July 15 (Bloomberg) -- French economist Thomas Piketty sparked a global debate on inequality by arguing that the wealthy pull ahead by reaping disparate rewards from financial capital. He may be missing the human half of the story.
When defining capital, Piketty excludes the kind that “consists of an individual’s labor power, skills, training and abilities” because it can’t be owned or traded on a market, according to his best-selling book “Capital in the Twenty-First Century.”
The distribution of such human capital is a growing area of focus as some economists see gaps widening early on based on what money can buy. Children from poorer families may miss advantages that include time spent with their parents and early childhood education, which is linked to better brain development, higher test scores and, in turn, greater earnings, said Sean Reardon, professor of education and sociology at Stanford University.
“Low-income kids have less access to lots of opportunities to develop their cognitive skills,” Reardon said in an interview. “A lot of these differences in cognitive development emerge in the first few years of life and then are kind of there forever.”
High-quality preschool and home visits to instruct parents of young children on how to be effective teachers can add more than $89,000 to lifetime earnings for the average person, while costing $11,600 per child, according to an analysis published this month by the Brookings Institution in Washington.
When those programs are combined with others in middle childhood and adolescence that seek to reduce drop-out rates, improve reading skills and boost social learning, lifetime earnings increase by a total of about $205,200 at a cost of $21,100, according to the report.
Equalizing the distribution of human capital through improving literacy and developing math and cognitive skills offers a more immediate way to chip away at, though not solve, wealth inequality, Robert Solow, a 1987 Nobel laureate and a professor emeritus in economics at the Massachusetts Institute of Technology in Cambridge, Massachusetts, said in an interview.
“It would be a good thing, but a very difficult thing, to make the distribution of wealth and capital more equal,” Solow also said at a panel hosted by the Economic Policy Institute in Washington in April that included Piketty. Conversely, smoothing the distribution of human capital is “a very valuable thing, and it is definitely worth doing. Thomas, God help him, doesn’t talk much about human capital. The book would not be carry-able if he did,” Solow said, referring to Piketty’s 700-page tome.
Human capital is “key” to understanding inequality, Piketty wrote in an e-mailed response to questions. “Next time I will write an even longer book!”
President Barack Obama is pushing for universal preschool as a way to reduce achievement gaps and has called income inequality “the defining challenge of our time.” Early education is “going to raise the productivity and the wages of kids, and every study shows that it has an extremely high return,” Betsey Stevenson, a member of the president’s Council of Economic Advisers, said in an interview.
As the owner of a Greenwich, Connecticut, day care, Verna Esposito has witnessed how eager well-heeled families are to give their children an advantage.
“We have families on our wait list now that are not yet pregnant,” said Esposito, who owns Little Friends Child Care and Early Education. Tuition for infants 6 weeks or older starts at about $21,000 annually and the wait list has grown by 25 percent each year for the last three, she said.
Criteria for designating preschool as high-quality include having comprehensive early learning standards, a maximum class size of 20 children and teachers with at least a bachelor’s degree, according to the National Institute for Early Education Research. They should also provide at least one meal, vision, hearing and health screenings and referrals as well as support services such as parent education and home visits.
Only four states -- Alabama, Alaska, North Carolina, Rhode Island -- and one of Louisiana’s three programs met all 10 of the organization’s benchmarks for state preschool quality standards in 2013, according to the organization.
The introduction of a public preschool program for disadvantaged children would, in the long run, increase college enrollment by 3.6 percentage points, according to a 2013 paper by economists James Heckman of the University of Chicago and Lakshmi Raut of the Social Security Administration.
The share of the poor population -- defined as those making less than 70 percent of the average income -- would fall to 29 percent in the long run from 36 percent, Heckman and Raut found. Additionally, the ability of generations within families to move up the pay scale also improves, they said.
The disparity in investment in human capital existed before the recession, and it has grown wider since then.
Expenditures on children rose 17 percent among the poorest households from 1972 through 2007 after adjusting for inflation, compared with a 76 percent increase for the richest, according to Sabino Kornrich, an assistant professor of sociology at Emory University in Atlanta.
Then, as the economic slump unfolded, high-income households boosted outlays on education, while those lower down the income ladder tightened their belts as unemployment jumped and incomes plunged, Kornrich said, citing more recent data that have yet to be published. He said some of the increase among the better off may have been on higher education for older offspring who stayed in school waiting for the job market to improve.
“All of these parents really are worried about their children, want to invest in them and want to do what’s best for them,” Kornrich said in an interview. “They simply have different capabilities.”
Average annual daycare center costs for an infant in 2012 ranged from $4,863 in Mississippi to $21,948 in the District of Columbia, according to Child Care Aware, an Arlington, Virginia, group that advocates national policies to ensure access to early learning services.
It’s not just money that gives some children a leg up. The advantages afforded by parents who have more time and other intangible resources to invest also widen the gap early on, as their children more quickly develop the cognitive skills needed to succeed once they enter the classroom.
By the age of 2, infants from low-income families are six months behind in the development of language and vocabulary skills compared with children from wealthier families, creating impediments for their later educational success and career opportunities, according to 2013 research from Anne Fernald, an associate psychology professor at Stanford, near Palo Alto, California.
“Your experiences early in life loom larger than your experiences when you’re say, an adolescent,” said Isabel Sawhill, a senior fellow in economic studies at Brookings. “Experiences build on each other and interact with each other. If someone hasn’t learned to read or hasn’t learned language at an early age, it’s not impossible but it’s hard to remediate that when they’re older.”
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