Inequality and Fairness: Why Investors Should Care

The effect of unequal educational funding is to reinforce existing wealth inequalities across social class, race, gender, and region. But the most significant effect is the reproduction of these inequalities across generations.
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I'm writing this essay from a tiny café in Paris (literally tiny, with the name Au Petit Saint-Paul), one block from the apartment where I'm living for the month and from the adjacent elementary school where I'm privileged to awaken each morning to the music of shouting, laughing children chasing each other across the school's courtyard. This setting offers the perfect environment for thinking about the meaning of inequality in the United States.

In a speech prepared for a Boston Fed conference on economic inequality, Fed Chairwoman Janet Yellen spotlights data from the 2013 Federal Reserve Survey of Consumer Finances, which indicates that half of U.S. households own 1 percent of the nation's financial wealth, while 5 percent of the households own 63 percent of this wealth, a 630-fold difference. Yellen properly wonders whether widening inequality "is compatible with values rooted in our nation's history."

Yellen specifically focuses on increasingly limited opportunities for generational mobility in the United States, which contrasts not merely with mobility in other advanced industrial nations, but which directly challenges core economic myths about equality of opportunity in the United States. Yellen pins much of this disparity on decentralized funding regimes for public education in the U.S., which rely heavily on local property taxes and state disbursements. In a nutshell, the effect of unequal educational funding is to reinforce existing wealth inequalities across social class, race, gender, and region. But the most significant effect is the reproduction of these inequalities across generations.

So here I am in France, the homeland of Thomas Piketty, and a nation that, by history and disposition, most certainly does not leave education funding decisions to local municipalities and the vagaries of property tax assessment and collection. And from this perspective, as I see schoolchildren enter and exit their lycees each day, and sit amongst college and graduate students in national libraries housed in 16th century hotels, I am compelled to ask the community of investors -- who have so greatly benefited from Fed monetary and interest rate policy -- to consider why we should care if the reality of economic inequality in the United States puts to flame the myth of equality and opportunity that we pretend our Constitution, our institutions, and our values protect with the ardor of Mother Bear.

Let's be clear. This is not a debate about the relative quality of the French education system. Nor is it a debate about Piketty's (no doubt perfidiously French and perversely flawed) survey methodology. Because those debates would be a deception and a distraction from the real issue, which is the meaning of inequality in the context of wealth and capital investment in the United States.

I propose an analogy. How often does one read indirectly about, or experience directly, financial markets that sure seem to be rigged against "the little guy"? Insider trading. Flash trading. Front running. Executive stock awards. Market manipulation. Dark pools. Tax avoidance. Bailouts. If one is a little guy, which of course most of us are, how unfair and frustrating and dispiriting might these structural impediments to investing success and wealth creation seem to us? How angry might they make us? Because if the big guys are too big to fail, doesn't that imply the little guys are too little to succeed?

Without getting too deep into the weeds of demographic profiling, I think we can agree that the investment community in the United States that matters largely represents the interests, preferences, and opinions of that 5 percent of Americans with disproportionate wealth -- a community that is predominantly white, male, and closer to being old than to being young. Relatively speaking, compared to those who don't fit our profile, we are the "big guys".

These are not aspersions. These are demographic facts. It is easy for us to forget that we predominantly white, male, and older Americans are not the nation. Not even close. Not now, not in the future, and truly never even in the past. To believe that our interests, preferences, and opinions trump or possess more value than the interests, preferences, and opinions of those with less wealth or with no wealth is to commit the sin of reification - the confusion of the object and the subject, of the past and the future, of the part and the whole.

Let's return to the example of the little guy investor who is too little to succeed so long as the big guy investors are too big to fail. Is this not another example of stifled mobility, an example that illustrates directly the value we assign to fairness and the pain we experience when fairness as a principle is disregarded and abandoned?

Now let's consider our children, and what fairness means to them generationally. Our children are innocent. They don't request or deserve the circumstances into which they are born. But we also implicitly understand that our children are a trust. We are their stewards. We want to invest in them. As a nation, investments in our children, not unlike our financial investments, are stakes in future returns.

And in order for these investments to matter, and to succeed in elevating the life prospects and opportunities of these children above those of their parents, we need to take extremely seriously the value of fairness, and the idea that the "little children", the "forgotten children", are neither too little nor too forgotten to succeed. And we need to appreciate the degree to which excessive wealth inequality may "rig" the game against the children of our nation, generationally depriving them of future opportunities we would never individually want to deny to our own biological children.

This challenge in the end returns us to the beginning, to the idea broached by Janet Yellen about the unequal impact of local education funding, and to the larger philosophical implications of our commitment as a nation to values of fairness and opportunity. This challenge also returns us to France, with its overpowering sense of national identity and responsibility.

Latent antagonisms to the French - with their sophistication and their palates and their curious ways - may color our sense that we have anything to learn from them (although we might also do well to remember who saved our asses from the British during the Revolutionary War). But while the French educational system faces its own significant challenges, we in the United States who increasingly lack any substantively inclusive sense of national identity, would do well to consider the value of our values (as it were) as they apply to all who live within our borders.

Even in these uncertain times, in which the nation-state increasingly appears under siege and vulnerable, a profound and deeply rooted conception of national identity can provide a moral compass to guide us in our position on the meaning and significance of inequality and barriers to opportunity in the United States. In thinking about national values, in particular about fairness, we need always to start with a conception of the community to which these values apply, and then consider what it means, as a nation, to satisfy the demands of those values.

The emergence of a national securities regulation and disclosure regime in the 1930s supplanted state-controlled Blue Sky laws because the fragmentation and distortions produced by those state laws undermined fundamental conceptions of fairness and equality that we determined applied to all investors. In the same manner, we need to appreciate that as investors in the future of our children, none are too little to fail, and that fairness dictates that all deserve the greatest opportunities to develop their human faculties that we can provide.

Just as we would always want legislators and regulators to visualize the creation of investment laws and practices according to the value of fairness, and through the eyes of the little guy, we must certainly visualize the generational opportunities we provide our children, and the impact of inequality in their lives, through their eyes, every last one of them.