Equitable Growth in Conversation: Richard Reeves

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.

In this installment, Equitable Growth’s Senior Director for Family Economic Security and Senior Fellow Elisabeth Jacobs talks with Richard Reeves, senior fellow in Economic Studies and co-director of the Center on Children and Families at The Brookings Institution and most recently the author of Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It (2017).

[Editor’s note: This conversation took place on October 11, 2017.]

Elisabeth Jacobs: Let’s jump right in, Richard. Who are the dream hoarders?

Richard Reeves: I define them in two ways. One, they are the people at the top of the income distribution who are essentially the winners of the inequality divide in our country, who have risen to the top over the past three or four decades. They are, in my view, the top 20 percent roughly of the income distribution. That means they earn healthy six-figure household incomes, with average incomes of about $200,000 a year.

This is where I see the divide between the bottom 80 percent and the top 20 percent. But then, more specifically, I identify some behaviors among those at the top of the distribution that I think amount to kind of a form of hoarding. In other words, they are kind of overconsuming, or unfairly consuming, some goods or services that actually give them a leg up or give their kids a leg up in a way that perpetuates the inequality that they are currently benefiting from.

Jacobs: What kinds of goods and services?

Reeves: Education and housing are at the top of my list, and the way that they kind of interact with each other. Think about the way the geography of our cities now reflects economic inequality. There has been a slight drop in racial segregation from very high levels but an increase in economic segregation between neighborhoods, between different areas. I think that’s true at the top, as well as the bottom of the income distribution too. So, we are seeing those who are affluent, the top 20 percent and above, separate themselves off into different neighborhoods, which means they can access education resources such as Kindergarten through grade 12 education, and then use local zoning laws to protect the neighborhoods and the land in those neighborhoods from incursions by those who are of more modest economic backgrounds.

That’s all subsidized through the federal mortgage interest deduction. If you want to think about the way in which money buys opportunity and therefore perpetuates inequality, the interaction between the income trends and earning trends, the residential segregation of neighborhoods, the way that education is provided and local zoning laws and regulation of land—they all interact with each other in a way that effectively means the federal government subsidizes me in an expensive neighborhood in an area with great schools. I can then defend against anybody else using unfair exclusionary zoning laws. And my kids therefore get to go to a good public high school and live in a relatively affluent neighborhood.

Jacobs: Why do you think this happened?

Reeves: It’s the combination of millions of small decisions. I think that what happened was that we’ve seen growing labor-market inequality, which combined with inequalities in family formation and family structure and, using a stunningly unromantic phrase, assortative mating, has led to even greater household income inequality. That money, in a society where money matters so much, has been able to be readily transferred into other kinds of advantages, including wealth, including housing, and including access to education.

So, you can see the how. The question then is why, and I think you have to talk about incentives, and the particular incentives of those who are doing well to protect their own position and to protect the position of their children. And I think there is inequality and class perpetuation that really speak to each other.

One of the things I think more strongly now than when I even wrote the book is that actually it’s a long way down from the upper-middle class. It’s a long way down. And the stakes are higher because actually dropping from the 90th to the 50th percentile of income doesn’t look very good down there.

Jacobs: Right.

Reeves: So, being in the middle or lower than that in the United States has dramatic consequences for other things such as access to health care, access to housing, and access to your kids’ education. So it’s both farther to fall and a harder landing, which means the upper 20 percent are highly incentivized to use every means at their disposal to protect their position and the position of their children, and if there are tools available to do that, even if they become exclusionary and unfair, they are highly incentivized at an individual level to use everything, every tool at their disposal. And individually that’s kind of rational, and in some ways sort of justifiable because of this fear of falling, as [author and activist] Barbara Ehrenreich phrases it.

Fear of falling is a really great phrase. The worse inequality gets, the greater the incentives among upper-middle class households to prevent downward mobility and protect their position. The more successfully they do that, the worse inequality gets. I think one other thing that’s important as to why it happens is the more separate these households become, the more their reference point for what counts as rich or affluent changes. It gets distorted because they tend to use local reference points. And it’s much easier to convince yourself you’re not very rich, even if you are in the 95th percentile, if everyone who you know is in the 98th percentile.

This “I’m not rich” problem is getting worse because they are seeing people who are segregated by neighborhood, by institution, by occupation, by marriage, and essentially spending their time more and more with people like themselves or wealthier than themselves. And that actually increases the fear of failure because you don’t see yourself as the winner because you’re always looking up.

