Innovative societies must have equality of opportunity

The current tax bill is largely motivated by the theory that if you give tax cuts to successful rich people, even though it increases inequality, it will be worth it because these elites will create jobs through innovation with the new money that the cuts hand them. This idea comes from the theory of the equity-efficiency tradeoff which claims that greater equity reduces economic productivity. The fatal problem for this theory is that highly unequal societies are not more productive. This is because there are many reasons why greater equity can increase efficiency. Because most people think that equity and efficiency are both good things, we should be doing a lot more research to figure out how we can get more of both. New research reported by Matt Yglesias is a start. It shows that we are wasting the talents of over 80% of high-performing kids because they are too poor to be able to innovate as well as the kids whose families are at least upper-middle class (top 20%):

  • Among affluent families, young kids who perform highly on math tests are much more likely to make successful inventions than low-ability kids.
  • But this isn’t true among low-income families. There, high-scoring and low-scoring kids alike are about equally unlikely to become inventors — suggesting that it isn’t a lack of aptitude that’s holding back poor kids; it’s that aptitude alone isn’t enough.

Some regions (the former slave states) are particularly bad at helping smart kids innovate:

To create more innovation, we don’t need more tax cuts for elites. We need to figure out how to create more equality of opportunity. Let’s figure out what they are doing right in Utah, Wisconsin, and Massachusetts.  The original paper is basically trying to figure out why parental income has such a big effect upon the patent income of their children.

The fact that smarter kids don’t produce much more patents than their peers unless they came from rich homes means that rich kids’ success isn’t just caused by rich people have smarter kids.  Rich kids also tend to be smarter on the tests by some combination of genetics and getting better nutrition, better schools, and better healthcare, but even for poor kids who beat out the rich kids at academic achievement and IQ, they still aren’t able to turn their talents into innovation that produces patents.

Posted in Inequality, Public Finance

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