The Meritocracy Trap

by Daniel Markovits

  The rich and the rest cannot escape separately, but only together. To do this, they must dismantle meritocratic hierarchy and build democratic equality—a social and economic order that serves everyone and in which the status of each is valuable precisely because it is shared by all.

  TWO PATHS TO REFORM

  Progressives have fought for an ideal like this before. In the ancien régime, kings and princes looked down on their subjects; and under slavery, and then Jim Crow, and in many ways still today, whites look down on people of color. Progressives know that democratic citizens look each other in the eye as equals. They also know, as abolitionists and civil rights campaigners emphasized, that this equality elevates everyone’s humanity. Now progressives must apply this wisdom to economic life, to dismantle the meritocracy trap that consigns the rich and the rest to separate discontents and build an economy in which they can flourish together.

  Unwinding meritocratic inequality is “the work of a civilization.” It requires a comprehensive adjustment—to government, private associations, cultural habits, and individual consciousness—on a scale equivalent to the changes that built up meritocratic inequality to begin with. The meritocracy trap was constructed over generations and will take generations to dismantle. Nevertheless, studying the meritocracy trap shows reformers the way. Progressive reformers must take aim at each of the two mechanisms that produced meritocratic inequality. This basic insight lights two paths to reform.

  First, education—now concentrated in the extravagantly trained children of rich parents—must become open and inclusive. Admissions must become less competitive, and training less all-consuming, even at the best schools and universities.

  Second, work—now divided into gloomy and glossy jobs—must return mid-skilled labor to the center of economic production. Industry that is now concentrated in a superordinate working class must be dispersed widely across a broad middle class.

  Of course, these precepts do not yield instructions for curing meritocratic inequality entirely. Like every generational project, the campaign to build democratic equality cannot be planned out in advance. Instead, it will require committed but also flexible and opportunistic action, on many fronts at once, in a movement that develops and adapts as it grows. It is a fool’s errand to try to spell out a complete reform all in one place—in a policy wonk’s checklist or even a politician’s program—in advance of the first practical efforts to adopt any element of it. The two precepts are important not because they specify a reform agenda right through to its end, but because they tell campaigners where to begin, and because—by tackling meritocratic inequality at its roots—they show that meaningful progress is possible.

  Education reformers should begin by leveraging the obvious unfairness of the status quo to their political and practical advantage, to attack meritocratic inequality head-on.

  The meritocratic inheritance is at present entirely exempted from the estate taxes that normally apply to traditional bequests: the massive investments that rich parents make in their children’s educations are simply not included in their estates. Moreover, private schools and colleges are taxed as if they were charities, devoted to the public interest: alumni donations are tax-deductible, and schools and colleges pay no taxes on income from their endowments.

  These practices make meritocratic education in effect a tax shelter that only elites can exploit. Where parents’ incomes and educations determine children’s academic achievement, even purely meritocratic admissions fill elite schools and colleges with students whose parents also have elite degrees (even if not from the precise schools that their children attend).

  Although elite schools and colleges are taxed as public charities, meritocratic inequality makes them functionally into exclusive clubs. The tax benefits that they enjoy are meritocratic analogs to the allowances that aristocracies once gave to princesses and princes. Middle-class families pay for elite educations that their own children will never receive.

  The tax shelter, moreover, is massive. The meritocratic inheritance, for its part, transfers roughly $10 million untaxed to each rich child. And in a recent year, Princeton University’s tax exemption amounted to a subsidy of $105,000 per student, compared to public education spending of $12,300 per student at the State University of New Jersey at Rutgers and $2,400 per student at Essex County College in Newark. (Numbers like these lead cynics to call Harvard, Yale, and Princeton “hedge funds with universities attached.”)

  Finally, the shelter keeps growing. The ten largest university endowments now total over $180 billion, and they have in recent decades been growing at roughly 7 percent per year, which more than doubles the growth rate for the net wealth of U.S. households generally. Universities plan for the long haul: Yale, which built two residential colleges last year, expressly designed the new buildings to last forever. But if these rates of growth continue in the future, then inside of meritocracy’s second century, the ten richest universities—even as they overwhelmingly educate the children of rich, well-educated parents—will own the entire country.

  Something, literally, has to give.

  These facts provide government with enormous leverage over elite schools and universities, including even—indeed especially—over the richest private colleges. (Princeton has in recent years derived as much as four-fifths of its total revenues from tax-free endowment income and tax-deductible alumni donations, and the top twenty universities on average derive a third of their revenues from these sources.) Reforms should use this leverage to break up the club, insisting that schools and universities should be taxed as charities only if they actually function as charities—that is, openly and inclusively to educate the broad public.

  There are many ways to go about this. But the best is the most direct.

  First, private schools and universities should lose their tax-exempt status unless they draw at least half of their students from families in the bottom two-thirds of the income distribution. And second, schools should be encouraged (including through public subsidies) to meet this requirement by expanding enrollments.

