The One Economic Policy America Truly Needs
Americans are unhappy with inequality. Americans are unhappy with campaign financing. Americans are unhappy with differences in pay and unemployment. And more than anything, Americans are unhappy that the American dream – going from rags to riches – seems to be fading away.
Actually, Americans are unhappy about just one thing: the erosion of our meritocracy. It’s a simple thing, too. Being rewarded for your achievements, talents, and ideas seems so reasonable, so fundamentally American, and yet it happens less and less. Money, connections, and group identities are determining who gets the opportunities in our economy, whether they’re in education, the labor market, or politics. And that is a very worrying fact for our economy.
Meritocracy is a fundamental driver of economic growth. It ensures that we take full advantage of the opportunities created in new business and industries. Without it, an opportunity that might have gone to a poor but talented person is more likely to go to a rich but not-so-bright person. When that happens, the opportunity is wasted.
People can feel that meritocracy is disappearing. Universities squeezed by shrinking endowments and lower public funding are being forced to reconsider need-blind admissions. Candidates pull out of elections or never even throw their hats into the ring when they can’t compete in fundraising. The likelihood that children will achieve a socioeconomic status higher than their parents’ has fallen steadily fordecades.
Despite these clear signs of the problem, some people believe that our economy is still meritocratic. Indeed, it is more meritocratic than many others; for one thing, racial, religious, and gender discrimination are less tolerated here than in most countries. But the idea that the rich are the most capable people in society, and the poor are the least capable, simply isn’t true. You can’t always inherit talent and creativity, but you can inherit money, connections, and a powerful family name.
Sometimes you can even inherit control of a business, and this is one situation where the costs of abandoning meritocracy have actually been measured. Francisco Pérez-González, an economist at Stanford (and a close friend of mine from graduate school), studied what happened when companies unexpectedly lost their chief executives. He found that companies where an heir took over became less profitable, on average, than companies wherethe successor was unrelated.
Research like this should get the attention of Wall Street just as much as Main Street. As our meritocracy disappears, we’ll be seeing more crummy CEOs, lousy politicians, and a more polarized society. Lower economic growth, lower corporate profits, and lower prospects for our children will inevitably result. We can stop these trends, but first we have to acknowledge that eroding meritocracy is at the core of all of them.