Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a university professor in the University of Toronto’s School of Cities and Rotman School of Management, and a distinguished fellow at New York University’s Schack Institute of Real Estate and visiting fellow at Florida International University.
In this interview with Jonathan Rothwell about his new book, A Republic of Equals, he explains how U.S. racism helped create elite, highly paid professions.
This is the first part of a two-part Q&A with economist Jonathan Rothwell. Read the second part next week.
Inequality and low productivity growth are two of the biggest problems that vex the U.S. economy. For Jonathan Rothwell, they are of a piece, driven by the power of large and influential groups of professionals in fields like finance, medicine, and law to wall themselves off from competition.
Rothwell, formerly of Brookings Institution and now Gallup’s senior economist, shows that the United States is unique among the advanced nations in the power afforded to these groups. The huge differences in incomes we see in this country are not the result of education or skills, but of political power. Inequality in the United States is also bound up with race and racism, from slavery, to the exclusion of minorities from early professional organizations, to exclusionary zoning that denies minority and low-income people access to suburban schools.
I talked to Rothwell about his new book, A Republic of Equals (I liked the book so much I blurbed it). Our conversation has been condensed and edited.
RICHARD FLORIDA: How and why has our republic become so unequal?
JONATHAN ROTHWELL: In the United States, we went from 10 percent of GDP going to the top 1 percent in 1980, to 20 percent of GDP going to the top 1 percent in 2014. That is a much greater rise than we see in the other countries, and we are left with a level of inequality that is more than double what we see in Scandinavian countries.
My explanation is that interest groups that are involved primarily in providing professional services like finance or law or medicine have distorted or corrupted markets. The result is that the members of these groups can charge excessive prices for their services. That’s the main factor driving such high levels of inequality in the United States.
There are extraordinary laws in terms of the monopoly of services that these groups provide. For example, it's against the law to directly employ a doctor, except for under special circumstances. Hospitals can employ doctors but usually hospitals have to be owned and operated in some part by other licensed physicians. Doctors in particular felt that being part of corporations was demeaning. They felt they needed to distinguish themselves from engineers and other skilled professionals who had become servants of large corporations, so they fought very aggressively through the AMA (American Medical Association) and other organizations to preserve their autonomy and make it difficult for them to become employees or organize healthcare in a more efficient manner. Much the same is true for lawyers. They are allowed to work for businesses if they are on staff as the legal counsel. But otherwise you cannot—unless you're a licensed lawyer—open and operate an establishment that provides legal services even if the people providing the services are licensed lawyers.
In finance, we have made it illegal for normal people to directly invest in the highest yield investment strategies, such as hedge funds. You have to be rich to do so, an accredited investor. What this means is that companies like Vanguard and Fidelity—which have lowered fees for retail investors a lot—are not allowed to compete with hedge funds, and hedge funds charged egregiously high fees for decades. This ends up siphoning away billions of dollars from worker pension funds to the super rich.
FLORIDA: So, is this the core of what makes America “exceptional?”
ROTHWELL: Yes, other countries don’t have this constellation of rules—and almost no other country compensates elite healthcare professionals as we do. We are also exceptional because of our history of race. Going back the early 20th-century when the northern and midwestern states were dealing with the black migration and the influx of southern and Eastern European immigrants, there was a very widely-held view that people from northern Europe ancestrally were gifted genetically relative to everyone else. It also ties into the extraordinary treatment that professionals receive.
The American Medical Association and the American Bar Association emerged in the early 20th century as prominent and very well-respected organizations and their members were afforded very high levels of prestige. African Americans were prohibited from becoming members of those organizations. One reason why they received so much esteem is that Americans told themselves a story that these are the best and brightest, not only because of what they've managed to achieve, but naturally or inherently. So, they need to be respected in ways that go beyond the educational or skill achievements they have acquired—almost like a “natural aristocracy.”
FLORIDA: You write: "A conventional explanation for income inequality is that the most productive companies in highly competitive industries are generating enormous profits for the winners of globalization while everyone else loses out. But the opposite is closer to the truth. The sectors that contribute the most to the 1 percent contribute the least to innovation and global productivity growth." Tell us more about that.
ROTHWELL: One of the most prominent economic trends of the 20th century is the shift away from goods to services. That's happened across all rich countries. That has also coincided with a slowdown in productivity. Take healthcare in the U.S., which went from 9 percent of GDP in 1980 to 18 percent in recent years. There's actually strong evidence that productivity growth is negative for healthcare. It's well-known that the U.S. spends twice as much on healthcare as other rich democracies like Canada. We know that our healthcare providers are making much higher salaries. We see similar evidence of slow productivity growth in other professional services. The sectors tend to be domestically-focused; they do very little international trading; they are not really exposed to international competition.
It matters because we are often told that U.S. inequality is so high because our entrepreneurs get rich after unleashing great innovations. They do, and that’s great, but there just haven’t been that many entrepreneurs nor many innovations in recent decades. Entrepreneurship is declining and so is productivity growth, and yet the rich are pulling away.
FLORIDA: So, who’s to blame for rising inequality: big corporations, capitalism or capitalists, globalization, technology, trade, robots, or something else?
ROTHWELL: When it comes to, corporations, it's certainly true that there are rich owners and manager-CEOs in corporate America. And if they were paid less, income inequality would fall. But, other countries also have rich CEOs. Sweden has more billionaires per capita than the United States, and they certainly have many global brands with highly compensated CEOs. The same would be true of Western European countries, and Japan and Korea, which have extremely successful corporations.
The share of GDP going to corporations—C-corporations in particular, which are the ones that are publicly traded—has fallen dramatically over the last 30 to 40 years. Back in the '50s and '60s, the economy was legitimately dominated by major corporations like the automakers and GE, but their influence and importance have declined alongside with declining U.S. manufacturing. They have been replaced largely by S-corporations and partnerships; small businesses that typically engage in local markets for medical, legal, and financial services. This is where business income has been going.
Among developed countries, those with low-tariffs and more openness to trade tend to have low levels of inequality. And most of the top 1 percent don’t work in tradable sectors like manufacturing, mining, or communications. Indeed, most OECD countries have a larger fraction of the top 1 percent in these sectors compared to the United States.
Surprisingly, only a small percentage of top earners work in the tech sector or in fields like computer programming. There is some evidence that the adoption of information-technology has disproportionately benefitted workers with higher levels of education. But that does not explain why there are so many doctors and lawyers in the top 1 percent.
FLORIDA: There is an argument whether the surge in inequality is due to the outsized gains of the truly rich, the 1 percent, or the top 20 percent? Which is it?
ROTHWELL: I would put the income gains from 1980 to 2014, in the top 10 percent. Using data from Piketty (French economist Thomas Piketty) and collaborators, I find that 13 percent of national income went to the top ten percent.
FLORIDA: Who would that top 10 percent be?
ROTHWELL: People in the top 10 percent, but not the top one percent, include a wide range of professionals and managers. The bottom threshold for all income to be in the top ten percent is $120,000 in national income—this includes things like benefits and esoteric income sources like owner occupied rent. For the type of income people report to the Census Bureau, you need $85,000 to be in the top ten percent. To be in the top one percent, you need $488,000 in national income or about $330,000 in income as reported to the Census Bureau.
When I break it down, since 1980 about a quarter of all the income going to the top 10 percent went to those between the 90th and 99th percentiles. About 30 percent went to people earning between the 99th and 99.9th. $2.1 million would be the upper limit of that group.
FLORIDA: That's a doctor, lawyer, professional person. That's not a billionaire, right?