Income Inequality and Legacy Admissions

From the Economist Magazine. The article is long, but it is well-written and definitely worth reading. Brazil's Gini Index is close to 0.6, so the U.S. is nowhere near the bottom. The American system is conducive to breeding startups and entrepreneurs, but it does leave people behind. Unfortunately, too much regulation and taxation may stymie growth and the entrepreneurial spirit. The solution may be to support startups in sectors that have an impact on other things beyond the bottom line. Renewable energy comes to mind. Also, there are serious inefficiencies in healthcare, and we need startups to exploit them. Hopefully those that heed the Triple Bottom Line.

"AMERICANS do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Europeans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.

.. The rise of the working rich reinforces America's self-image as the land of opportunity. But, by some measures, that image is an illusion. Several new studies* show parental income to be a better predictor of whether someone will be rich or poor in America than in Canada or much of Europe. In America about half of the income disparities in one generation are reflected in the next. In Canada and the Nordic countries that proportion is about a fifth."

Taxes are so much higher in Canada and the Nordic countries. I would guess that the inheritance tax explains most of the disparity uncovered by the cited study. In the U.S., parental income probably does predict future income quite well. Just think of the number of kids who get into top colleges via legacy admissions, an unheard of concept in the entrance-exam driven world of Asian universities. By some estimates, 10-15% of Ivy League admissions fall into this category! If we are to be a merit-based society, legacy admissions have got to go -- or at least be curtailed.

UPDATE: The NY Times reports that Executive pay in Europe is starting to resemble the U.S.

Along with hip-hop and Hollywood movies, Europeans are eagerly importing another American phenomenon: soaring pay packages for chief executives.

For decades, Europeans were far more restrained than Americans when it came to rewarding the boss. Now, executives overseas are less inhibited about asking for American-style compensation. And often they are getting their wish.