On Socio-Economic Classes

Dated Jul 4, 2020; last modified on Fri, 24 Nov 2023

#meritocracy #inequality #socioeconomics

Our Lot in Life

Not recognizing your blessings feeds into the dark side of capitalism and meritocracy: success is a choice, and that those who haven’t achieved success are not unlucky, but unworthy.

I’m relatively lucky. I don’t know how much of the techie hubris that I bear. I have unresolved feelings about meritocracy and fairness. Race is usually used as a proxy for bridging the gap, e.g. affirmative action at colleges. But who is affirmative action better suited for - a rich black kid or a poor white kid? I’m in the camp that believes wealth is a bigger divider than race.

\(\Delta\) “wealth is a bigger divider than race” misses the point that racism adds yet another obstacle. The hypothetical should not be rich black kid vs. poor white kid, but rather, poor black kid vs. poor white kid.

Growing up in the US. More $$$ for entrepreneurs, freedom to challenge institutions, not going bankrupt if company fails.

Um, but I’ve also heard the argument that Nordic countries are forgiving to entrepreneurs given their large social benefits net, e.g. universal health care. Maybe Scott means that the company goes bankrupt but the individual is protected, but isn’t that standard everywhere?

Being born at an opportune time, e.g. white heterosexual male when Dow Jones increased 445% on average during prime working years; getting +$100m for startups in the 90s in SF.

Scott had a pie chart from Richard Kerby breaking down VC diversity numbers:

By RaceBy GenderBy Race & Gender
White - 74%Male - 89%White Male - 67%
Asian - 23%Female - 11%Asian Male - 19%
Black - 2%White Female - 7%
Latino - 1%Asian Female - 4%
Black Male - 2%
Hispanic Male - 1%

​I was skeptical of VC firms for PoC, but this chart is alarming. I wonder how skewed the numbers would be if viewed by parental income. How would one even get such data?

Rapid mobility is not correlated with capitalism, democratization, mass public education, decline of nepotism, redistributive taxation, emancipation of women, or socialist revolution. 10% of variation in income can be predicted based on your parents' earnings. ~50% of variation in overall status is determined by your lineage. It can take up to 10-15 generations (300-450 years) for lineages to regress to the mean.

What factors affect social mobility and what factors do not? Going to an elite university especially benefits those from lower socio-economic groups. Lottery-like careers, e.g., making it in the NBA, music, etc.

Though the LeBrons and Will Smiths of the world are outliers enough that banking on their paths is more of a prayer than a deliberate path.

An elite education. For the class of 2013, Dartmouth, Princeton, Yale, Penn, and Brown had more students from the top 1% of the income scale than the bottom 60%.

The statistic is from 2013. In 2021, Colleges now flaunt how many FLI students they have in the incoming cohorts.

Feeling broke is different from being broke where your basic utilities like water are on the chopping block. Being broke implies some structural problem with your income and finances that budgeting won’t fix.

Can be a source of naïveté when people discuss economic hardships. You’re not broke if you’re illiquid after making mortgage, auto, 401k contribution, and ETFs.

Advice like spend \(\le 30\%\) of your income on rent doesn’t account for the drop-off on the lower end of the scale, e.g. between a $1,250 tiny but acceptable apartment, and an $840 in a crime/drug-ridden area.

People living at decent-to-great income hardly lie awake thinking about their car. For a $2,000 car, paying $50-100 per month insurance doesn’t add up. Simply taking the bus isn’t an option if it increases the trip time 4x, and the commuting crowd isn’t all dandy.

Coming to the US, I was pretty impressed that some minimum wage workers drive to work, unlike in Kenya. This puts a better lens on the “But you have a car” attitude.

Dilemma in upgrading jobs while having dependents. The higher-paying jobs tend to have better qualified candidates, while the junior positions, while achievable for newcomers to the field, pay too little to cover the bills.

Being able to study your way into a better paying career requires some sustenance while getting “ready”. Working overtime shifts is not conducive to learning Java on the side. Presumably, this is a problem that organizations like Ada Developers' Academy have wrangled with?

If making $35k, taking a job at $40k with healthcare benefits leaves you worse off: insurance is expensive, and the government won’t help you.

