The Road to Freedom Page 5

  In another study, social psychologists at the University of Toronto asked students to predict how much they would cheat on a simple math test in order to get a small prize. The average student said he would cheat on almost one-third of the questions. When confronted with the actual ability to do so though—with no repercussions—the participants actually had a physically negative reaction: the researchers found that the participants’ hearts pounded, their palms sweated, and they became short of breath. The students’ bodies reacted adversely to the immorality of taking the test unfairly, and they cheated far less than anticipated.3

  A commitment to the idea of fairness seems to be bred to the bone. The problem is that the definition of “fairness” is ambiguous. We see this ambiguity around us constantly. For example, I have three kids, and they fight a lot. If there’s one cookie left, they will inevitably make multiple claims on it. The conflict goes something like this:

  “I want the last cookie!”

  “No, I should get it!”

  “But that’s not fair—you already had two, and I had only one!”

  “Yes, but I helped Mom make them!”

  At this point, I generally intervene and eat the cookie. (Being a dad has its privileges.) But the point is that the kids are arguing over the definition of fairness, not just a cookie. One thinks “fair” means “equal.” The other thinks “fair” means “earned.”

  This is just like many policy arguments. Some people argue that the income structure and tax code aren’t fair, because they leave the rich with so much more money than the poor, while social programs are, as administration officials commonly say, “desperately underfunded.”4 Others disagree, arguing that taking resources away from people who earned them honestly, just to equalize outcomes, is unfair.

  Here, in short, are the two definitions of fairness in American economic life today.5

  Definition one: Redistributive fairness. It is fair to equalize rewards. Inequality is inherently unfair.

  Definition two: Meritocratic fairness. Fairness means matching reward to merit. Forced equality is inherently unfair.

  Many progressive politicians publicly subscribe to the first definition. For example, former House Speaker Nancy Pelosi has complained publicly that the United States is becoming a nation in which “wealthy people continue to get wealthier” at the expense of the less fortunate. Why is this a problem? “It’s all about fairness in our country,” she says.6 The president of the United States has proposed tax increases on families earning more than $250,000 a year as part of his attempts to get “more fairness” in the tax code.7

  Many Americans—perhaps you—disagree with the claim that fairness requires less income inequality. They think that higher taxes may be necessary for the country—or not. But either way, redistribution does not make society “fairer.” That’s because they prefer the second definition.

  The fact that there is more than one definition of fairness led the great Nobel laureate economist Milton Friedman to write that “‘fairness’ is not an objectively determined concept. ‘Fairness,’ like ‘needs,’ is in the eye of the beholder.”8 Many economists have taken this to mean that people should dismiss the whole concept of fairness and ignore it as hopelessly subjective, even childish, like the argument between my kids.

  This is a mistake. To dismiss fairness is like dismissing love: a difficult phenomenon to identify quantitatively, but a central facet of life and hugely important to nearly everybody.

  THE REAL QUESTION is not whether fairness matters—it does—but which definition is correct for public policy. Is it equal outcomes, rewarding merit, or something in between? Social scientists over the years have developed experiments and surveys that help answer this question.

  One fairness experiment is called an “ultimatum game.” Two subjects who don’t know each other—imagine they’re you and me—are asked to split a certain amount of money—say, $10. I am given the $10 and am instructed to choose how much to offer you. I offer you $3 and keep $7. Next, you are told to accept or reject the offer. If you accept, we both keep the respective amounts. If you reject the offer, we both walk away empty-handed.

  Classical economic theory predicts that you should accept any positive offer I make. If I offer you a penny and propose to keep $9.99, you’ll take it because it’s better than getting nothing, according to the theory.

  But, of course, that’s wrong. If the offer seems too unfair, you’ll walk away out of spite and punish me for my selfishness. In the United States, games like this have an average offer of about $4. People reject the offer between 9 and 17 percent of the time.9

  When the ultimatum game is played in various other countries, the results differ significantly. Researchers observed the highest offers in Paraguay, where good-hearted Paraguayans offered grateful partners a bit more than half, on average. They observed that the lowest offers were in Spain, about $2.50, on average. Not coincidentally, Spain has the highest offer-rejection rate, approaching 30 percent. (According to my Spanish wife, this explains some of the problems in doing business in Spain.)

  Just for fun, I tried the ultimatum game using my three kids as subjects. My two sons (ages eleven and thirteen) and my daughter (age eight) each got to play on both sides of the game with the other two, using ten pieces of candy in each round.10 The big winner was my daughter.11 She made generous offers to my sons, got generous offers in return, and suffered no rejections. She ended up with eighteen pieces of candy. My sons made miserly offers to each other, which each summarily rejected with great prejudice. Their haul of eleven pieces each came entirely from good trade relations with their little sister.

