Saturday, December 19, 2015

How Rich Kids Get a Head Start - TIME

Posted: 18 Dec 2015 08:34 AM PST
Back in 2011, I wrote a TIME cover story on declining social mobility and growing inequality in the United States. The title: “Can You Still Move Up in America?.” My answer back then: “not as easily as in the past.” For some time now, we’ve seen rising inequality in the U.S. And as a result, social mobility has been declining, particularly respective to many of our peer nations.
Today, new Pew Research Center data on the differences in how rich and poor families raise their children has only solidified my view that we’re becoming a two-tier society — one in which who you become depends heavily on who your parents are.
Pew’s survey found that rich parents tend to coddle their kids, creating busy after-school schedules full of soccer games and violin lessons. Working-class kids, however, are left much more to their own devices, given fewer resources and less stroking. According to Pew, that makes them more independent and closer to their parents. Yet it doesn’t help working-class youths climb the socioeconomic ladder. Once they hit their working years, they struggle just as their parents did.
Inequality and a lack of social mobility isn’t a new phenomenon. It’s always been the norm. In the wonderful 2014 book “The Son Also Rises,” University of California academic Gregory Clark shows that birth has accounted for about 50% of people’s success in life across nearly every country and time period. On top of that, Clark found that it takes 10 generations or more for inherited upward mobility to wear off. Even in the U.S., we’re more like the inhabitants of Downton Abbey than we would like to admit.
Why is this? Much of it has to do with education, including better schooling for rich children but also those after-school resources cited by Pew. But there’s a larger factor driving this, too: real estate. Rich kids are more likely to inherit property wealth from their parents, increasingly the fastest way up the economic ladder. Academics like Thomas Piketty have written at length about real estate’s importance in building socioeconomic oligopolies. More recently, former British financial regulator Adair Turner has made a strong case for real estate as the single biggest driving factor in our two-tier economy.
“There is something about a modern economy that is extremely real estate intensive,” Turner, author of “Between Debt and the Devil,” told me in a recent interview. “Living in a ‘nice’ location is a high-income want, as is good education and healthcare.”
These desires are what economists call “elastic” wants. They are constantly in demand, and in lieu of proper price control, their cost can and will spiral almost infinitely (unlike, say, the price of a pair of jeans, shoes, or even a car, which is somewhat bounded).
Just as rising education costs make it harder for the poor to climb the socioeconomic ladder, so too do higher real estate prices. Banks aren’t willing to extend credit to those who can’t put down 30% cash on a new home, but rising rents are making it tougher for people to save. That’s making it harder, if not impossible, for working-class (and even some middle-class) families to buy a home. As an increasing share of global wealth is held in housing, those who lack real estate fall are left behind.
What’s the solution? The price inflation of elastic economic goods like healthcare, housing, and education need to be constrained by smarter policies involving both the public and the private sector. In the case of real estate, some are calling for privatizing Fannie and Freddie Mac, which still underwrite about 90% of the U.S. mortgage market. But that would do nothing to fix the problem. Instead, it would create a more divisive property market, since private companies would have no impetus to create any kind of affordable housing.
The quickest fix would be tax reform that focuses on rewarding people for equity rather than debt. That means getting rid of mortgage interest deductions that allow people to buy McMansions (and create asset price inflation that fuels the cycle of inequality I have outlined above). When only the rich can afford property, and property makes up an increasing amount of global wealth, and a larger percentage of that wealth is kept in the family, then you really do have the makings of a new Gilded Era.