It is my Friday Lay Day blog and it is going to be relatively quick. There was an article in the Wall Street Journal (December 23, 2015) – Economists Say ‘Bah! Humbug!’ to Christmas Presents – that says a lot about how my profession struggles to appreciate reality in all its dimensions. Every year, it…
Its my Friday Lay Day blog, which was meant to mean a smaller writing commitment but sometimes doesn’t turn out that way. But today I plan to stick to that ‘pledge’. I have just arrived back from 2 weeks working in Sri Lanka and have things to catch up on back here. I read an interesting book a few years ago – Whither Opportunity: Rising Inequality, Schools, and Children’s Life Chances – by Greg Duncan and Richard Murnane (2011), which studies “the consequences of rising in- equality for America’s education”. While there are national differences, the dynamics uncovered in that book apply to most nations (that I know of). I am currently engaged in a project on equity and opportunity and the link that this has with income inequality. We are now well informed about the rising income inequality that has occurred over the last 20-30 years. But we are less informed on how this is reinforced and reinforces itself by a stark inequality in opportunity.
The conservatives who railed against Marxism liked to depict it as trying to equalise outcomes and claimed that as long as we equalise opportunities, then the outcomes will reflect different propensities to work backed by skill and ability differences. The equality of opportunity myth is one that is paraded often, particularly about the US, which likes to claim it is the land of opportunity and compares itself against other places it likes to claim stifle potential. It often invades the comparator countries soon after! The book argues that for “the first three-quarters of the twentieth century, economic growth, fueled in large part by the increasing educational attainments of successive generations of Americans” helped poor and rich alike. But then over the last 30 years, “the fruits of economic growth have not been widely shared … the gap between the incomes” of rich and poor “has grown enormously”. This has led to a marked gap in the educational attainments of each cohort, which “portends diminishing economic opportunities for low-income children in the next generations of Americans”.
There was an article in last week’s Economist Magazine (January 21, 2015) – An hereditary meritocracy – that reminded me of the book (given it produces a graphic from the book).
The Economist article states that US politicians and elites have always:
… held more fervently than any other country the belief that all comers can penetrate that elite as long as they have talent, perseverance and gumption.
And while stating that “Some self-perpetuation by elites is unavoidable”, it says:
And though the best predictor of an American child’s success in school has long been the parents’ educational level-a factor which graduates are already ahead on, by definition – money is an increasingly important factor.
There is a strong and “growing correlation between parental income and children’s test scores”. The higher parental incomes allows them to spend more on education, which then self-perpetuates.
If more equity was to be introduced into the system to even out the income distribution a bit (that is, reverse the destructive trend in income inequality), then it is the responsibility of the public sector to increase the spending on lower income children to ensure their opportunities are not restrained by a lack of parental income.
In Whither Opportunity, the authors presented this graph (Figure 1.6 Enrichment Expenditures on Children, 1972 to 2006), which shows the real expenditure on education and related resources (music lessons, books, trips to museums etc) by the highest quintile (top 20 per cent of the income distribution) and the bottom quintile (lowest 20 per cent of the income distribution) expressed in 2008 dollars.
The trend is obvious.
The Economist article notes that even before school age, high income parents bombard their children with resources and gain places at the best kindergartens.
90 per cent of Americans then go to public schools but then “the advantages of living in a well-off neighbourhood kick in … Funding levels per pupil can vary by up to 50% across a state”, which usually results in children from wealthier families having better schools and resources available to them.
The Economist article states that:
The result is that America is one of only three advanced countries that spends more on richer pupils than poor ones, according to the OECD (the other two are Turkey and Israel). And on top of spending on school, there is spending outside it: the gap between what rich and poor parents shell out for museum trips, music lessons, books and so on has been widening.
The inequality is compounded at the tertiary level where the high income earners pay heaps for the best universities, which offer the best return on the investment. The capacity to enter the best universities is intrinsically related also to whether one or both parents went there.
I updated the data that Whither Opportunity used and the following graph only shows the expenditure on Education (not including the other items that help make educational participation a success – better housing, better health care, better extra-curricular resources etc) for the lowest and highest quintiles in the income distribution between 1984 and 2013.
The expenditure is expressed in 2013 US dollars.
In 2013, the highest quintile spent 3.5 times the amount on education than the lowest quintile families. In 1984, this gap was 1.6 times.
The real growth in expenditure for the lowest quintile between 1984 to 2013 was 9.5 per cent, whereas for the other quintiles the growth rates were the second quintile 29.2 per cent, third quintile 29.6 per cent, fourth quintile 57.5 per cent, and the highest quintile 140.8 per cent.
The GFC tempered the spending by the highest income earners somewhat but had a similar impact on the low income families.
And remember this is just direct spending on education. The gaps widen when we include all the other expenditures that the authors of Whither Opportunity computed. But given this is my Friday Lay Day, I decided not to do the complete calculation today. Later.
I will write more about these matters as my research unfolds. But never accept anyone telling you that the US is the land of opportunity for all.
Dilbert on MMT (sort of)
Thanks to Mick for steering me to this 3-picture depiction of MMT. Well, at least , one can imagine that is what it is about!
