The Gig Economy (sic)

The Gig Economy has merely exposed the lie that our labor is the most valuable asset we own. Rather, our man-hours have been depreciated drastically in the last 50 years. Much of this has been due to the explosion in capital credit after the abandonment by Nixon in 1971 of the gold peg under the Bretton Woods international monetary regime. This has led to capital-labor substitution, technological innovation, and productivity increases that have reduced the demand for labor, both skilled and unskilled. It’s made some of us richer.

The second contributing factor has been capital mobility under globalization and the liberalization of the populations of the developing world. This has led to a vast increase in the supply of both skilled and unskilled labor. China and India, for the past 30 years, but we still have Africa and South America in the pipeline. 

The combined effect of these policies and geopolitical trends has driven the marginal price of labor down towards the subsistence level. We need to think outside this shrinking box. Btw, union organization will do nothing to reverse these trends unless the focus is not on controlling the supply of labor and artificially raising wages. Asset ownership, risk sharing, and personal data ownership are key.

(Note: We can’t really expect Vanity Fair to tackle these issues.)

“What Have We Done?”: Silicon Valley Engineers Fear They’ve Created a Monster

Vanity Fair

In the heart of San Francisco, the gig economy reigns supreme. Walk into a grocery store, and a large number of shoppers you see are independent contractors for grocery-delivery start-up Instacart. Step outside, and cars with black-and-white Uber stickers or flashing Lyft dashboard lights are sitting, hazards on, blocking the bike lane as they wait for passengers. Cyclists zigzag around the cars, many hauling bags branded with various logos—Caviar, Postmates, Uber Eats—as they deliver food to customers around the city. You can stand on a street corner and count the number of gig-economy workers walking by, as I often do; sometimes it’s 2 out of every 10. On some corners, like the one near the Whole Foods on 4th and Harrison, I’ve counted 8 out of every 10.

The gig-economy ecosystem was supposed to represent the promised land, striking a harmonious egalitarian balance between supply and demand: consumers could off-load the drudgery of commuting or grocery shopping, while workers were set free from the Man. “Set your own schedule,” touts the Uber-driver Web site; “Be your own boss,” tempts Lyft; “Make an impact on people’s lives,” lures Instacart. These companies have been wildly successful: Uber, perhaps the most notorious, is also the most valuable start-up in the U.S., reportedly worth $72 billion. Lyft is valued at $11 billion, and grocery delivery start-up Instacart is valued at just over $4 billion. In recent months, however, a spate of lawsuits has highlighted an alarming by-product of the gig economy—a class of workers who aren’t protected by labor laws, or eligible for benefits provided to the rest of the nation’s workforce—evident even to those outside the bubble of Silicon Valley. A July report commissioned by the New York City Taxi and Limousine Commission found that 85 percent of New York City’s Uber, Lyft, Juno, and Via drivers earn less than $17.22 an hour. When the California Supreme Court ruled in May that delivery company Dynamex must treat its gig workers like full-time employees, Eve Wagner, an attorney who specializes in employment litigation, predicted to Wired, “The number of employment lawsuits is going to explode.”

Of course, the threads of this disillusionment are woven into the very structure that has made these start-ups so successful. A few weeks into my tenure at Uber, where I started as a software developer just a year after graduating from college, still blindly convinced I could make the world a better place, a co-worker sat down next to my desk. “There’s something you need to know,” she said in a low voice, “and I don’t want you to forget it. When you’re writing code, you need to think of the drivers. Never forget that these are real people who have no benefits, who have to live in this city, who depend on us to write responsible code. Remember that.”

I didn’t understand what she meant until several weeks later, when I overheard two other engineers in the cafeteria discussing driver bonuses—specifically, ways to manipulate bonuses so that drivers could be “tricked” into working longer hours. Laughing, they compared the drivers to animals: “You need to dangle the carrot right in front of their face.” Shortly thereafter, a wave of price cuts hit drivers in the Bay Area. When I talked to the drivers, they described how Uber kept fares in a perfectly engineered sweet spot: just high enough for them to justify driving, but just low enough that not much more than their gas and maintenance expenses were covered.

Those of us on the front lines of the gig economy were the first to spot and expose its flaws—two months after leaving Uber, I wrote a highly publicized account of my time there, describing the company’s toxic work environment in detail. Now, as Silicon Valley struggles to come to terms with its corrosive underpinnings, a new vein of disquiet has wormed its way into the Slack chats and happy-hour outings of low-level rank-and-file engineers, spurred by a question that seems to drown out everything else: What have we done? It’s a question that I, too, have been forced to grapple with as I notice how my job as a software engineer has changed the nature of work in general—and not necessarily for the better.

The risk, we agreed, is that the gig economy will become the only economy.

Gig-economy “platforms,” as they’re called, take their inspiration from software engineering, where the goal is to create modular, scalable software applications. To do this, engineers build small pieces of code that run concurrently, dividing a task into ever smaller pieces to conquer it more efficiently. Start-ups function in a similar way; tasks that used to make up a single job are broken down into the smallest possible code pieces, then partitioned so those pieces can be accomplished in parallel. It’s been a successful approach for start-ups for the same reason it’s a successful approach to writing code: it is perfectly, beautifully efficient. Across so-called platforms, there are no individuals—no bosses delegating tasks. Instead, various algorithms run on the platform, matching consumers with workers, riders with the nearest driver, and hungry customers with delivery people, telling them where to go, what to do, and how to do it. Constant needs and their quick solutions all hummingly, perpetually aligned.

By now it’s clear that these companies represent more than a trend. Though it’s difficult to accurately determine the size of the gig economy—estimates range from 0.7 to 34 percent of the national workforce—the number grows with each new start-up that figures out how to break down another basic task. There’s a relatively low risk associated with launching gig-economy companies, start-ups that can engage in “a kind of contract arbitrage” because they “aren’t bearing the corporate or societal cost, even as they reap fractional or full-time value from workers,” explains Seattle-based tech journalist Glenn Fleishman. Thanks to this buffer, they’re almost guaranteed to multiply. As the gig economy grows, so too does the danger that engineers, in attempting to build the most efficient systems, will chop and dice jobs into pieces so dehumanized that our legal system will no longer recognize them. [Note: yes, labor contracts will be obsolete and meaningless, which means asset ownership is the only defensible right.] And along with this comes an even more sinister possibility: jobs that would and should be recognizable—especially supervisory and management positions—will disappear altogether. If a software engineer can write a set of programs that breaks a job into smaller increments, and can follow it up with an algorithm that fills in as the supervisor, then the position itself can be programmed to redundancy.

A few months ago, a lunchtime conversation with several friends turned to the subject of the gig economy. We began to enumerate the potential causes of worker isplacement—things like artificial intelligence and robots, which are fast becoming a reality, expanding the purview of companies such as Google and Amazon. “The displacement is happening right under our noses,” said a woman sitting next to me, another former engineer. “Not in the future—it’s happening now.

