to account for shifting trends in the worldwide economy.
In 2003, Roger Martin and Mihnea Moldoveanu of the University of Toronto published a paper entitled “Capital Versus Talent: The Battle That’s Reshaping Business.” They argue that the overarching conflict inherent in the American economy has shifted from labor versus capital, which dominated the 20th century, to capital versus talent, which already dominates the 21st century and will continue to do so.
They state that “In our knowledge-based economy, value is the product of knowledge and information. Companies cannot generate profits without the ideas, skills, and talent of knowledge workers, and they have to bet on people—not technologies, not factories, and certainly not capital.”
As our economy becomes more knowledge-based and specialized, it requires knowledgeable and specialized workers. This is evident in the stark disparity in the unemployment rate among those with and without a college degree (8.7 versus 4.1). Simply put, the jobs for those without specialized education and training aren’t there anymore.
This economic conflict is not inherently bad; it is manageable, and could even be a positive development, if the educational infrastructure existed to respond to changes. Thus, what makes the changing economy troubling is that the American educational infrastructure has failed, and failed massively.
While the United States’ education system used to be an example for the world, it has, of late, struggled to keep up with the rest of the world. In 2010, American students ranked 17th in the world in educational standards, including 14th in reading, 17th in science, and 25th in math. At the same time, the cost of higher education has been rising at a stunning rate. Between 1986 and 2011, goods increased as a result of inflation by 115.06% while the cost of a college education increased by 498.31%. The average debt amassed by students after a 4-year degree is now $26,000.
At the same time that the American economy has shifted to a talent/knowledge based structure, public schools have failed to properly train students and the rising cost of higher education has made it more difficult for many to get the knowledge and training necessary. Thus those already higher on the income spectrum have the ability to benefit from the changing economy while those lower do not, leading to an increase in inequality.
Martin and Moldoveanu wrote their 2003 paper in reference to CEO salaries, an issue which is still controversial today. But their work reflects the broader trends in today’s economy and the failures of the American education system to deal with them.