I was interested to note that the first European statement from the new Greek government was not about debt or deficits but about Russian sanctions. In the statement from the newly-appointed Foreign minister – Greece’s Coming Clash in Europe Starts With Russia Sanctions – Greece has indicated that it doesn’t consent to the continuation of the sanctions and it has the power to veto the EU decision. This raises the question as to whether the sanctions achieve their aims anyway, which presumably at to damage the economy of Russia and change its approach to the Ukraine question (whatever that actually is)?
I read an interesting research study (Brief No. 35) on this topic published by the Institute for Security Studies (December 2014) – Do sanctions against Russia work?.
Whenever one reads some research it is wise to establish who the organisation doing the research is, who funds them, and who the publisher is.
In Australia, for example, many research reports issued by so-called independent organisations under commission from Government are not necessarily ‘independent’ given the nature of government contracts. But that is another story which I might write about another day.
The Institute of Security Studies (ISS) funded by the European Union as “an autonomous agency”. It is impossible to work out whether the ISS is, indeed, autonomous in practice, even if in structure and reporting lines it might look like that.
The paper appears to provide a pro and con analysis, which suggests it is not just EU propaganda, unlike a lot of the so-called independent economic analysis that is funded to provide justifications for creating the Eurozone, the harsh fiscal rules and the rest of it.
It notes that the main sanctions include:
1. Asset freezes and visa bans on certain persons and companies.
2. Suspension of preferential economic development loans to Russia.
3. Ban on trading certain bonds and equities with some Russian banks.
4. A ban on lons to five major Russian banks.
5. A two-way arms embargo.
6. A ban on certain exports which might help the Russian military and/or “Russia’s new, innovative and technology- intensive energy projects”.
The problem with evaluating the bans is that two non-related events have been coincident:
1. Major fall in oil prices.
2. Major depreciation in the currency.
They conclude that:
These factors are having a cumulative effect, and it is therefore hard to distinguish the specific and distinctive impact of the sanctions as such.
They also conclude that:
1. The current economic situation in Russia is “less dramatic than the 2009 recession”.
2. “The Russian government’s financial situation remains relatively favourable”.
3. Inflation is steady.
4. “the CBR’s international reserves are still sizeable”.
From which they conclude that “Russia has enough of a buffer to weath- er a 2-3 year financial storm”.
So have the sanctions worked?
1. “Russia is still deeply involved in Ukraine”.
2. “The sanctions, in other words, did not coerce Russia into reversing its posture.”
3. Trade restrictions “decrease future Western leverage, hurt Western exporters and cost jobs in an already fragile economic environment”.
4. “Sanctions are pushing Russia into the arms of China, speeding up the formation of a non-Western global financial infrastructure which poses an alternative (and a challenge) to the existing Western-dominated system”.
5. “sanctions help Putin domestically by uniting Russians behind him”.
1. Forced Russia to “seriously factor in possible Western responses to its actions in Ukraine” so their behaviour is “constrained”.
2. “sanctions shattered Putin’s ‘contract’ with the Russian people” – although this is hard to prove.
The main argument in favour of sanctions is that they have helped create “non-events” – Russia might have been more aggressive without them. But then a lot of what the West thinks Russia is planning is just paranoia anyway.
The authors, on balance, consider the debate about sanctions is a matter of choosing the “least bad” alternative.
My view is that the only way to evaluate whether the sanctions are “working” is whether they alter Russia’s approach to Eastern Ukraine. They appear to have hardened that approach – which suggests they are failing but just dishing out pain to the common Russian worker, who is unable to influence Russian foreign policy anyway.
Further, is the defense of the regime in Ukraine a valid aim for Western governments? How much funding is the EU giving Ukraine to prop it up and how does that stack up against the treatment that is meted out to Greece for bailout funding?
And, if they really want to damage the Russian economy why doesn’t Germany just turn of the gas lines? It is here that we get the pragmatics interfering with the ‘principle’, which tells me always that they don’t really believe in the principle anyway.
This Der Spiegel article (May 6, 2014) – Cold Turkey: How Germany Could End Russian Gas Dependency – is interesting.
The US government is now abandoning the failed, 4-decade sanctions against Cuba. Haven’t they learned that that sort of approach doesn’t really change behaviour greatly.
It is more likely that the Saudi strategy to wipe out the Russian and North American oil producers will damage the Putin regime more than the EU sanctions, given he has rode the wave of high oil prices.
There was a news story from EUObserver this week (January 26, 2014) – Greece turns left: What next? – which conjectured that Greece was a “litmus test for the rest of the continent”.
Apparently, Leonard Cohen’s song ‘First We Take Manhattan’ was being played at a political rally in Athens last week and Spanish Podemos leader Pablo Iglesias, who appeared at the rally, opened with the chant:
First we take Manhattan then we take Berlin!
And others chanted “First we take Athens then we take Madrid”.
So let’s hear the classic. But perhaps it is Brussels and Washington they have to take with some counter-insurgency in Frankfurt.
But then this is probably more apt. From 1979, Bob Marley and the Wailers.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
I guess my Lay Day was a little more active than I had planned!
That is enough for today!
(c) Copyright 2015 Bill Mitchell. All Rights Reserved.