This creates real problems as a political way of thinking because it does encourage those who are maybe not quite in the top 1 percent, earning $400,000 or more, to say “I’m not rich. I’m not rich.” Everyone wants to tax the rich, and no one thinks they are rich. And that’s another side effect of economic inequality when it becomes physical, becomes corporal, is incorporated into our neighborhoods and our institutions—so incorporated that it has these huge effects of reference point bias and insulation from what’s really going on. This institutionalization of inequality in the various ways that I’ve talked about speaks to this class divide, and that most troubles me. To me, this speaks to the kind of infantilized debate about inequality, where it’s much easier to stop eating avocado toast than it is to talk about the fundamental problems of the wage distribution.

Jacobs: Part of the problem, too, is the connection between this “I’m not rich” effect and the provision of public services and public goods. Underlying your argument about the separation of classes is that society today doesn’t actually have a unified sense of public goods and have a floor for the quality of public goods in this country.

Reeves: One argument for public goods is it de-risks downward mobility, it lowers the stakes about your own position and the position of your children, and therefore somewhat blunts the incentives to do absolutely everything in your power to protect your position. You can’t get that desperate because the stakes are little bit lower. Therefore, people in the upper-middle class will pull back a bit, be persuaded that actually they need to give up a little bit, and it’s not the end of the world.

Still, for the top 20 percent of households, it does feel like a long way down. When people in the upper-income neighborhood I live in obsess about their kids getting into a good college, and I tend to say, “Relax already,” and they say, “No, it’s different now.” And what they say, it’s because the Chinese are coming, or robots, or whatever—they point to this much more competitive world. But actually I think it is different now, but in a different way. It’s different now because the stakes are higher—that actually failing to get a good start in the labor market will have kind of tougher consequences.

The other thing it speaks to, and you’ve written about this yourself, is the growing importance of human capital of various forms in terms of the labor market. It means you’ve got to do better earlier now. It doesn’t feel as if, well, if you don’t do so well now, then maybe you don’t do so well in college, but you can catch up later. I think the labor market can still do that, but my sense is that it doesn’t do it as effectively as it did before. Unless you hit the labor market with a decent running start in the labor market—and that means increasingly certain qualifications, credentials, human capital, and so on—it’s just tougher to succeed than it was before.

I am making it personal because I think inequality is more personal, that some people are willing to accept as a necessary first step toward saying, “Oh, well, in that case, maybe we do need to do more redistribution. Maybe things aren’t as fair. Maybe actually I could give up a bit more as a necessary first step towards doing that.”

Jacobs: You say in your book that you believe in meritocracy for adults but not for kids. Which is like halfway there, right, but like you still believe in meritocracy for adults?

Reeves: Well, I still basically believe in the market for adults. That invites some criticism from the left, too, because I think the other things being equal, a sort of reasonably freely functioning labor market tends to be relatively meritocratic. I think it has helped to overcome historic prejudices of various kinds, based on gender and race, though there’s still a long way to go. It’s like the alternative to democracy, it’s better than the alternatives.

The idea that social engineers can start deciding that person A is worth more than person B, I think, flies in the face of the evidence of human capital skills. The things that are rewarded in the market tend to be rewarded in the market. It doesn’t mean you can’t then do more to distribute market rewards, but I quite like that. What I don’t like is the fact that the preparation for the market is so uneven. Once the market starts to kick in, it does its thing. So, broadly, the reason why kids of the upper-middle class go on to do so well is not because, by and large, the labor market discriminates wildly in their favor. It does discriminate, but not wildly. It’s because they are chock-full of human capital and skills and credentials, soft skills, hard skills, you name it. They are pretty awesome in the labor market.

The problem is, the idea of meritocracy creeps into childhood. There is selection into our education institutions, even selection into our high schools. That leads to thinking that, well, the brighter kids should get the greater resources, they should get more opportunities. So, the idea of meritocracy kicks in quite early. And if anything, education should be antimeritocratic. If the goal is to equalize the contest, then we need to think about it completely differently and then have the contest.

The other criticism from the left is the top 1 percent. But if one looks at how much real income growth has gone to the 1 percent, and if one uses the share of growth and income accruing to the 1 percent to illustrate the point, then one can produce this amazing chart and say, “This is wrong.” But it’s not just that 1 percent. Some people say, “No, that’s ridiculous, it’s not the top 20 percent, it’s much more like 15 percent, maybe 10 percent.” I say, “Fine, okay, great, big deal.” I’ll take it. I would like to cut the upper-middle income distribution a little bit broader, but I’ll take 10 percent or 15 percent because at least that level is just the 1 percent.

