Is the American dream being hoarded? A short-read Q&A with Richard Reeves

Though the 1% typically draw the most ire, Richard Reeves of the Brookings Institution argues it is the top 20% providing more reason to worry. Richard and I discussed this and his recent book “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.” To listen to our conversation, head on over to Ricochet. The full length version of this abbreviated transcript can be found here.

Via Twenty20.

PETHOKOUKIS: The dream hoarders. Who is doing the hoarding and what is being hoarded here?

REEVES: Broadly, the top fifth. The top quintile — those with healthy six-figure incomes. Largely college graduates; the average income for that group is $200,000 or so. The dream that is being hoarded is the dream that, I think, most Americans would have, which is a chance to get a good college education, a chance to get your kids into a good school, a chance to own your own home, and build some wealth.

So this is a story of the top 20% pulling away from the bottom. And not only are they pulling away, they’re actively doing things to not only help their own position but then ensure that their kids will do even better than they are. What are the mechanisms involved here?

You’re right. The story I tell is one of both separation and perpetuation. There’s this pulling away. You see that economically. The top fifth has seen the pulling away; there’s been no increase in income and equality in the bottom 80%. All the action’s above that line. It is true that the closer you get to the top, the more action you see. So it’s certainly true that the higher you get, there’s been this stronger pulling away. But you start to see this break at about the bottom of the top fifth.

I think one of the problems of the inequality debate has been the “We are the 99%” rhetoric.

But I think one of the problems of the inequality debate has been the “We are the 99%” rhetoric. I think that’s been profoundly unhelpful because it’s allowed somebody in the 98th percentile or the 95th percentile — someone who’s really doing pretty well, on the winning side of recent inequality — to point upward and say “No, it’s them. It’s just the super rich.” And then they blame the super-super rich and they blame the super-super-super rich. But in terms of the class fracture, in terms of not just money, but the way the housing market works, the way education works, the way college education works, that’s not just a top 1% story. So, four year selective colleges, you know, the best four year colleges: 70% of their students are from the top 20% now. And sure, disproportionately more from the top 1%. And so, then the question becomes: Are those inequalities happening as a result of fair processes or unfair processes? I think it’s a combination of the two. So you want to focus on the unfair ones. I think it’s the way the housing market is rigged, and the way you subsidize a rigged housing market, and the way you organize K-12 education, it’s almost like a perfect storm in a way to separate and then perpetuate inequality.

You’re seeing economists on the left, right, and center talk a lot about housing now. Could you get into that?

The more I look into housing and the combination of local zoning ordinances, federal tax subsidies in the form of the $70 billion a year mortgage interest and local property deduction, housing wealth, neighborhood schools, and so on, the more I have come to believe that regulation of land is becoming a bigger and bigger problem in the US. The US used to be a big country, it’s getting to be a smaller country in the sense that the areas of economic prosperity and growth are smaller. We’re also getting really expensive. Why? Because of land use regulation. You look at places like LA, which used to be zoned for 10 million people, now 4.6. It didn’t get any smaller. What happened was all these zoning ordinances came around in single family dwellings. And then, it’s totally in my self interest as an upper middle class person to resist any encroachment on that.

I don’t in any way underestimate the political problems here. It does seem to me if we’re willing to say “Look, these people are always going to be self-interested in everything they do and everything they vote for,” there’s no chance of making any kind of progress, so let’s just walk away. Either let’s live with the consequences of a fractured and unfair society or become really egalitarian and move towards very strong redistribution. Because if we’re going to give up on the idea of mobility, well in that case, we better start compensating the losers much more handsomely. I don’t really want to go either of those ways. Because neither of those ways seem to be particularly American. To give up on the idea of mobility and fluidity and meritocracy in the proper sense or to just say, “Look, let’s just accept the fact we’re going to have to take lots of money from these people and give it to the poor people who can’t possibly keep up with them.” Both of those are un-American solutions, so let’s at least try.

Would we care as much about this if the economy had been growing for the past 10 years at 3.3%? Maybe the relative mobility rates wouldn’t change, but you’d be doing a lot better, so maybe you wouldn’t really care. Is this also an economic growth issue?

I also should say that I care a lot about relative mobility. I’m not sure that ordinary people do. They care more about absolute mobility — “Am I getting better off?” I use an analogy that was given to me by the writer Steve Pearlstein, where he takes the analogy of a highway where everyone’s driving along at 60 miles per hour or whatever the speed limit is here. But everyone’s moving along nicely. If someone overtakes you, eh, you’re pretty relaxed about it. If you’re in gridlock, and someone cuts up the inside lane and tries to cut in front of you, you’re furious. That’s a great analogy of a world of lower growth where relative mobility, where the sense of someone cutting in line or the system not working fairly becomes actually more acute. When things are slower and more cramped and more difficult, I think the sense of fairness around relative mobility might get greater. My position is more growth — everyone getting better off — is not good enough of itself. It might also lower the stakes a little bit about relative mobility. One of the reasons the upper middle class is so terrified about kids being downwardly mobile and putting a glass floor underneath them, it doesn’t look so good down there. It looks pretty yucky down there. Then you’re heavily incentivized to do everything you can to stop your kids from falling. If it didn’t look so bad down there, maybe the idea of a kid dropping a quintile or two in a high growth economy, that doesn’t feel so threatening. In a low growth economy, the stakes get much higher. Therefore, we work much harder to make sure that doesn’t happen. I think low growth changes the equilibrium, the social equilibrium, around this stuff.

A common criticism is that you’re taking your eye off the ball here. We need to be worried about the super rich, and now you’re throwing in a couple — he’s a cop, she’s a nurse — and they’re making a good salary. And you’re throwing them into the same group as Silicon Valley billionaires.

My main concern is to point out that the economic inequality trends do not start at the top 1%. They might be the most glaring at the top 1%, but they don’t start there.

It’s a criticism I take very seriously. As soon as you start drawing lines, they start feeling very arbitrary. My main concern is to point out that the economic inequality trends do not start at the top 1%. They might be the most glaring at the top 1%, but they don’t start there. They do start much lower down the distribution.

Secondly, the top 1% aren’t some kind of fixed permafrost on top of society. Actually what you find is quite a significant proportion of the top quintile move into the top 1% for a period of time. These aren’t other people; they’re quite often us having a good year. And so, we shouldn’t sort of separate them out.

Thirdly, even the top 1% with all their money can’t actually have the same impact on housing markets and education markets that a broader class can, the upper middle class.

Lastly, I’m not letting them off the hook. Look, I think the top 1% should be paying a lot more taxes, and can. There’s all kinds of egregious tax subsidies to the extent they help the top 20%, they really, really, really help the top 1%. So many of the policies I’m proposing and in favor of would actually hit the top 1% really hard — it would hit them harder than it’d hit the rest of the 20%. I just don’t think the conversation which has tried to restrict inequality to the top 1% has worked or been effective. Not least because the top 1% says “No, no, no. It’s the top 0.1%.” And the top 0.1% says “No, no, no, it’s the top 0.01%.” So everyone’s looking up. Everyone knows somebody richer than them. It’s always possible to convince yourself you’re just an ordinary Joe compared to the person you live next to or work with. Actually, that’s a problem. It’s a problem for Americans that they are all able to convince themselves that even if the rich deserved to be taxed, they’re never talking about themselves. But at some point, you have to be.