“What can we do about it?” someone asked. Another woman replied that the only way forward was for gig-economy workers to unionize, and the table broke out into serious debate [Labor contracts, union or otherwise, will be legally ill-defined and indefensible]. Yet even as we roundly condemned the tech world’s treatment of a vulnerable new class of worker, we knew the stakes were much higher: high enough to alter the future of work itself, to the detriment of all but a select few. “Most people,” I said, interrupting the hubbub, “don’t even see the problem unless they’re on the inside.” Everyone nodded. The risk, we agreed, is that the gig economy will become the only economy, swallowing up entire groups of employees who hold full-time jobs, and that it will, eventually, displace us all. The bigger risk, however, is that the only people who understand the looming threat are the ones enabling it. 

Identity – National or Cultural?

Mr. Kotkin offers a powerful warning for US politics. In a world where the nation-state and national sovereignty are the organizing principles of global politics, a national identity is the necessary glue that holds democracies together and strengthens them against chaotic change. Multiculturalism and identity group tribalism only weaken democratic societies.

America’s Future Depends on Believing in a Shared National Identity.

 By Joel Kotkin

City Journal, August 7, 2019

This week, the troubled state of American democracy was on display in the reactions to the mass shootings in Texas and Ohio. To the establishment Left, led by the New York Times, the El Paso shooter operated as if he were a white nationalist acting on orders from Donald Trump. Some on the right, meantime, linked the Dayton shooter’s actions to Antifa. In a healthy political environment, Americans, regardless of political views, would consider these tragedies the heinous actions of disturbed people, motivated mostly by a dangerous combination of madness and ideology. But in our warped political climate, everyone assumes that their enemies want to kill them.  

Our political polarization reflects a decline in the notion of American identity. Tribalism on the left has supplanted foundational ideals of citizenship. Representative Ayanna Pressley recently insisted that blacks, Hispanics, gays, and members of other minority groups must promote identity-first politics over any notion of the common good; failure to do so, she suggested, is a betrayal of the group. In addition, progressive Democrats have effectively championed open borders, advocating the removal of criminal penalties for border-crossers, who also would get free health care not readily available to most American citizens. Such views represent the triumph of identity politics over the civic ideal of E Pluribus Unum.

The Left’s positions, according to Jeh Johnson, Homeland Security secretary under Barack Obama, are “unworkable, unwise,” and lack support of “a majority of American people or the Congress.” And yet our press, cultural institutions, and universities—all controlled by progressives—amplify those views each day, shaping an angry younger generation with little use for citizenship, free speech, open dialogue, democracy, or capitalism. Some 40 percent of millennials, for example, favor limiting speech deemed offensive to minorities—well above the 27 percent that prevails among Gen Xers, 24 percent among baby boomers, and just 12 percent among the oldest cohorts. Many millennials also dismiss basic constitutional civil rightsand support socialism over free markets.

While progressives seek to impose their agenda, some populist conservatives are understandably resentful at being told by 1 percenters like Beto O’Rourke that they are beneficiaries of “white privilege” and are members of the “male patriarchy.” Most Republicans, according to Pew, worry that foreigners are remaking and undermining the country’s identity. Considering the country’s demographic trajectory, this politics has a limited shelf life. A return to 1950s America is no more likely than the mass expulsion of Trump’s white “deplorables.”

Fighting for a robust and inclusive American identity won’t be popular with our corporate elite. “Transnational class formation”—long linked by various parts of the industrial and financial aristocracy—is becoming more pronounced. The late Peter Drucker, considered the father of management thinking, suggested that national citizenship may no longer be “meaningful” in a world connected by digital technology and global markets. Many top firms including Amazon, Apple, Chevron, and General Electric refuse even to identify as American companies. Like feudal lords loyal to the European Christianitas, not their locale, this corporate elite increasingly identifies with global markets and a cosmopolitan, post-national worldview. Since Trump’s election, many companies, including Google, have grown reluctant to work with the U.S. military, immigration agencies, and police departments, while assisting the surveillance agenda of  authoritarian China.

Given their post-nationalist inclinations, it’s not surprising that many corporate powers—notably in tech—prefer unlimited immigration. This partly reflects the non-native share of the tech workforce, which has reached 24 percent nationwide, compared with 16 percent for the rest of labor force. In Silicon Valley, it’s roughly 40 percent. Though they defend open borders, tech leaders express little concern for the native-born, largely white middle class. Immigrants, suggests Steve Case, former CEO of AOL, should replace our troubled, indigenous working class.

Such positions invite backlash from those who live outside the charmed circle. After all, if uneducated migrants want to enter the country, they won’t settle in Malibu, posh parts of San Francisco, or the Upper East Side, but instead in working- and middle-class neighborhoods. They’ll compete for housing and jobs in hardscrabble neighborhoods, but they won’t bid up the price of houses in exclusive enclaves or threaten well-paid jobs in the executive suite or at universities.

Our present trajectory is ruinous; it will exacerbate political antagonism and likely produce even more politicized violence. The only solution to greater polarization lies in reestablishing the norms of a civic nationalism that transcends identity politics of all kinds.

Developing a renewed sense of American identity won’t be easy. As a lifelong Democrat, I saw nothing remotely unpatriotic in the rhetoric of George McGovern—a World War II hero—and certainly not from Jimmy Carter or Bill Clinton. Yet today, according to Gallup, only 22 percent of Democrats today say that they are “proud to be Americans,” down from 65 percent in 2003, when the widely disliked George W. Bush was in the White House. Modern progressives generally reject any thought of American exceptionalism, maintaining, in the words of Pete Buttigieg, that America was “never as great as advertised.”

It’s hard to build a positive agenda without some sense of national pride and shared culture. Fortunately, America’s founding principles—rule of law, protection of minority rights, market-based capitalism—are not dependent on race and heritage. Unlike Europe, we don’t have one great historic tradition that we must embrace or lose. By contrast, America, based on ideas that transcend race, boasts a remarkable record of incorporating newcomers, first from Ireland and Germany, then Italy and Eastern Europe, and more recently from Latin America and Asia. These generations of new Americans constitute the secret sauce that makes this country work and could sustain it in the future.

This expansive civic nationalism also represents an economic imperative. Due to sharply lower birthrates, most of our prime competitors—the EU, Japan, and even China—are on the verge of demographic collapse. Europeans may need immigrants, but their welfare states, slow growth, and lack of cultural cohesion will make absorbing these newcomers problematic at best. Most Asian countries have little interest in large-scale immigration.

America’s future will depend on believing in a shared mission. Calling progressives “Communists” or conservatives “fascists” gets us nowhere. Convincing young people, particularly young men, that they have no future won’t dissuade them from authoritarian views—or even violence. The road to sanity starts with a renewed embrace of a shared American identity that transcends all others.

The Titans of Tech

I reprint this article in full with citation from Quillette. The tone might sound a bit strident, but the warning signals pointing to a form of 21st-century feudalism are real. We’re seeing this in the CA housing crisis today and in the divergence in wealth and incomes since 1980, driven by cheap credit and technology. The oligarchs of tech have been able to leverage their wealth to dominate entertainment and information. They have set their sights on politics and the ideological politics of the tech industry are particularly disturbing and contradictory to its genesis in free-market entrepreneurialism.

