A Piece of the Pie

I was just a baby when I came to the United States with my family from Canada — where I was born. My family is from Guyana in South America, although when they immigrated to Canada Guyana was still known as British Guiana. Although I am thoroughly American both culturally and as a naturalized citizen, the idea of The American Dream has been a puzzle to me. Without going into a long-winded tale of my family’s history, let’s just say that by the time I was born, I was lucky. My father was a medical doctor (eye surgeon, to be exact) and because he had worked very hard to achieve his professional success, he had the wherewithal to send me and my siblings to college. Like many folks, I was told with great regularity that if I followed a particular path, I’d achieve what can be called Middle-Class Dreams. That path included the following:

— Study hard and graduate from high school
— Study hard and take the SAT and get good scores in verbal and math
— Get into a college and study hard and graduate
— Find a job that hopefully pays well
— Work hard and start saving for a house
— Get married and maybe have a kid
— Accumulate wealth and save for retirement

Somewhere along the way, if kids factor in, you kind of instill the same path in them so they can live comfortably. It’s a nice path to follow, but it presumes a static model that all high schools and colleges tend to produce more or less equal outcomes. That is to say, a high school or college diploma signals all graduates have a similar set of skills that the degree certifies. This path also makes a presumption that other factors like race, class, and gender have no effect on achieving those dreams. But even if you factor out those elements, the type of professions one chooses won’t necessarily lead to a middle-class life. In other words, there will always be inequality, but does there have to be such a large gap? And can economists help create conditions that reduce inequality through taxation?

The answer is yes — but it’s a qualified “yes.”

My alumni magazine from the University of Pennsylvania has a really interesting article on how one professor at Wharton School of Business is doing research and creating models to address inequality through changes in the tax code. It sounds boring, and it probably is, but the consequences of such changes are anything but.

In economics, there’s a concept that in the vast categories of jobs, they all have an equivalent social value. Does that mean a highly paid corporate lawyer who works very hard for her client to loosen pollution laws has the same social value as a retail worker? No. What “equivalent social value” means is that a teacher, a lawyer, and a scientist are all professionals who require specialized training. Although they are paid different amounts for their labor, there’s a view that says each profession is a benefit to society in a similar way.

However, challenging that view is the University of Pennsylvania’s Benjamin Lockwood at the Wharton School of Business — hardly a hotbed of leftish thinking. What Lockwood tests through economic modeling is how the social value of say a teacher or a scientist is greater than a bond manager or a corporate lawyer. An example he points to is the replacement of a lousy teacher in a classroom with a competent one — not a superstar teacher, but rather someone who is, in a word, average. It’s no secret that teachers aren’t paid well, but their effect on the future financial success of their students far exceeds their salaries. That’s why an average teacher’s work with students is more valuable than say a corporate lawyer. Average, good, and great teachers can raise the future collective wealth of their students far more than a corporate lawyer can in trying to secure oil rights in a zero-sum battle.

In the example of the lawyer, she and her team are well paid to secure a deal over a fixed resource (the oil field). The hours of work they do will have very little effect on the value of the resource because the salaries paid to the lawyers for the work they do does very little to expand the collective wealth of the society. Compare that to scientists working on drug treatments for a virus or a disease. Their extra hours of work could lead to the betterment of the collective health of society.

How does one go about addressing this inequality? Through changes in income taxes. Lockwood understands that high paying job opportunities are what lure students into certain majors. Between 1980 and 2005, salaries in the financial sector more than doubled — which is why college students majoring in education has fallen while finance and law have risen. If you’re going to spend over one-hundred-thousand-dollars on a college education, you’ll want a return on your investment. However, what if tax policies were changed so teachers and scientists would pay zero in income tax — while anyone paying over one-million-dollars paid a rate of 37-percent? How would that affect a student’s decision-making process knowing that if he or she became a school teacher, their salaries would be four times higher than if the status quo remained just that? Lockwood and his colleagues said there would be significant growth in teaching — which would create a kind of spillover benefit to the society as a whole. Going back to the evidence that an average teacher can raise the collective wealth of his or her class by two-hundred-fifty-thousand-dollars per year, having more average, good, and great teachers in the profession would see a 35-percent gain per student over the course of their working life. The social gains of raising the collective wealth of a society have a positive effect by shrinking the gap in income, leading to more social stability, and a greater sense of utilitarian happiness. While this economic model Lockwood and others tout are certainly not without its faults (because really, how can one control for all contingencies and consequences), his ideas about addressing inequality should be tried at local and state levels to see if taxing certain professional types of labor differently can really lead to the outcomes sketched above.

Read “Inequality Economics” by Trey Popp in The Pennsylvania Gazette (May/June 2020)