The United States has a problem with poverty. The latest statistics show that 49 million Americans are in poverty and another 90 million are in “near-poverty” (i.e., have incomes less than twice the poverty line). These two groups, which together account for 48 percent of all Americans, would form a country with a population ranked the tenth largest in the world.
We’re all familiar with the claim that our high poverty rate is simply an unfortunate byproduct of running a competitive economy. If we really wanted less poverty, the argument goes, we would have no choice but to follow the European way, which means holding down poverty to an “unnaturally” low rate via a host of productivity-strangling regulations. The sage economists thus intone that Europeans pay dearly for their low poverty rate by foregoing GNP. Under the American social compact, by contrast, we agree to run a highly competitive and regulation-free economy, with the happy result of higher GNP. To be sure, another less fortunate consequence is a high poverty rate, but in principle we could always spend part of our enlarged GNP on a safety net for the poor.
The foregoing story, however frequently repeated, is wildly off the mark. It’s not just that we don’t invest our high GNP in a bona fide safety net. The more fundamental problem is the presumption that poverty is the inevitable price of a highly competitive economy. This presumption is wholly unsubstantiated. In fact, we have so much poverty precisely because we’re running an uncompetitive economy, one that protects the rich from competing with the poor. The “laissez-faire” tag that we so love mainly serves as camouflage for an economy that’s rigged to serve the wealthy.
This is a strong claim but not without support. Consider, for example, the relationship between education and jobs. The high unemployment rate among poorly-educated workers arises because there are too many of them chasing after the few jobs for which they’re qualified. In effect, there’s a vast reserve of poorly educated labor, thus increasing unemployment and driving down wages for the relatively small number of available low-skilled positions. The result is far too much poverty.
And an extra dose of inequality too: if the supply of college-educated workers grew, there would be more competition for jobs requiring a college education, which would in turn drive down the pay of college-educated workers. Although it’s fashionable to rail against growing unemployment among college-educated workers, their unemployment rate is still far lower than that for less-educated workers. The resulting “unemployment gap” can only be maintained by restricting access to quality education. If we’re really serious about reducing income inequality, we should stop rationing degrees and ratchet up the number of college-educated workers.
We’d have less poverty and inequality if we increased the number of slots in higher education and committed to a fair and open competition for them.
The educational rationing in our economy constricts both the supply and demand for college students. The supply of potential college students is artificially lowered because children born into disadvantaged families are poorly prepared for college and, in any event, haven’t the money to afford it. The demand for college students is kept artificially low because some universities (e.g., elite private and public institutions) ration their available slots. Stanford University, for example, isn’t meeting the rising interest in its degrees by selling some profit-maximizing number of them. If top universities did meet demand this way, the outsized returns from a high-prestige education would disappear. But they haven’t.
Is this how a competitive market works? Absolutely not. When the demand for hybrid cars, for example, increased dramatically in the U.S., car manufacturers didn’t set up “admissions committees” charged with evaluating the qualifications of prospective buyers. They instead ramped up production to a profit-maximizing level. We have become so accommodated to rationing higher education that we no longer appreciate how profound a market failure it is.
The educational bottlenecks in our economy affect prices by changing the relative size of the poorly-educated and well-educated classes. Because they artificially protect the well educated from competition, the wages of the well educated are artificially inflated. Because they also create a bloated class of poorly educated workers, they artificially lower their wages and raise their unemployment rate. The implication is clear: we’d have less poverty and inequality if we increased the number of slots in higher education and committed to a fair and open competition for them.
We’ve too often given our highly flawed labor market a free pass and assumed that poverty can only be addressed by building a better safety net. We do of course need to build a better safety net, to bolster unions, and to undertake other reforms. But we also need to build a labor market that’s not rigged against the disadvantaged. If the spirit of the Occupy movement is to ask whether our institutions are living up to our ideals, then it’s high time to consider whether a poverty-generating labor market founded on rationing and unequal educational opportunity can possibly pass that test.