You see, the idea here is to socialize the costs of wealth concentration and information centralization, using politics to buy off the unwashed masses who provide the raw material for their business models. Makes one feel good with noblesse oblige of the oligarchy, using the middle class’s money though.

Success can go to the brain.

What Do the Oligarchs Have in Mind for Us?

June 18, 2019

By Joel Kotkin

There seems to be no good reason why a thoroughly scientific
dictatorship should ever be overthrown.
~Aldous Huxley, Brave New World Revisited

The recent movement to investigate, and even break up, the current tech oligarchy has gained support on both sides of the Atlantic, and even leapt across the gaping divide in American politics. The immediate concerns relate to such things as the control of key markets by one or two firms, the huge concentration of wealth accruing to the tech elite and, increasingly, the oligarchy’s control over and manipulation of information pipelines.

What has not been discussed nearly as much is the end game of the oligarchs. What kind of world do they have in mind for us? Their vision of what our society should look like is not one most people—on the Left or Right—would like to see. And yet, unless unchecked, it could well be the world we, and particularly our children, will inhabit.

Almost 40 years ago, in his book The Third Wave, the futurist Alvin Toffler described technology as “the dawn of a new civilization” with vast opportunities for societal and human growth. But instead we are lurching towards what Taichi Sakaiya has called “a high-tech middle ages.” In his landmark 1973 work, The Coming of Post-Industrial SocietyDaniel Bell predicted that, by handing ultimate economic and cultural power to a small number of technologists and financiers the opportunity to monetize every aspect of human behavior and emotion, we would be handing them the chance to fulfill “a social alchemist’s dream: the dream of ordering mass society.”

The New Aristocracy

Like the barbarian princes who seized control of western Europe after the fall of Rome, the oligarchs have captured the digital landscape from the old industrial corporations and have proceeded to concentrate it in ever-fewer hands. Like the Medieval aristocracy, the ruling tech oligarchy—epitomized by firms such as Amazon, Google, Facebook, Apple, and Microsoft—have never produced a single coherent political manifesto laying out the technocratic vision of the future. Nevertheless, it is possible to get a sense of what the internet elite believe and, more tellingly, to see the outlines of the world they want to create.

This tiny sliver of humanity, with their relatively small cadre of financiers, engineers, data scientists, and marketers, now control the exploitation of our personal data, what Alibaba founder, Jack Ma calls the “electricity of the 21st century.” Their “super platforms,” as one analyst noted, “now operate as “digital gatekeepers” lording over “e-monopsonies” that control enormous parts of the economy. Their growing power, notes a recent World Bank Study, is built on “natural monopolies” that adhere to web-based business, and have served to further widen class divides not only in the United States but around the world.

The rulers of the Valley and its Puget Sound doppelganger now account for eight of the 20 wealthiest people on the planet. Seventy percent of the 56 billionaires under 40 live in the state of California, with 12 in San Francisco alone. In 2017, the tech industry, mostly in California, produced 11 new billionaires. The Bay Area has more billionaires on the Forbes 400 list than any metro region other than New York and more millionaires per capita than any other large metropolis.

For an industry once known for competition, the level of concentration is remarkable. Google controls nearly 90 percent of search advertising, Facebook almost 80 percent of mobile social traffic, and Amazon about 75 percent of US e-book sales, and, perhaps most importantly, nearly 40 percent of the world’s “cloud business.” Together, control more than 95 percent of operating software for mobile devices, while Microsoft still accounts for more than 80 percent of the software that runs personal computers around the world.

The wealth generated by these near-monopolies funds the tech oligarchy’s drive to monopolize existing industries such as entertainment, education, and retail, as well as those of the future, such as autonomous cars, drones, space exploration, and most critically, artificial intelligence. Unless checked, they will have accumulated the power to bring about what could best be seen as a “post-human” future, in which society is dominated by artificial intelligence and those who control it.

What Do the Oligarchs Want?

The oligarchs are creating a “a scientific caste system,” not dissimilar to that outlined in Aldous Huxley’s dystopian 1932 novel, Brave New World. Unlike the former masters of the industrial age, they have little use for the labor of  middle- and working-class people—they need only their data. Virtually all their human resource emphasis relies on cultivating and retaining a relative handful of tech-savvy operators. “Software,” Bill Gates told Forbes in 2005, “is an IQ business. Microsoft must win the IQ war, or we won’t have a future.”

Perhaps the best insight into the mentality of the tech oligarchy comes from an admirer, researcher Greg Ferenstein, who interviewed 147 digital company founders. The emerging tech world has little place for upward mobility, he found, except for those in the charmed circle at the top of the tech infrastructure; the middle and working classes become, as in feudal times, increasingly marginal.

This reflects their perception of how society will evolve. Ferenstein notes that most oligarchs believe “an increasingly greater share of economic wealth will be generated by a smaller slice of very talented or original people. Everyone else will increasingly subsist on some combination of part-time entrepreneurial ‘gig work’ and government aid.” Such part-time work has been growing rapidly, accounting for roughly 20 percent of the workforce in the US and Europe, and is expected to grow substantially, adds McKinsey.

Of course, the oligarchs have no more intention of surrendering their power and wealth to the proletariat than the Commissars did after the 1917 revolution in Russia. Instead, they favor providing what Marx once described as a “proletarian alms bag” to subsidize worker housing, and provide welfare benefits to their ever expanding cadre of “gig” economy serfs. The former head of Uber, Travis Kalanick, was a strong supporter of Obamacare, and many top tech executives—including Mark Zuckerberg, Y combinator founder Sam Altman, and Elon Musk—favor a guaranteed annual wage to help, in part, allay fears about the “disruption” on a potentially exposed workforce.

Their social vision amounts to what could be called oligarchal socialism, or what the Corbynite Left calls “fully automated luxury communism.” Like the original bolshevist model, technology and science, as suggested by billionaire tech investor Naval Ravikant, would occasion “the breakdown of family structure and religion” while creating the hegemony of a left-wing identity-centered individualism.

Life in a world dominated by these oligarchs would depart from the model of democratic and competitive capitalism that emerged over the last half-century. Rather than hope to achieve upward mobility and the chance to own property, the new generation will be relegated largely to the status of rental serfs. For the next generation, this promises a future not of upward mobility and owned houses, but of rented apartments and social stagnation. Here in California, Facebook is leading the drive to vastly expand this kind of housing, where the serfs and technocoolies can lose themselves in what Google calls “immersive computing.”The poor, most of whom simply want opportunity, will be relegated to permanent dependent status.

The World They Are Creating

To get a preview of the society the oligarchs want to create, the best place to look is where oligarchal domination is most complete. Wired magazine’s Antonio Garcia Martinez has called Silicon Valley “feudalism with better marketing.” In Martinez’s view, the new aristocratic class is an “Inner Party” of venture capitalists and company founders. Well below them is an “Outer Party” of skilled professionals, well paid, but forced to live ordinary middle-class lives due to high housing prices and high taxes. Below them lies the vast population of gig workers, whom Martinez compares to sharecroppers in the South, “…with the serfs responding to a smartphone prompt rather than an overseer’s command.” Further below still lie those who constitute, in Martinez’s phrase, “the Untouchable class of the homeless, drug addicted, and/or criminal.”

