The Truth About Income Inequality in America
By Charles Murray
Of course the rich are getting richer. But the divergence between Main Street and America's elites begins with two of our most cherished institutions: college and marriage.
In the early 1990s, Bill Gates was asked what competitor worried him the most. Goldman Sachs, Gates answered. He explained: "Software is an IQ business. Microsoft must win the IQ war, or we won't have a future. I don't worry about Lotus or IBM, because the smartest guys would rather come to work for Microsoft. Our competitors for IQ are investment banks such as Goldman Sachs and Morgan Stanley." Gates's comment reflected a reality that has driven the formation of the new upper class: Over the last century, brains became much more valuable in the marketplace.
First, the higher-tech the economy, the more it relies on people who can improve and exploit the technology, which creates many openings for people whose main asset is their exceptional cognitive ability.
Second, the more complex business decisions become, the more businesses rely on people who can navigate through labyrinths that require advanced cognitive ability. Consider the prospects for a lawyer. A hundred years ago, lawyers mostly practiced law for individual clients and made the amounts of money that individuals could afford to pay. As the size of business deals grew and regulatory law became more complex, the need for lawyers who never see the inside of a courtroom increased. Today, if a first-rate attorney can add 10 percent to the probability of getting a favorable decision on a regulatory ruling worth hundreds of millions of dollars, he is worth his many-hundreds-of-dollars-per-hour rate.
Third, the bigger the stakes, the greater the value of marginal increments in skills. The corporation ranked 500 in 2010 was about eight times larger than the 500th-ranked corporation in 1960, in constant dollars. The value of a manager who could increase his division's profitability by 10 percent instead of 5 percent escalated accordingly.
Given that backdrop, it is no surprise that the people working in managerial occupations and the professions made a lot more money in 2010 than they had made in 1960. Real income for the bottom quartile of American families fell after 1970 (the growth of in-kind benefits and earned-income tax credits more than made up the drop in pretax cash income—but they didn't improve their position much either). Real family income for families in the middle was flat. Just about all of the benefits of economic growth from 1970 to 2010 went to people in the upper half of the income distribution.
COLLEGE, MARRIAGE, AND THE SORTING OF WEALTH
The initial mechanism whereby people with distinctive tastes and preferences are brought together is the college sorting machine. In 1997, just 10 schools took 20 percent of all the students in the United States who scored in the top five centiles on the SAT or ACT. Forty-one schools accounted for half of them.
The reason that upper-middle-class children dominate the population of elite schools is that the parents of the upper-middle class now produce a disproportionate number of the smartest children. Among college-bound seniors who took the SAT in 2010, 87 percent of the students with 700-plus scores in the math and verbal tests had at least one parent with a college degree. Fifty-six percent of them had a parent with a graduate degree. The children of the well educated and affluent get most of the top scores because they constitute most of the smartest kids. They are smart in large part because their parents are smart.
That brings us to the role of homogamy — interbreeding of individuals with like characteristics. Drawing on the extensive technical literature and the CPS, sociologists Christine Schwartz and Robert Mare examined trends in "assortative marriage," as it is known in the jargon, from 1940 to 2003. They found that homogamy has increased at both ends of the educational scale — college graduates grew more likely to marry college graduates and high school dropouts grew more likely to marry other high school dropouts. In 1960, just 3 percent of American couples both had a college degree. By 2010, that proportion was 25 percent.
It's not just that college graduates are likely to marry college graduates, but that graduates from elite colleges are likely to marry other graduates from elite colleges. Increased educational homogamy inevitably means increased cognitive homogamy. On average, children are neither as smart nor as dumb as their parents. They are closer to the middle. This tendency is called regression to the mean. In 2010, 87 percent of the students with 700-plus scores in Critical Reading or Mathematics had a parent with a college degree, and 57 percent had a parent with a graduate degree. Those percentages could have been predicted pretty closely just by knowing the facts about the IQs associated with different educational levels and the correlation between parental and child IQ.
The bottom line is not subject to refutation: Highly disproportionate numbers of exceptionally able children in the next generation will come from parents in the upper-middle class, and more specifically from parents who are already part of the broad elite.
Reprinted from Coming Apart by Charles Murray.
http://www.theatlantic.com/business/archive/2012/02/the-truth-about-income-inequality-in-america/252892/