Economic Inequality: Isn’t it Inevitable?

BY Paul Solman  March 22, 2013 at 9:56 AM EDT

If you get equal opportunity — an equal slice of the educational cake or pie — that doesn’t necessarily mean you will have equal economic opportunities as a result. Paul Solman answers a reader’s question on why, so many times, there are unequal outcomes for different people, regardless of talent or opportunity. Photo by Dimitri Vervitsiotis/Getty Images.

Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here are Friday’s responses on economic inequality and the vertiginous price of bonds.:

Dale — Storrs, Conn.: Could someone explain to me why a rich educational environment should not be producing wide variations in achievement? Don’t plants vary more widely in rich soil and the distances between runners increase in longer races? Kurt Vonnegut once wrote a story in which the Handicapper General was responsible for holding back the gifted and highly motivated. It ends badly and suggests that there is a fundamental difference between focusing on equal results instead of equal opportunity.

Paul Solman: There is of course a fundamental difference between focusing on equal results instead of equal opportunity, but the Kurt Vonnegut, Jr. story which you cite, “Harrison Bergeron,” was not a plea for equal opportunity so much as a satire — a reductio ad absurdum about absolutely equal results, absolutely enforced. Just read Vonnegut’s most ambitious novel, “Player Piano,” to see how dystopian a country of non-equal outcomes seemed to him.

As for your question, it all depends on what you mean by “a rich educational environment.” “Rich” as in well-funded? Socio-economically and ethnically diverse? Are you actually suggesting that the educational soil in America is homogeneous — i.e., everywhere the same? That a five-year-old going to school in inner city Detroit, for example, grows in the same kinder-garden as one in my hometown of Newton, Mass.?

But even if you are suggesting this, there would still be a problem with inequality. It’s bad for all of us. Demonstrably so.

I’m recently back from a shooting trip to California. Among our locations: the Greater Good Science Center at Berkeley. Their findings bear out what we’ve reported here again and again and again. As the third of these stories put it in the broadcast headline: “Inequality Hurts: the Unhealthy Side Effects of Economic Disparity.”

These are the simple facts: the lower you are on the economic ladder, the unhealthier you are, the shorter your lifespan. All else equal. And the higher you are, the more you cordon yourself off — protect yourself — from society, which leads to a negative outcome of its own: you’re less connected to others, more on your own, less happy.

Rufus Dude — Irvine, Calif.: So, with bonds at half-century historical highs, you’re still pushing the same old “your age in bonds” advice? Amazingly bad. Next, you’ll probably argue that a high debt-to-GDP ratio won’t have any consequences for interest rates (or bond prices) either.

Paul Solman: I’m not pushing anything. I’m just responding to people’s questions by being honest about what I do. You could be right, of course. Indeed, my recent post about TIPS yields was prompted by a similar anxiety about bond prices. But then, more experienced investors than I have been warning about bond prices for how long now? And what’s happened to bond prices over those years of admonition?

Right now, I look at Japanese 10-year bond yields – down below six-tenths of one percent, last I looked – and I say to myself (and friends): “It’s ridiculous.” That very debt: GDP ratio you mention is well past 200 percent in Japan, more than double ours in the US. The now well-known economists Ken Rogoff and Carmen Reihardt, featured here in 2009, say that history shows any ratio above 90 percent to be unsustainable. Domestic Japanese investors — individuals, companies and the government — have been buying Japanese bonds. But won’t they have to start borrowing from abroad at some point? Won’t they then have to pay a far higher interest rate than 0.6 percent?

You’re worried about inflation, “Rufus Dude.” I am too. That’s why I’ve long pushed TIPS, which build the Consumer Price Index into their return. But if instead deflation becomes the rule, as it has been in Japan for decades now, then interest rates will go down, not up, and current bond yields will look very attractive.

To me, asset allocation these days, no matter what your age, is a conundrum. That’s why I recently put the bulk of our retirement assets into a liquid fund that guarantees 3 percent. But as I explained on this page, I am grandfathered in with this fund, which has since been closed to the public. Back in the day, a 3 percent guarantee didn’t sound like much. Today, it’s rather more attractive.

The plain fact is, I don’t know what to do except diversify, as my asset allocation suggests. But I’m not saying this is the right formula for others.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions