The Real Impact of Economic Despair

A new report shows rising inequality linked to rising high school dropout rates — and upends the view that poverty ‘incentivizes’ the working class.

More and more, I am reminded of that old adage that “it isn’t what you don’t know that’s the problem, it’s what you know that just isn’t so.”

A recent research paper from the Brookings Institution investigated one of those “things we know,” and came to some disquieting conclusions.

When it comes to staying in school, many economists talk about the “aspirational effects” of income inequality. When students look around them and see a better life, they are incentivized to invest in their own human capital—such as investing in their own education.

But what if that conventional thinking is wrong? What if inequality doesn’t incentivize students at the bottom of the income ladder to work harder, but rather disincentivizes them? This is one of the questions Melissa Kearney and Phillip Levine sought to answer in a new paper published as part of the Spring 2016 Brookings Papers on Economic Activity.

Kearney and Levine found that low-income children growing up in states that have greater income inequality are dropping out of high school at higher rates than are children living in states with less income inequality.

The authors point to a concept they call “economic despair,” or a feeling that economic success is unlikely because the distance from the bottom to the middle of the ladder is too far to climb. If students perceive a lower benefit to remaining in school, then they will choose to drop out — even if they aren’t struggling academically.

What is particularly interesting about this study is that it focused upon the perceived distance between the bottom and the middle of the income distribution, not the distance between the bottom and the top. The idea is that what they call “lower tail” inequality is a more relevant measure, because making it to the middle would seem to be a more manageable goal.

The authors suggest interventions: mentoring programs that connect youth with successful adults, programs focused on establishing high expectations and pathways to graduation, or early-childhood parenting programs to build self-esteem and engender positive behaviors. Although such interventions might help ameliorate the problem, it’s hard to escape the conclusion that the effects would be modest, at best.

In fact, this study is one more “data point” in a picture that paints an inescapable conclusion: the level of inequality in America today is unsustainable and extremely detrimental, not just to the prospects of poor children, but to the nation as a whole.

We are in the midst of an election season that has unleashed a furious and troubling display of social dysfunction, in-your-face bigotry and populist anger. It’s hard not to attribute a significant part of that to economic realities that pit low-wage workers against each other and against a perceived plutocracy that has “rigged the system.”

Social scientists tell us that stable democracies are characterized by distributional equity, and the existence of a large and relatively secure middle class. Economists tell us that economic growth requires robust demand, generated by consumers with discretionary dollars to spend in the market, and a well-educated workforce.

When large numbers of people working 40 hours a week cannot earn enough to cover basic living expenses, when children don’t believe education offers them a path out of subsistence, democracy and the economy both suffer.

It’s past time to revisit some of the economic “facts” we think we know.

Sheila Suess Kennedy teaches law and public policy in the School of Public and Environmental Affairs at Indiana University Purdue University at Indianapolis. Her scholarly publications include eight books and numerous law review and journal articles. Kennedy, a frequent lecturer, public speaker, and contributor to popular periodicals, also writes a column for the Indianapolis Business Journal. She blogs at www.sheilakennedy.net.