  Together, these reforms would exchange meritocracy’s exclusive, narrow, and profligately educated elite for an inclusive, broad, and yet still well-educated replacement. The reforms would spread the wealth that the meritocratic inheritance now concentrates, distributing “elite” education across a wider population and at the same time improving education generally by reducing the strain on resources outside the elite. In this way, they would dramatically shrink the educational gap between the rich and the rest.

  The reforms’ two prongs fit naturally together, as the second provides a road map to realizing the first. Elite education has become so extravagant that schools can afford to grow; and the schools that would need to grow the most (because their current students skew most toward wealth) are also the richest. The Ivy League could meet the condition for retaining not-for-profit status by doubling enrollments (drawing new students mostly from outside the elite) and still spend about as much per student as it did in 2000. Colleges generally could increase their enrollments by half and still spend roughly as much per student as they did in 1970. And private schools could double their enrollments and still have better student/teacher ratios than their public counterparts. Public funds paid to subsidize additional students would lend further support to already manageable growth. Certainly, the changes required today to make elite education inclusive are no greater than the revolution that elite schools and universities undertook by embracing meritocracy in the 1960s, and that then triggered meritocratic inequality’s rise. Institutions once transformed may be transformed again.

  Populists are already taking aim at private schooling, especially at elite universities (which they attack as hotbeds of liberalism and “political correctness”); and their efforts are beginning to succeed. After years in which similar proposals died in committee, a modest excise tax on the incomes of the very richest private unive
rsities became law as part of the most recent tax reform. Populists who say that colleges and universities are bad for America may have narrowly political motives, but a clear-eyed understanding of meritocratic inequality shows that they are not wrong.

  Elites, for their part, should also support education reform. For all the financial subsidies that it bestows, the current regime leaves elites battered, bruised, and vulnerable. Extreme meritocratic competition imposes human costs on rich students, associated with the grinding and dehumanizing admissions tournament, that are increasingly unbearable. And the rigor of the tournament increasingly means that no child, no matter how elite her parents, is safe from elimination.

  Reforms that made education inclusive by expanding elite student bodies would not require displacing anyone from the incumbent elite and would even (both inevitably and by design) modestly increase the number of rich students who get into competitive schools. (In this respect, the reforms model themselves on the reforms that brought women into elite universities by growing class sizes, so that adding women did not require excluding men.) Even a small increase in the number of places available to rich students can dramatically relax competition among rich applicants. And the increase to authentic freedom that the new breathing room affords is massively more valuable to elites than any associated decrease in the income or status conferred by degrees. Palo Alto would be transformed by inclusive education, but the change would on balance be benign—a relief and a blessing to the people who live there. The lesson of midcentury St. Clair Shores applies double in Palo Alto today: steady and true good is better than fleeting and false great.

  Finally, although elite schools strenuously defend their tax exemptions against even the most modest incursions, this is a mistake. Inclusive education would reopen the pipelines through which schools and universities provided social mobility and rekindle the luster that even the most exclusive schools once held in the general imagination. The reforms would therefore actually advance the core mission of schools and colleges. And where something has to give—ten universities will never own all of America—these reforms would surely be more congenial to educators than their most likely populist alternatives.

  A parallel policy agenda that may be pursued at the same time aims to reform work—to rebalance production away from superordinate and toward middle-class labor. The most direct way to promote middle-class labor is to promote ways of making goods and services that favor mid-skilled workers. Economic policy at present entirely ignores this possibility; it should be placed front and center going forward.

  Government pervasively seeks to influence what goods and services are produced in order to ensure that basic needs are met or that products are safe. Health care policy, for example, promotes access to medicines, legal regulations promote access to justice, rules about corporate governance protect investors, and financial regulations protect consumers against exploitation and the financial system against crises.

  But all of these regulations also influence what jobs exist in the regulated industries and how workers in these industries are paid. This generally overlooked effect is enormously consequential. Health care, for example, accounts for roughly one-sixth of GDP and finance for nearly one-tenth; and management, finance, medicine, and law together employ perhaps half of the richest 1 percent of workers. Reforms that promote mid-skilled production in these areas would therefore go a substantial way to securing equality overall.

  Models for promoting mid-skilled production already exist. In medicine, San Francisco’s proposed universal health care plan emphasizes nurse-practitioners rather than doctors, and clinics in Oregon and Wisconsin are even experimenting with deploying dentists to screen for health problems ordinarily diagnosed by doctors. In law, Washington State is experimenting with using mid-skilled special-purpose legal technicians rather than super-skilled JD lawyers to deliver routine legal services. In finance, regulations that limit exotic financial engineering and favor Main Street over Wall Street banks also shift finance jobs toward mid-skilled workers. And in management, governance regimes that rein in the market for corporate control, or that promote long-term employment over subcontracting, disperse the management function and its returns across a broad class of middle managers.