California, and particularly the Bay Area, already reflects this neo-feudal reality. Adjusted for costs, my adopted home state suffers the overall highest poverty rate in the country, according to the US  Census Bureau. Fully one in three welfare recipients in the nation live in California, which is home to barely 12 percent of the country’s population, while a 2017 United Way study showed that close to one in three of the state’s families are barely able to pay their bills. Today, eight million Californians live in poverty, including two million children. Roughly one in five California children lives in deep poverty and nearly half subsist barely above that.

For all its protestations of progressive faith, the Golden State now suffers one of the highest GINI rates—the ratio between the wealthiest and the poorest—among the states. Inequality is growing faster than in almost any state—it now surpasses that of Mexico, and is closer to that of Central American banana republics like Guatemala and Honduras than it is to developed countries like Canada and Norway. There’s even the return of medieval diseases such as Typhus tied to the growing homeless encampments. We could soon even see the return of Bubonic plague, although the mainstream media seems to be ready to blame this, like most ills, on climate change as opposed to failed social policy.

Urban website CityLab has described the tech-rich Bay Area as “a region of segregated innovation,” where the rich wax, the middle-class wanes, and the poor live in increasingly unshakeable poverty. Some 76,000 millionaires and billionaires call Santa Clara and San Mateo counties home. At the other end are the thousands of people who struggle to feed their families and pay their bills each month. Nearly 30 percent of Silicon Valley’s residents rely on public or private assistance.

As recently as the 1980s, the San Jose area boasted one of the country’s most egalitarian economies. But in the current boom, cost-adjusted wages for middle class workers, Latinos, and African Americans in Silicon Valley actually dropped. Many minorities labor in the service sector in jobs such as security guard, for around $25,000 annually, working for contractors. There’s ever-greater segregation of minority and low income families, workers forced into mobile home parks or sleeping in their cars, as well as some of the nation’s largest homeless encampments. According to the Brookings Institution, in the last decade, increasingly tech-dominated San Francisco has suffered the most rapid growth in inequality while the middle class family heads towards extinction.

Needed: An Alliance of Progressives and Conservatives against the Oligarchy

Americans, enamored of the entrepreneurial spirit, were initially slow to see in the tech oligarchy a threat to the future of the republic. But public skepticism, notably in California, towards the tech lords is growing; many on both sides of the political divide see them much like modern versions of the gilded age mogul, successfully playing the political system to avoid regulation, anti-trust action, and taxes.

Yet overcoming the oligarchs will not be easy. Far more than the old industrial giants, they enjoy unprecedented sway through their manipulation of the information pipelines, as is widely evidenced in de-platforming of largely conservative voices on outlets such as Facebook, YouTube, and Twitter. Nearly two-thirds of readers now get their news through and their dominance among younger generations is, if anything, more overwhelming. As the Guardian put it: “If ExxonMobil attempted to insert itself into every element of our lives like this, there might be a concerted grassroots movement to curb its influence.”

To this influence, they have added control over what is left of the traditional media they have helped to undermine. Often getting bargain basement prices, the oligarchs have been able to buy up prestigious outlets, including the New Republic in 2012, the Washington Post in 2013, the Atlantic in 2017, and Time last year.

In the coming political storm, the oligarchs will also retain some supporters on both the Left and Right, all aided by a huge, growing, and politically hermaphroditic lobbying operation. Some California progressives have backed the oligarchs on privacy and Senator Kamala Harris, one of the leading Democratic contenders, has gained widespread support from the oligarchs. Meanwhile, on the Right, some libertarians at places like the Wall Street Journal and conservative think-tanks, continue to defend the oligarchs as the rightful winners of dogged economic competition.

But these well-placed defenders may not be enough to fend off regulatory assaults, particularly as more people recognize how the world being created by the tech elites offers little promise for the middle class, democracy, or free thought. Rather than the saviors many once saw, the oligarchs now represent a clear and present danger to the most basic foundations of our democracy. Resisting them represents the great imperative of our era.

Joel Kotkin is a Presidential Fellow in Urban Futures at Chapman University and Executive Director for the Center for Opportunity Urbanism. His last book was The Human City: Urbanism for the Rest of Us (Agate, 2017).

What’s Goin’ On…

This essay by Victor Davis Hanson is worth reprinting in full (with citation). Our current politics is so focused on the Trump phenomenon that people miss the fact that this all started long before Trump set his sights on the POTUS. Trump is a symptom, not a cause.

We may all have laudable goals for society, but it matters how we attain them.

Why Are the Western Middle Classes So Angry?

What is going on with the unending Brexit drama, the aftershocks of Donald Trump’s election and the “yellow vests” protests in France? What drives the growing estrangement of southern and eastern Europe from the European Union establishment? What fuels the anti-EU themes of recent European elections and the stunning recent Australian re-election of conservatives?

Put simply, the middle classes are revolting against Western managerial elites. The latter group includes professional politicians, entrenched bureaucrats, condescending academics, corporate phonies and propagandistic journalists.

What are the popular gripes against them?

One, illegal immigration and open borders have led to chaos. Lax immigration policies have taxed social services and fueled multicultural identity politics, often to the benefit of boutique leftist political agendas.

Two, globalization enriched the cosmopolitan elites who found worldwide markets for their various services. New global markets and commerce meant Western nations outsourced, offshored and ignored their own industries and manufacturing (or anything dependent on muscular labor that could be replaced by cheaper workers abroad).

Three, unelected bureaucrats multiplied and vastly increased their power over private citizens. The targeted middle classes lacked the resources to fight back against the royal armies of tenured regulators, planners, auditors, inspectors and adjustors who could not be fired and were never accountable.

Four, the new global media reached billions and indoctrinated rather than reported.

Five, academia became politicized as a shrill agent of cultural transformation rather than focusing on education — while charging more for less learning.

Six, utopian social planning increased housing, energy and transportation costs.

One common gripe framed all these diverse issues: The wealthy had the means and influence not to be bothered by higher taxes and fees or to avoid them altogether. Not so much the middle classes, who lacked the clout of the virtue-signaling rich and the romance of the distant poor.

In other words, elites never suffered the firsthand consequences of their own ideological fiats.

Green policies were aimed at raising fees on, and restricting the use of, carbon-based fuels. But proposed green belt-tightening among hoi polloi was not matched by a cutback in second and third homes, overseas vacations, luxury cars, private jets and high-tech appurtenances.

In education, government directives and academic hectoring about admissions quotas and ideological indoctrination likewise targeted the middle classes but not the elite. The micromanagers of Western public schools and universities often preferred private academies and rigorous traditional training for own children. Elites relied on old-boy networks to get their own kids into colleges. Diversity administrators multiplied at universities while indebted students borrowed more money to pay for them.