Being poor-ish, you’re forced into more variable marketplaces like Craigslist. The cookware that you can afford at Target starts flaking teflon into your eggs a week in, and Sam Vimes' “Boots” theory of socioeconomic unfairness kicks in.

What data sources can one use to examine social mobility? Census data is probably too de-anonymized to support such analysis. Maybe home records as where you live is a proxy of where you are on the social ladder?

Tax records, registry of professionals (e.g., Swedish Bar Association), list of university graduates especially post-graduate, membership rolls at Oxford and Cambridge. Lists of members of parliament.

What are examples of high-status surnames and low-status surnames, and their respective correlations?

In 6 Stockholm-area municipalities in 2008, the average taxable income of people with noble names was 44% higher than those with the common surname Andersson. Uppsala University’s master’s graduates from 2000 to 2012 had Swedes with elite surnames overrepresented by 60% to 80%. People with rare surnames shared with an Oxbridge alumni from the 1800s are 4x more likely to be enrolled at Oxbridge.

Societies that invest the most in helping disadvantaged children, e.g., Nordic countries, have produced absolute, commendable benefits for these children, but they have not changed their relative social position.

Studies of adopted children in the US and Nordic chances show that life chances are more strongly predicted from their biological parents than their adoptive families, suggesting that genetics is the main carrier of social status. Societies with higher tendency to marry within the same group show even lower social mobility.

This is a pretty bold claim by , who presents it as if it is conventionally held. notes that Clark’s views are not conventional. Clark defends his positions on the fact that he looks at longer periods of time that allow chance variations in status from generation to generation to smooth out.

Pitchforks for the Billionaires?

It’s a classic trope in Reddit threads. Billionaire X does Y. Commenters assemble into two camps, but mostly rehashing arguments in previous threads. Let’s weigh and consider the arguments.

The highest federal marginal rate in the US is 37% for income over $518,401. San Francisco has the highest income tax bracket at 51.8%. Finland tops at 65%. Japan has the highest inheritance tax rate at 55%. America’s inheritance tax rate is 40%.

Undeserved wealth, e.g. government bailouts, multi-million bonuses in context of lesser bonuses for lower-ranked employees.

  • This is poignant when placed in context of people suffering elsewhere, e.g. extreme poverty, starvation, disease, refugees, etc.

Peter Singer’s “Famine , Affluence, and Morality” is an influential paper on the obligation of affluent persons to humanitarian causes.

  • Much of the wealth is in equity. It’s paper money, so how can we tax it?

It being paper money doesn’t make it inaccessible. The market cap of the US stock market is $35T and $122T of stock changes hands annually. US billionaires have less than $4T in stocks, so it wouldn’t exactly crash the market.

  • One proposal (championed by Warren in the US in 2020) is a wealth/capital/equity tax. For example, in Switzerland, residents with more than $101,010 in assets pay wealth tax on net assets with the top rate ranging from 0.13% to 0.94%.

Piketty’s “Capital in the Twenty-First Century” is considered influential in this space. The issue is highly contested. For instance, a 1.0% wealth tax for assets above $50m vs. a typical successful startup will lead to a 41% tax of the stock after 60 years, and some consider this excessive.

Billionaires do not exist without exploitation of others.

  • Ignoring anecdotes of exploitative vs. helpful billionaires, the cumulative change in real wages was +6.5% for the 10th percentile, +8.8% for the 50th percentile, and 41.3% for the 90th percentile.

The pie is getting bigger for every one, but for some, it’s getting bigger much faster.

It’s an absurd amount of money. If you’re making $40k/year, it’d take you 25k years to get to just $1b.

  • However, people don’t become billionaires by getting a wage. Counter-example: Invest $1 for 1% return per year, compounded. After 25k years, you’ll have have more than $\(10^{98}\)b.

  • A more apt illustration would be something like: If spending $1m every month, one would need 83 years and 4 months to exhaust $1b.

However, wealth begets wealth. Invest the $1b in an instrument that returns at least 1.2% per year, and perpetually spend $1m/month.

  • The combined net worth of all US billionaires in Dec 2020 was $4.011T . If this wealth were to be redistributed to the 255m Americans aged 18+, each would get $15,720.

In 2020 Q3, the top 10% had $80.7tr. Assuming 255m => 100%ß, the average net worth of the top 10% is $3.1m.

In 2017, the lowest 20% of income earners had a median net worth of $4,883, while the top 20% of earners had a median net worth of at least $500k.