  Conventional debates about all of these reforms focus on what effects they will have on the quantity, quality, and price of goods and services. Those are reasonable concerns. But the reforms also influence whether production is divided into gloomy and glossy jobs or unified around mid-skilled ones. Health care can be delivered by a few specialist doctors who deploy high-tech machines and deskilled technicians, or by a mass of mid-skilled GPs and nurse-practitioners. Which approach is best for patients of course matters. But even where health is at stake, whether one-sixth of the economy succumbs to meritocratic inequality or promotes democratic equality through mid-skilled work matters also. Indeed, it matters just as much.

  Policymakers should therefore always attend to how their choices will impact the balance between elite and middle-class jobs. A mandatory review of this impact—an analog to the existing requirement that all new federal regulations must be subjected to a cost/benefit analysis—would help to promote and to coordinate these piecemeal reforms. It might even promote equality to simplify the regulatory process itself, as increasing evidence suggests that elaborate administrative procedures increase the influence that the rich have over the regulatory outcomes that the procedures produce.

  A second reform should use taxes to encourage employers to create mid-skilled jobs. The existing tax structure—incredibly—actively promotes meritocratic inequality, by encouraging employers to displace mid-skilled in favor of super-skilled workers. A simple reform to the payroll tax would reverse these incentives, to favor mid-skilled, middle-class workers. The reformed payroll tax would also raise new revenues, and some of these might be deployed to generate further incentives for creating new middle-class jobs.

  The federal payroll tax—in particular, the 12.4 percent tax on a person’s first $132,900 of wages that funds Social Security—is starkly regressive, on account of the cap on the amount of a person’s income to which it applies. Over much of the past half century, the regressiveness of the payroll tax has exceeded the progressiveness of the income tax, and this pattern entails that federal wage taxes burden lower-middle-class workers at effectively the same marginal rates as millionaires and burden upper-middle-class workers at significantly higher rates. The effect has been durable and large. Over the decades that produced meritocratic inequality, a married couple in which each partner earned the equivalent of about $100,000 (in 2018 dollars) could easily have faced the very highest aggregate marginal federal tax rate, with both capital income and income from superordinate labor often facing marginal tax rates that were only half as high. Overall, the existing tax structure makes middle-class labor the single most highly taxed factor of production in the entire economy.

  A simple example illustrates the special burden that the payroll tax imposes specifically on middle-class labor. If a bank deploys midcentury financial technologies to issue home mortgages using twenty mid-skilled loan officers who each earn $100,000 per year, this costs the bank and the workers, taken together, $306,000 in payroll taxes. By contrast, if the bank were to switch to the current mode of production and displace the mid-skilled loan officers with a single Wall Street trader who earns $2 million, this would cost the bank and the trader only about $90,000. Where two technologies of production are economically equivalent, but one requires twenty mid-skilled workers while the other requires one super-skilled worker, the mid-skilled approach currently faces an average payroll tax rate over 10 percentage points higher than the meritocratic approach, which produces an aggregate payroll tax burden over three times as great.

  The payroll tax, in other words, substantially suppresses mid-skilled employment and wages and fosters super-skilled employment and wages. (Indeed, if the super-skilled worker can get capital
gains treatment for her income, by styling it as founder’s shares or carried interest, the income tax adds a further bias, on the order of 20 percentage points.) Once again, middle-class workers subsidize superordinate jobs that they will never get.

  Eliminating the income cap on the Social Security payroll tax would promote middle-class work. The new taxes would eliminate the present regime’s substantial subsidy for production that deploys super-skilled rather than mid-skilled labor. They would therefore immediately reduce the appeal of organizing production around super-skilled workers and increase the appeal of organizing production around mid-skilled workers.

  Eliminating the cap would also generate revenue. It is unclear just how much revenue would be raised, as the reform would influence both the labor market in particular and the economy in general. No fully dynamic model that takes all of these influences into account exists, but the Congressional Budget Office has built several semi-dynamic models. These predict that eliminating the cap would at once raise between $150 billion and $200 billion in new revenue and would in the long run increase payroll tax revenues by 1.1 percent of GDP.

  These are large sums. They amount, for example, to roughly sixty times the total budget of the Department of Labor’s Employment and Training Administration in recent years (and roughly ninety times its 2018 budget), and they amount to about one-third of the total budgets of all (public and private) U.S. colleges and universities.

  Government might spend these additional revenues further to promote middle-class jobs. The optimal pattern of expenditures would require close study and experimentation. But imagine, by way of illustration, devoting half of the money to creating mid-skill jobs, by paying wage subsidies to employers who hire mid-skilled, middle-class workers, and allocating the other half to funding the expansion of private school and university student bodies required to make education open and inclusive. Combining the wage subsidies with a higher minimum wage can help to prevent employers from capturing the subsidies.