In matters of immigration, the story was much the same. Western elites encouraged the migration of indigent, unskilled and often poorly educated foreign nationals who would ensure that government social programs — and the power of the elites themselves — grew. The champions of open borders made sure that such influxes did not materially affect their own neighborhoods, schools and privileged way of life.

Elites masked their hypocrisy by virtue-signaling their disdain for the supposedly xenophobic, racist or nativist middle classes. Yet the non-elite have experienced firsthand the impact on social programs, schools and safety from sudden, massive and often illegal immigration from Latin America, the Middle East, Africa and Asia into their communities.

As for trade, few still believe in “free” trade when it remains so unfair. Why didn’t elites extend to China their same tough-love lectures about global warming, or about breaking the rules of trade, copyrights and patents?

The middle classes became nauseated by the constant elite trashing of their culture, history and traditions, including the tearing down of statues, the Trotskyizing of past heroes, the renaming of public buildings and streets, and, for some, the tired and empty whining about “white privilege.”

If Western nations were really so bad, and so flawed at their founding, why were millions of non-Westerners risking their lives to reach Western soil?

How was it that elites themselves had made so much money, had gained so much influence, and had enjoyed such material bounty and leisure from such a supposedly toxic system — benefits that they were unwilling to give up despite their tired moralizing about selfishness and privilege?

In the next few years, expect more grassroots demands for the restoration of the value of citizenship. There will be fewer middle-class apologies for patriotism and nationalism. The non-elite will become angrier about illegal immigration, demanding a return to the idea of measured, meritocratic, diverse and legal immigration.

Because elites have no answers to popular furor, the anger directed at them will only increase until they give up — or finally succeed in their grand agenda of a non-democratic, all-powerful Orwellian state.

(C) 2019 TRIBUNE CONTENT AGENCY, LLC.

Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University. His latest book is The Savior Generals from BloomsburyBooks. You can reach him by e-mailing author@victorhanson.com.

You Say Po-tay-to and I Say Po-tah-to!

Our political divide between left and right is most often characterized by the media as an ideological battle between liberalism and conservatism. Yet the meanings of these ideological terms are too often misinterpreted and mischaracterized – mostly by the opposing point of view – in order to fit a preferred political narrative. For those on the left, liberalism implies tolerance and empathy, while conservatism connotes bigotry and selfishness. For those on the right, liberalism infers intellectual naiveté and moral degeneracy, while conservatism assumes moral rectitude and time-tested reason. A clear understanding of political ideology can be useful; false stereotypes much less so. We should unpackage these terms as they are used in the popular vernacular to understand just how unhelpful and misguided they have become.

The etymological root of liberal is liber, or free, as it pertains to individual human rights and freedoms. Merriam-Webster offers this definition: a political philosophy based on belief in progress, the essential goodness of the human race, and the autonomy (i.e., freedom) of the individual and standing for the protection of political and civil liberties. Liberalism shares the same root as liberty and it would be difficult to find an American conservative who was not attuned to the universal idea of individual liberty.

Likewise, the root of conservative is conservare, meaning to preserve. Merriam-Webster offers the following definition: a political philosophy based on tradition and social stability, stressing established institutions, and preferring gradual development to abrupt change. If one assumes the evolutionary perspective, it would be difficult to find a society, American liberal or otherwise, that did not seek to preserve certain time-worn traditions in the interests of stability and self-preservation. We should also note that conservatism shares the same word root as conservation, so nature weighs in on this meaning as well.

So where did we get the idea that these ideologies are opposed? Merriam-Webster is partly culpable by posing these ideologies as antonyms but, as we will discover, they should be mostly viewed as useful complements.

Jonathan Haidt, in his psychological studies summarized in The Righteous Mind, explains how our ideological leanings can be expressed through complex moral matrices, where differences arise in moral interpretations and priorities. Haidt cites six moral precepts: 1) care; 2) liberty; 3) fairness; 4) loyalty; 5) authority; 6) sanctity. Haidt results show how liberals privilege the first three, while conservatives employ a mix of all six, giving additional weight to loyalty, authority, and sanctity.

One should read Haidt’s book to understand the nuances of these moral matrices, but the major divergence between our conceptions of liberal and conservative seem to revolve around the moral values of care and fairness. Haidt argues that everyone cares about fairness, but there are two major kinds.: “On the left, fairness often implies equality, but on the right it means proportionality—people should be rewarded in proportion to what they contribute, even if that guarantees unequal outcomes.” Implicit in these interpretations is the idea that consequences follow actions, but some consequences are rooted in contextual factors that are outside the individual’s control, such as educational opportunity. The takeaway from Haidt’s studies is that these moral matrices are hardly set in concrete and can be easily reconciled through a fuller understanding of the different emphases. They do not really divide us into red vs. blue.

The other dichotomy posed by our definitions of liberal and conservative is the implication that conservatives are intolerant and resistant to change while liberals seek to remove institutional barriers to change. Conservatives may be guilty of saying ‘don’t fix what ain’t broke,’ while liberals may be guilty of forcing change without due regard to the uncertainty inherent in change. But there is a way of reconciling these two approaches to inevitable change.

All societies embrace change to a certain degree, what matters is the pace of change. Change that is disruptive to social traditions naturally will be resisted by those it disrupts. This does not mean change will not occur, it merely means the pace must be managed prudently. Pushing change beyond the limits of social adaptation often leads to reactionary backlashes, causing undo conflict over the inevitable. The gradual evolution of cultural mores is a good example of how change occurs within the limits of order and stability. Naturally, there will be those in society who object to the too slow or too rapid pace of change.

Finally, opinion polls and surveys suggest that fewer Americans define themselves as truly liberal or conservative, with conservatives exceeding liberals by roughly 35% to 26%, though the gap has been closing. I would also guess these poll numbers are biased by the partisan mischaracterization of both ideological labels.

If this is the case, how do we politically define or classify most American voters? Perhaps we don’t. I would suggest that average non-political Americans are neither conservative nor liberal as strictly defined by their true ideological meanings. Elsewhere I have suggested that most of us, regardless of our politics, are both tolerant and traditional. I have called this dominant ideology based on liberty and justice tolerant traditionalism, as opposed to conservative or liberal. Americans are generally willing to adapt to societal changes as best we can, embracing the good to come of it while feeling wistful for the past we know. Societies that evolve and endure by adapting to change have a proud past and an ever-brighter future.

Was Quantitative Easing the Father of Millennial Socialism?

If you’ve been reading these pages for the past 8 years you know that central bank policy has been a constant refrain. The financial policies of the Fed for the past generation under both Greenspan and Bernanke have created a historic asset bubble with cheap credit. This has greatly aggravated wealth inequality and invited greater risks of both economic catastrophe and political chaos. We’re still experiencing where it leads. The eventual correction will likely be more painful than the original problem…

From the Financial Times:

Is Ben Bernanke the father of Alexandria Ocasio-Cortez? Not in the literal sense, obviously, but in the philosophical and political sense.

As we mark the 10th anniversary of the bull market, it is worth considering whether the efforts of the US Federal Reserve, under Mr Bernanke’s leadership, to avoid 1930s-style debt deflation ended up spawning a new generation of socialists, such as the freshman Congresswoman Ms Ocasio-Cortez, in the home of global capitalism.