Billionaires are a result of a system that provides things that we value, e.g. computers, phones, fast shipping, web indexing, socialization, etc.

Poverty Reduction

What are the four factors that have historically reduced inequality?

Catastrophe (from ’s title). Depletion of natural resources? More accountable governments?

Mass-mobilization warfare, violent and transformative revolutions, state collapse, and catastrophic epidemics. The pressures of total war spurred unionization, extensions of voting rights, the creation of the welfare state, and higher marginal tax rates. The communist revolution of the 1920s confiscated, redistributed and collectivized private wealth, and set wages, leveling inequality. When violent turmoil collapses states altogether, everyone stands to suffer, but the rich simply had more to lose: the last Roman aristocrats lined up for handouts from the Pope. The bubonic plague, the Black Death, smallpox and measles claimed so many lives that the price of labor soared and the value of land and other capital plummeted.

Pretty grim picture. Does suggest that we make our peace with inequality as long as everyone is trending upward with time, albeit some faster than others?

Why aren’t democracy and education effective ways to combat inequality?

Democracy doesn’t eliminate the social elite class. Cronyism often follows. No hypothesis for education – hitherto thought it was universally good for fighting inequality.

Less murderous mechanisms of combating inequality show lower successes. Land reform was often subverted by the propertied. Macroeconomic downturns, e.g., 2008, rarely hurt the rich for more than a few years. While improving access to education can indeed narrow income gaps, American wage premiums for the credentialed collapsed precisely during both world wars.

What’s the relationship between economic growth and poverty reduction?

If economic growth requires an educated populace, then it leads to poverty reduction.

The fastest growth seems to come from reallocating poorly allocated resources, i.e., putting capital and labor toward their most productive use. Beyond the low-hanging fruit of reallocations, the recipe for growth is uncertain. Plugging in data on education, investment, corruption, inequality, culture, distance to sea, etc., has not offered conclusive recipes. However, disagrees that there is a mystery to it – progress in ending extreme poverty would result from good governance, investments in health and education, and the global spread of technological advances; developmental aid is necessary to break poverty traps or accelerate progress in certain disadvantaged regions, e.g., distant inland regions of sub-Saharan Africa and Asia. If rich countries spent .7 of their respective GDPs into well-targeted developmental assistance, then extreme poverty could be ended by 2025. In 2020, rich countries give about .31% of their GDPs.

What are examples of misallocation of resources in developing countries and how does it affect productivity?

Corruption. Donors insisting how money should be spent without regard to local knowledge. Misallocation decreases productivity, not sure if there’s nuance to that claim.

Examples of successful reallocations: China under Deng moving away from collectivized agriculture; India in the 1990s to speed up resolution of debt disputes and thus make credit markets more efficient.

Children who die of preventable diseases, schools where teachers do not show up, court systems that take forever to adjudicate cases.

What factors make quality of life vary across countries with similar income levels?

The distribution of said wealth. For example, oligarchical societies can claim a high mean wealth, but a lot of the residents are below that mean. However, assuming that the similarity of income levels are fair, e.g., both reporting in medians, not sure what could cause variation. Maybe the extent of the social safety net for those on the lower end of the economic spectrum – that would greatly affect the quality of life.

What are some successes of the last few decades that were not driven by economic growth, but by a direct focus on improving particular outcomes?

Eradication/mitigation of various diseases, e.g., polio, HIV/AIDS.

The under-five mortality rate has fallen drastically, even in poor countries whose economies have not grown particularly fast. Credit goes mostly to policymakers' focus on newborn care, vaccination, and malaria prevention.

One big advantage on focusing on clearly defined interventions is that they have measurable objectives. For example, Cohen and Dupas showed that massive distribution of free insecticide-treated bed nets in the most effective way to fight malaria. Charging people for bed nets, once thought to make the nets more likely to be used, in fact decreased their use. However, there were already breakthroughs in public policy and funding that were a decade in the making and 400m free nets had been distributed between 2004 and 2010. Development-focused institutions urgently need cross-disciplinary teams, not experiments to test the known or the obvious. Randomized trials should not delay the implementation of proven life-saving interventions, and are inappropriate when the issue is not the efficacy of an intervention, but how to deliver a proven intervention in a local context.


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