  In the ultimatum game, merit is not part of the experiment. Nobody earns the resources they are bargaining over. You walk into the room, and somebody gives you ten bucks (or ten pieces of candy). That’s it. Under these circumstances, participants find it unfair to try to keep too much. That’s why they are willing to reject offers in order to punish others, even when it means personal sacrifice. Fairness matters to people, even in little experiments.

  When merit comes into the mix, however, people’s perceptions change a lot. If you earn what you have, most people think you have a right to keep it, even if others end up with less.

  There are no ultimatum games using earned income, but there are surveys that show the same thing. For example, in 2006, the World Values Survey asked a large sample of Americans to consider this scenario:

  Imagine two secretaries, of the same age, doing practically the same job. One finds out that the other earns considerably more than she does. The better paid secretary, however, is quicker, more efficient and more reliable at her job.12

  Then the survey asked, “Is it fair or not fair that one secretary is paid more than the other?” To this question, 88.6 percent answered that it was fair to pay the better secretary more, while 11.4 percent said it was unfair.

  So which is the “right” definition for American public policy: redistributive fairness or meritocratic fairness? The answer is, “it depends.” When people do not perceive resources to have been earned (as in the ultimatum game), they think it fair that the resources be split somewhat evenly. When merit is involved (as in the case of the two secretaries), people believe that unequal rewards are fairer than equal rewards.

  When I was a university professor, I used to make this point to my economics students in an unorthodox way. There was always a lot of class discussion about how society should distribute income. Many of the students were politically progressive, and I probably heard them say a thousand times that it is “not fair” the rich in America have so much more than the poor. Fairness was their rationale for income redistribution.

  So I set up a thought experiment. Halfway through the course, I could see big differences between students who were working hard and those who weren’t. The hard workers got lots of points on their tests and quizzes; their less motivated friends didn’t. We all knew that the students with the highest point totals were work
ing harder than the others. They might have been a bit brighter or already knew more about economics, but the real difference was how much they were studying.

  I proposed that the class take a quarter of the points earned by the top half of the class and pass them on to the students in the lower half of the class. The students were in unanimous agreement that this was a stupid idea. Redistributing points earned on the basis of hard work and merit, simply so that students who didn’t study could get a higher grade, would be completely unfair. Even students at the bottom thought the scheme was idiotic.

  I didn’t have to spell out my point. Beyond providing for essential services and a minimum safety net, redistributing earned income just to get more equality is not fair.

  If income were handed out purely arbitrarily, then most of us would viscerally agree that the money should be redistributed in a more-or-less equal way. But income is not handed out to people purely arbitrarily. Most of us believe that even if the system is imperfect, we earn our success through hard work and initiative—in a word, through merit. Most of us understand that some redistribution is necessary to pay for a functioning government. But relatively few believe that the resources people earn should be redistributed to help equalize outcomes.

  THE UNITED STATES was founded on the ideals of meritocratic fairness. Alexis de Tocqueville wrote that Americans are “contemptuous of the theory of permanent equality of wealth.”13 Thomas Jefferson famously said it in this way:

  To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.14

  The views of Tocqueville and Jefferson follow an ancient truth: that to take resources from those who legitimately earn them and give them to another who does not is not fair. If it is voluntary, it is charitable. But if it is coerced, it is unfair. Aristotle put it best: “The worst form of inequality is to try to make unequal things equal.”

  Following in the footsteps of the Founders, Americans prefer rewarding merit over redistribution. Public opinion studies show this, such as the one about the two secretaries. Still, a lot was left to the imagination in the story of those two secretaries. Did they both have access to a good education? Had both received equivalent training for the job? For their unequal salaries to translate into a fair economic system, both the secretaries needed the opportunity to develop their abilities. It’s not so fair, for example, if the less effective secretary couldn’t go to school and didn’t know how to read.

  If individual opportunity is a sham—if the system is fixed and some people get the breaks only by virtue of luck or birth or skin color—then inequality isn’t fair at all. We should redistribute wealth the same way we should redistribute unearned candy.15 But if America is an opportunity society—if, in fact, people have the chance to work harder, get more education, and innovate—then rewarding merit is fair, and for some people to make more money than others is good and just.

  The real question, then, is whether America is an opportunity society. If it is, then inequality is fair. If it isn’t, then inequality isn’t fair.

  According to the evidence, the United States is an opportunity society, even if an imperfect one. One way to show this is by looking at whether people can and do get ahead economically. University of Michigan-Flint economist Mark Perry has analyzed data from the Federal Reserve Bank of Minneapolis to see whether Americans are mobile between income classes. He asked the questions, “If you’re poor in America, does this mean you’ll stay poor? And if you’re rich, are you set for life?”16

  The answer to both questions was a resounding no. The poor can and do rise in America, according to Perry’s research, and the rich can and do fall. He shows that 44 percent of households in the bottom income quintile (the lowest 20 percent of earners) in 2001 had moved to a higher quintile by 2007. During the same period, 34 percent in the highest quintile in 2001 moved to a lower quintile by 2007. In other words, if you are poor, the chances are about one in two that you’ll be doing better within a few years. If you are at the top, the chances are about one in three that you won’t stay there very long.