Mr Bernanke’s unorthodox “cash for trash” scheme, otherwise known as quantitative easing, drove up asset prices and bailed out baby boomers at the profound political cost of pricing out millennials from that most divisive of asset markets, property. This has left the former comfortable, but the latter with a fragile stake in the society they are supposed to build. As we look towards the 2020 US presidential election, could Ms Ocasio-Cortez’s leftwing politics become the anthem of choice for America’s millennials?

But before we look forward, it is worth going back a bit. The 2008 crash itself didn’t destroy wealth, but rather revealed how much wealth had already been destroyed by poor decisions taken in the boom. This underscored the truism that the worst of investments are often taken in the best of times. Mr Bernanke, a keen student of the 1930s, understood that a “balance sheet recession” must be combated by reflating assets. By exchanging old bad loans on the banks’ balance sheets with good new money, underpinned by negative interest rates, the Fed drove asset prices skywards. Higher valuations fixed balance sheets and ultimately coaxed more spending and investment. [A sharp correction and reflation of solvent banks would have given asset speculators the correct lesson for their imprudent risks. Prudent investors would have had access to capital to purchase those assets at rational prices. Instead, we rewarded the profligate borrowers and punished the prudent.]

However, such “hyper-trickle-down” economics also meant that wealth inequality was not the unintended consequence, but the objective, of policy. Soaring asset prices, particularly property prices, drive a wedge between those who depend on wages for their income and those who depend on rents and dividends. This wages versus rents-and-dividends game plays out generationally, because the young tend to be asset-poor and the old and the middle-aged tend to be asset-rich. Unorthodox monetary policy, therefore, penalizes the young and subsidizes the old. When asset prices rise much faster than wages, the average person falls further behind. Their stake in society weakens. The faster this new asset-fuelled economy grows, the greater the gap between the insiders with a stake and outsiders without. This threatens a social contract based on the notion that the faster the economy grows, the better off everyone becomes. What then? Well, politics shifts.

Notwithstanding Winston Churchill’s observation about a 20-year-old who isn’t a socialist not having a heart, and a 40-year-old who isn’t a capitalist having no head, polling indicates a significant shift in attitudes compared with prior generations. According to the Pew Research Center, American millennials (defined as those born between 1981 and 1996) are the only generation in which a majority (57 per cent) hold “mostly/consistently liberal” political views, with a mere 12 per cent holding more conservative beliefs. Fifty-eight per cent of millennials express a clear preference for big government. Seventy-nine per cent of millennials believe immigrants strengthen the US, compared to just 56 per cent of baby boomers. On foreign policy, millennials (77 per cent) are far more likely than boomers (52 per cent) to believe that peace is best ensured by good diplomacy rather than military strength. Sixty-seven per cent want the state to provide universal healthcare, and 57 per cent want higher public spending and the provision of more public services, compared with 43 per cent of baby boomers. Sixty-six per cent of millennials believe that the system unfairly favors powerful interests.

One battleground for the new politics is the urban property market. While average hourly earnings have risen in the US by just 22 per cent over the past 9 years, property prices have surged across US metropolitan areas. Prices have risen by 34 per cent in Boston, 55 per cent in Houston, 67 per cent in Los Angeles and a whopping 96 per cent in San Francisco. The young are locked out.

Similar developments in the UK have produced comparable political generational divides. If only the votes of the under-25s were counted in the last UK general election, not a single Conservative would have won a seat. Ten years ago, faced with the real prospect of another Great Depression, Mr Bernanke launched QE to avoid mass default. Implicitly, he was underwriting the wealth of his own generation, the baby boomers. Now the division of that wealth has become a key battleground for the next election with people such as Ms Ocasio-Cortez arguing that very high incomes should be taxed at 70 per cent.

For the purist, capitalism without default is a bit like Catholicism without hell. But we have confession for a reason. Everyone needs absolution. QE was capitalism’s confessional. But what if the day of reckoning was only postponed? What if a policy designed to protect the balance sheets of the wealthy has unleashed forces that may lead to the mass appropriation of those assets in the years ahead?

Networks and Hierarchies

This is a review of British historian Niall Ferguson’s new book titled The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power. It’s interesting to take the long arc of history into account in this day and age of global communication networks, which might seem to herald the permanent dominance of networks over hierarchies. That history cautions us otherwise.

Ferguson notes two predominant ages of networks: the advent of the printing press in 1452 that led to an explosion of networks across the world until around 1800. This was the Enlightenment period that helped transform economics, politics, and social relations.

Today, the second age of networks consumes us, starting at about 1970 with microchip technology and continuing forward to the present. It is the age of telecommunications, digital technology, and global networks. Ours is an age where it seems “everything is connected.”

Ferguson notes that, beginning with the invention of written language,  all that has happened is that new technologies have facilitated our innate, ancient urge to network – in other words, to connect. This seems to affirm Aristotle’s observation that “man is a social animal,” as well as a large library of psychological behavioral studies over the past century. He also notes that most networks may reflect a power law distribution and be scale-free. In other words, large networks grow larger and become more valuable as they do so. This means the rich get richer and most social networks are profoundly inegalitarian. This implies that the GoogleAmazonFacebookApple (GAFA) oligarchy may be taking over the world, leaving the rest of us as powerless as feudal serfs.

But there is a fatal weakness inherent to this futuristic scenario, in that complex networks create interdependent relationships that can lead to catastrophic cascades, such as the global financial crisis of 2008. Or an explosion of “fake news” and misinformation spewed out by global gossip networks.

We are also seeing a gradual deconstruction of networks that compete with the power of nation-state sovereignty. This is reflected in the rise of nationalistic politics in democracies and authoritarian monopoly control over information in autocracies.

However, from the angle of hierarchical control, Ferguson notes that failures of democratic governance through the administrative state “represents the last iteration of political hierarchy: a system that spews out rules, generates complexity, and undermines both prosperity and stability.”

These historical paths imply that the conflict between distributed networks and concentrated hierarchies is likely a natural tension in search of an uneasy equilibrium.

Ferguson notes “if Facebook initially satisfied the human need to gossip, it was Twitter – founded in March 2006 – that satisfied the more specific need to exchange news, often (though not always) political.” But when I read Twitter feeds I’m thinking Twitter may be more of a tool for disruption rather than constructive dialogue. In other words, we can use these networking technologies to tear things down, but not so much to build them back up again.

As a Twitter co-founder confesses:

‘I thought once everybody could speak freely and exchange information and ideas, the world is automatically going to be a better place,’ said Evan Williams, one of the co-founders of Twitter in May 2017. ‘I was wrong about that.’

Rather, as Ferguson asserts, “The lesson of history is that trusting in networks to run the world is a recipe for anarchy: at best, power ends up in the hands of the Illuminati, but more likely it ends up in the hands of the Jacobins.”

Ferguson is quite pessimistic about today’s dominance of networks, with one slim ray of hope. As he writes,

“…how can an urbanized, technologically advanced society avoid disaster when its social consequences are profoundly inegalitarian?