Some people do genuinely still think it is just the top 1 percent who define inequality in the United States. They still have to deal with the fact that individuals and families are moving in and out of the 1 percent quite a lot, but they do still think that that’s the real fracture. There are two kinds of inequality here. There’s a kind of plutocratic inequality and a bourgeois inequality. I think both can be true. You can have the kind of pulling away, not just among the top 1 percent but also the top 0.1 percent. I think within the top 1 percent, there are many who get upset about the 0.1 percent. The 0.1 percent get upset at the 0.01 percent. Every time you add the zero, you just move the class wall a few notches up. The people who fly commercial versus the people who fly first class, and the people who fly on private jets versus the ones who have got their own planes. No matter how high you go, you can always kind of find a class fracture. I don’t think we can just do it on the basis of the top 1 percent.

But in my book, I also examine the danger of the classic “born on third-base thinking you’ve hit a triple” problem. I choose a few examples that get into problems such as legacy preferences in education or the way neighborhoods are zoned or how internships are secured. Because all of that looks like cheating to me. I’m trying to interrupt what I think is a complacent narrative that’s there on the conservative right, which is just, well, they are just amazing people and they are not doing anything wrong.

Jacobs: You talk a lot about legacy admissions, internships, occupational licensing, and exclusionary zoning. Say a little bit more about that and about why you highlighted those.

Reeves: Some of my suggestions about restructuring the financing of higher education, more access to health care, family planning, restructuring K–12, are all highly important and totally unoriginal. There is a vast literature on all of those. We know what need to do. The problem is that we can’t do it. And the reason we can’t do it is because the upper-middle class has convinced themselves that they don’t need to give anything up and that things are hunky-dory, basically. Or they have subcontracted it all out to more distant institutions. They don’t have to do anything personally. I’m trying to interrupt that narrative.

Take the most trivial problem—legacy preferences—and there’s a trivial objection to that, which is made all the time. People say, oh, it won’t make any difference. Great, let’s do it then. So, let’s do that and move on. If it really won’t make any difference, then why are you so worried about it? Why is everyone so troubled about it if it won’t make any difference?

I think the conversation about inequality has to be uncomfortable, and legacy preference is one example of that. It’s outrageous, it’s racist, it’s outdated, it’s a national embarrassment. So you might say, well, if you win that, so what? I would say, if I can’t convince the top of the upper-middle class, these affluent, well-educated liberal Americans that it’s unfair to have a hereditary principle operating in college admissions, then I think the chance of radically transforming the financing of higher education basically is zero.

Jacobs: I’m going to ask one more question. I think the relationship between inequality and mobility is at the heart of what you are getting at. But I think in the American story, race and class are fundamentally interwoven. So, I’m curious how you reflect on that, why you spent so little time on it in the book, whether that was an intentional choice.

Reeves: One of the reasons why that is not a big part of this book is because I am focused on the upper-middle class, the top 20 percent, who remain predominantly white, and are actually whiter than the general population today than they were a few years ago. However, I do think, and I wish now in retrospect that I had said more about the tools that are used to perpetuate class inequality—tools that are racist in origin and remain racist in practice, even if not legally sanctioned.

So, that’s why I’m doing more work now on exclusionary zoning. If you live in a relatively affluent neighborhood, then you don’t have to do that much to change the zoning rules. The status quo favors you anyway. It’s much harder to change things than it is just keep things as they are. And one of the reasons things are the way they are is because of the legacy of racist zoning laws and redlining and so on, which is now being sort of repurposed, I think, to perpetuate class, which again still has racist consequences, even if it is not on its face racist.

I now think there is more to the interaction between the two than I thought. The hardest question, and I think we should stop on the hardest question, is from Hispanic or African American upper-middle class families who ask me, “Do you think that if I am black or Hispanic and I have made it to the upper-middle class, I shouldn’t do everything to help my kids remain there?” That’s one of the hardest questions I’ve had to answer. Because the honest answer is, well, no, I don’t think it is the same. There is a different salience there, and there is a much greater risk of downward mobility for black kids anyway.

Jacobs: We could keep on talking until tomorrow, but you’re right to end on the hardest question.

Reeves: All great questions. Thank you.

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