  Figure 3.1. Starting out poor or rich in America is no guarantee of staying that way. (Source: Mark Perry, “Income Mobility in the Dynamic U.S. Economy,” 29 March 2011, The Enterprise Blog, http://blog.american.com/2011/03/income-mobility-in-the-dynamic-u-s-economy.)

  Perry’s results are typical. Economists at Urban Institute (a center-left think tank) conducted a large survey of the studies on income mobility in America, concluding that “mobility is significant and has remained stable over time.”17 Using the University of Michigan’s Panel Study of Income Dynamics—the most comprehensive nonpartisan data source tracking people and their incomes over the decades—economists have found that the likelihood of escaping the bottom quintile in a ten-year period is 44 percent.18 Another study using the same data found that the escape rate over five years is 38 percent.19

  Not everybody rises from poverty, but millions and millions do. This means real people in America are experiencing real opportunity, all the time. For them, the American Dream is no illusion.

  I am not arguing that everybody has an equal chance to rise. A lot of people are stuck at the bottom, especially if they have gotten an inadequate education, or have been on welfare and if their parents were on welfare, too.20 The Great Recession that is continuing as I write has seriously harmed the mobility of millions of hard-working people thrown out of work or unable to get ahead. But the data simply do not support the idea that the deck is hopelessly stacked against the poor.

  Given the facts, it’s hardly a surprise to find that huge majorities of Americans believe the U.S. is an opportunity society. In 2005, when Syracuse University researchers asked a cross-section of Americans, “Do you think everyone in American society has an opportunity to succeed, most do, or do only some have this opportunity?” 71.3 percent responded that everyone or most people have an opportunity to succeed.21

  This belief has persisted for many years, probably since the founding of the United States (although there is no data going back that far). The General Social Survey has asked a large sample of Americans since 1973 to answer this question: “Some people say that people get ahead by their own hard work, others say that lucky breaks or help from other people are more important. Which do you think is most important?” For forty years, between 60 and 70 percent of Americans have said “hard work,” while never more than 16 percent have said “lucky breaks.”22

  This faith in the effectiveness of hard work is distinctly American. In the World Values Survey conducted between 2005 and 2007, researchers asked people in fifty-four countries whether hard work brings success or whether success is more a matter of luck and connections. Americans were more likely than people in other developed countries to say success comes from hard work; for example, they were more than twice as likely as the French to give this response.23 This may be why many believe America is—for now—an aspirational society, while Europe is more animated by envy. The singer Bono summed it up evocatively: “In Ireland people have an interesting attitude to success; they look down on it. In America, you look up at . . . the mansion on the hill and say, ‘One day . . . that could be me.’ In Ireland, they look up at the mansion on the hill and go, ‘One day I’m gonna get that bastard.’”24

  Most Americans believe the U.S. is an opportunity society—but not all do. The biggest difference on this score is political ideology. According to the Syracuse University data, the people least likely to say they believe in the opportunity society today are political progressives. Liberals, including successful liberals, believe less than conservatives—even poorer conservatives—that economic mobility is actually possible in America. Forty-eight percent of lower-income conservatives believe there’s a l
ot of upward income mobility in America, versus 26 percent of upper-income liberals. And 90 percent of the poorer—but optimistic—conservatives said that hard work and perseverance could overcome disadvantage, versus just 65 percent of richer liberals.25

  For now, the optimistic view is the mainstream view, though, given that seven in ten Americans still believe in abundant opportunity. This is not very surprising, I suppose; it may even be in our genes. Had our ancestors not believed in the correlation between hard work and success, most of us wouldn’t even be here. If you’re descended from immigrants (and most of us are), ask yourself why your ancestors came here. I am confident they didn’t come to America in search of a stronger system of government income redistribution. Letters from my own great-grandparents who emigrated from Denmark suggest they came to America to earn their success. They wanted to start a farm, and to be rewarded if they worked hard. A system without opportunity, where merit was not rewarded, was what they were escaping from in Europe.

  Generation after generation of immigrants came to America for the same reasons that my family did.26 Abraham Lincoln promised, “When one starts poor, as most do in the race of life, free society is such that he knows he can better his condition; he knows that there is no fixed condition of labor for his whole life.”27

  Perhaps the popular American belief in meritocracy explains why our sense of economic class has remained practically unchanged across the decades. In 1972, 48 percent of Americans called themselves “working class,” while another 44 percent called themselves “middle class.”28 By 2002, despite a 15 percent increase in income inequality,29 these percentages were still 46 percent and 46 percent, with just 8 percent considering themselves either “lower class” or “upper class.”30