“To put the question more simply: can a networked world have order? As we have seen, some say that it can. In the light of historical experience, I very much doubt it.”

That slim ray of hope? Blockchain technology!

A thought-provoking book.

 

 

 

 

 

 

 

 

 

 

 

 

Pondering National Governance

This is a recent article published in the NY Times. To make any sense of our answers to this question requires some ideological and historical clarity. [Blog comments]

Is the United States Too Big to Govern?

By Neil Gross

May 11, 2018

Last month the Pew Research Center released a poll showing that Americans are losing faith in their system of government. Only one-fifth of adults surveyed believe democracy is working “very well” in the United States, while two-thirds say “significant changes” are needed to governmental “design and structure.” [Because nobody really knows what these words mean, or they don’t agree among the many meanings, polling results are questionable indicators.]

The 2016 election is one explanation for these findings. Something is not right in a country where Donald Trump is able to win the presidency. [Well, that’s a selective value judgment – one could easily substitute in the names Hillary Clinton or Bernie Sanders. The point of a democratic society is that the people get to make those decisions and the people agree to abide by them or revolt. Are the people revolting against themselves or against their political representatives?]  

But here’s another possibility: What if trust in American democracy is eroding because the nation has become too big to be effectively governed through traditional means? With a population of more than 325 million and an enormously complex society, perhaps this country has passed a point where — no matter whom we elect — it risks becoming permanently dissatisfied with legislative and governmental performance. [There’s an implicit assumption here that the original intent of the founders is that some central authority should “govern” the affairs of the population and manage the national interest (“traditional means”?). This is probably half true in that a national interest must be represented as the sum of its many parts. We have a Federal government. What was not intended was an all-powerful Federal government.]

Political thinkers, worried about the problem of size, have long advocated small republics. Plato and Aristotle admired the city-state because they thought reason and virtue could prevail only when a polis was small enough that citizens could be acquaintances. Montesquieu, the 18th-century French political philosopher, picked up where the ancient Greeks left off, arguing for the benefits of small territories. “In a large republic,” he wrote, “the common good is sacrificed to a thousand considerations,” whereas in a smaller one the common good “is more strongly felt, better known, and closer to each citizen.” [I suspect Dunbar’s number is at work here.]

The framers of the United States Constitution were keenly aware of these arguments. As the political scientists Robert Dahl and Edward Tufte noted in their 1973 book, “Size and Democracy,” the framers embraced federalism partly because they thought that states were closer in scale to the classical ideal. Ultimately, however, a counterargument advanced by James Madison won the day: Larger republics better protected democracy, he claimed, because their natural political diversity made it difficult for any supersized faction to form and dominate. [With Federalism and the separation of powers and overlapping jurisdictions, I think the founders split the difference here.]

Two and a half centuries later, the accumulated social science suggests that Madison’s optimism was misplaced. Smaller, it seems, is better. [This is a false and impossible choice. When complex networks grow too large, they break-up into smaller, more manageable pieces, but these smaller entities are vulnerable to competitive pressures. This is true in industrial organization, economic and financial markets, and digital and social networks. It also applies to social choice and governance. The founders’ idea was to create a coordinated network of states, counties, and municipalities to manage affairs at the appropriate jurisdictional level. National issues are the sole responsibility of a Federal government balanced by parochial interests. This would secure the strongest union to guarantee citizens’ rights and freedoms. As that task grows in complexity, the need for decentralization and coordination reasserts itself.] 

There are clear economic and military advantages to being a large country. But when it comes to democracy, the benefits of largeness — defined by population or geographic area — are hard to find. Examining data on the world’s nations from the 19th century until today, the political scientists John Gerring and Wouter Veenendaal recently discovered that although size is correlated with electoral competition (in line with the Madisonian argument), there is no association between size and many other standard measures of democratic functioning, such as limits on executive power or the provision of human rights. [Another question raised here is what exactly we mean by democracy. Strictly democracy means government by the people, but popular democracy is a narrow offshoot of that definition. IT also begs the question of what a government by the people is trying to accomplish. Our founders made it clear they thought it was life, liberty, and the pursuit of happiness.  Note: the pursuit of happiness, not its guarantee.]

In fact, large nations turn out to have what the political scientist Pippa Norris has called “democratic deficits”: They don’t fully satisfy their citizens’ demands for democracy. [Again, what is that demand? Is it coherent?] For one thing, citizens in large nations are generally less involved in politics and feel they have less of a voice. [Are they unable to secure life, liberty and pursue happiness or do they just not like the results?] Voter turnout is lower. [Low voter turnout could mean that voters are happy with the status quo, or don’t believe voting matters to their individual fates.] According to the political scientist Karen Remmer, smaller-scale political entities encourage voting in ways large ones can’t by “creating a sense of community” and “enforcing norms of citizenship responsibility.” [Perhaps because they enjoy more intrinsic rewards to participation. This would suggest more localized control over politics.] In addition, small countries promote political involvement by leaning heavily on forms of direct democracy, like referendums or citizen assemblies. [This is a feature of scale. Direct democracy on a large scale can empower the tyranny of the popular majority because the effects are so far removed from that majority.]

A second problem is political responsiveness: The policies of large nations can be slow to change, even if change is needed and desired. In a book published last year, the sociologists John Campbell and John Hall compared the reactions to the 2007-2008 financial crisis in Denmark, Ireland, and Switzerland. These three small countries didn’t cause the crisis; a homegrown Irish housing bubble notwithstanding, the shock wave they dealt with came from America. But though the countries were economically vulnerable, Mr. Campbell and Mr. Hall observed, this vulnerability fostered unexpected resilience and creativity, generating in each nation “a sense of solidarity or ‘we-ness’” that brought together politicians, regulators, and bankers eager to do whatever was necessary to calm markets. [Again, a sense of “we-ness” is one of scale. Cultural homogeneity helps.] 

With the United States lacking the same sense of shared fate and vulnerability, American policymakers could organize only a tepid response, which helps explain why the recovery here was so slow. This theory sheds light as well on developments in environmental and social welfare policy, where it is increasingly common to find a complacent America lagging behind its smaller, more innovative peers. [Complexity plus centralization leads to sclerosis, which is why centralizing authority in a large, diverse, pluralist society make be unworkable.] 

Finally, largeness can take a toll on citizen trust. The presence of a wide variety of social groups and cultures is the primary reason for this. Nearly all scholars who study country size recognize, as Madison did, that large nations are more socially heterogeneous, whether because they represent an amalgamation of different regions, each with its own ethnolinguistic, religious or cultural heritage; or because their economic vitality encourages immigration; or because population size and geographic spread promote the growth of distinctive subcultures; or because they have more differentiated class structures. [Agreed, which is why encouraging a large diverse population of the virtues of multiculturalism may actually be a detriment. I believe the original idea, or at least the one that prevailed in past influxes of cultural groups, was the melting pot of gradual, voluntary assimilation.]

It isn’t inevitable that a large amount of social variation would undermine trust. Well-governed societies like Canada address the issue by stitching diversity and multiculturalism into their national identities. Yet in the absence of cultural and institutional supports, heterogeneity and trust are frequently in tension, as different ways of life give rise to suspicion and animosity. Without at least a veneer of trust among diverse social groups, politics spirals downward. [This characterization of Canada seems counter-intuitive. Stitching ethnic diversity and multiculturalism into a national identity means that national identity must be based not on ethnicity, race, or diverse cultures but in a national identity based on universal principles and social contracts. In other words, on something called patriotism and fealty to the larger community, subsuming ethnic, racial, and cultural differences.]

The challenges of American largeness are here to stay. The task now is for individuals, civic organizations and institutions to commit themselves to building stronger communities and a renewed sense of shared responsibility and trust among different groups. Within the constraints of our nation’s size, we can create conditions for as much democracy as possible. [So, we converge on the idea that it is inevitable we decentralize power and assume the responsibility of self-governance? What then is the real political conflict of interest?]

Neil Gross is a professor of sociology at Colby College.

How the Enlightenment Ends

The Asset Divide

Below is a recent article explaining the growing wealth inequality based on asset ownership and control. This shouldn’t even be phrased as a question as our easy credit policies, massive RE debt leverage, and favored housing policy has created an almost insurmountable wealth divide between the asset-rich and the asset-poor. Who and what policies do we think those left behind are going to be voting for? Non-gender bathrooms? See also Thomas Edsall’s article in the NYT.

Is Housing Inequality the Main Driver of Economic Inequality?

Richard Florida

A growing body of research suggests that inequality in the value of Americans’ homes is a major factor—perhaps the key factor—in the country’s economic divides.

Economic inequality is one of the most significant issues facing cities and entire nations today. But a mounting body of research suggests that housing inequality may well be the biggest contributor to our economic divides.

Thomas Piketty’s influential book, Capital in the Twenty-First Century, put economic inequality—and specifically, wealth inequality—front and center in the global conversation. But research by Matthew Rognlie found that housing inequality (that is, how much more expensive some houses are than others) is the key factor in rising wealth.

Rognlie’s research documented that the share of wealth or capital income derived from housing has grown significantly since around 1950, and substantially more than for other forms of capital. In other words, those uber-expensive penthouses, luxury townhomes, and other real estate holdings in superstar cities like London and New York amount to a “physical manifestation” of Piketty’s insights into wealth inequality, as Felix Salmon so aptly puts it.

More recent research on this topic by urban economists David Albouy and Mike Zabek documents the surge in housing inequality in the United States. Their study, published as a National Bureau of Economic Research working paper, charts the rise in housing inequality across the U.S. from the onset of the Great Depression in 1930 through the great suburban boom of the 1950s, 1960s, and 1970s, to the more recent back-to-the-city movement, the 2008 economic crash, and the subsequent recovery, up to 2012. They use data from the U.S. Census on both homeowners and renters.

Over the period studied, the share of owner-occupied housing rose from less than half (45 percent) to nearly two-thirds (65 percent), although it has leveled off somewhat since then. The median cost of a home tripled in real dollar terms, according to their analysis. Housing now represents a huge share of America’s total consumption, comprising roughly 40 percent of the U.S. total capital stock, and two-thirds of the wealth held by the middle class.

What Albouy and Zabek find is a clear U-shaped pattern in housing inequality (measured in terms of housing values) over this 80-year period. Housing inequality was high in 1930 at the onset of the Depression. It then declined, alongside income inequality, during the Great Compression and suburban boom of the 1950s and 1960s. It started to creep back up again after the 1970s. There was a huge spike by the 1990s, followed by a leveling off in 2000, and then another significant spike by 2012, in the wake of the recovery from the economic crisis of 2008 and the accelerating back-to-the-city movement.

By 2012, the level of housing inequality in the U.S. looked much the same as it did in the ’30s. Now as then, the most expensive 20 percent of owner-occupied homes account for more than half of total U.S. housing value.

Data by Albouy et al. Design by Madison McVeigh/CityLab

Rents show a different pattern. Rent inequality—or the gap between the cost of rent for some relative than others—was high in the 1930s, then declined dramatically until around 1960. Starting in about 1980, it began to increase gradually, but much less than housing inequality (based on owner-occupied homes) or income inequality. And much of this small rise in rental inequality seems to stem from expensive rental units in very expensive cities.

The study suggests this less severe pattern of rent inequality may be the result of measures like rent control and other affordable housing programs to assist lower-income renters, especially in expensive cities such as New York and San Francisco.

That said, there also is an additional and potentially large wealth gap between owners and renters. Homeowners are able to basically lock in their housing costs after purchasing their home, and benefit from the appreciation of their properties thereafter. Renters, on the other hand, see rents increase in line with the market, and sometimes faster. This threatens their ability to maintain shelter, while they accumulate no equity in the place where they live.

***

But what lies behind this surge in housing inequality? Does it stem from the large housing-price differences between superstar cities and the rest, or does it stem from inequality within cities and metro areas—for instance, high-priced urban areas and suburban areas compared to less advantaged neighborhoods?

The Albouy and Zabek study considers three possible explanations: The change over time from smaller to larger housing units; geographic or spatial inequality between cities and metro areas; and economic segregation between rich and poor within metro areas.

Even as houses have grown bigger and bigger, with McMansions replacing bungalows and Cape Cods in many cities and suburbs since the 1930s (as the size of households shrunk), the study says that, at best, 30 percent of the rise in housing inequality can be pegged to changes in the size of houses themselves.

Ultimately, the study concludes that the rise in both housing wealth and housing inequality stems mainly from the increase in the value of land. In other research, Albouy found that the value of America’s urban land was $25 trillion in 2010, roughly double the nation’s 2016 GDP.

But here’s the kicker: The main catalyst of housing inequality, according to the study, comes from the growing gap within cities and metro areas, not between them. The graph below shows the differences in housing inequality between “commuting zones”—geographic areas that share a labor market—over time. In it, you can see that inequality varies sharply within commuting zones (marked “CZ”) while it remains more or less constant between them.

In other words, the spatial inequality within metros is what drives housing inequality. Factors like safety, schools, and access to employment and local amenities lead individual actors to value one neighborhood over the next.

Data by Albouy et al. Design by Madison McVeigh/CityLab

All this forms a fundamental contradiction in the housing market. Housing is at once a basic mode of shelter and a form of investment. As this basic necessity has been transformed over time into a financial instrument and source of wealth, not only has housing inequality increased, but housing inequality has become a major contributor to—if not the major overall factor in—wealth inequality. When you consider the fact that what is a necessity for everyone has been turned into a financial instrument for a select few, this is no surprise.

The rise in housing inequality brings us face to face with a central paradox of today’s increasingly urbanized form of capitalism. The clustering of talent, industry, investment, and other economic assets in small parts of cities and metropolitan areas is at once the main engine of economic growth and the biggest driver of inequality. The ability to buy and own housing, much more than income or any other source of wealth, is a significant factor in the growing divides between the economy’s winners and losers.

 86_main

%d bloggers like this: