The dissonance between politics and public opinion

John Burn-Murdoch has an excellent op-ed that compares the views of politicians and voters in Western countries on economic and sociocultural issues. He cites the work of political economist Laurenz Guenther, who draws attention to a remarkable convergence on the former and divergence on the latter. 

Guenther’s analysis shows that voters and mainstream politicians have long been broadly aligned on economic issues like tax and spend or public ownership. But on sociocultural issues such as immigration and criminal justice there is a yawning gulf. Western publics have long desired greater emphasis on order, control and cultural integration. Their politicians have tilted in the opposite direction, favouring more inclusive and permissive approaches. The result is the opening up of a wide “representation gap” — a space on the political map with large numbers of voters but few mainstream politicians or parties — into which the populist right is now rapidly expanding as cultural issues rise in salience.

Aside from Denmark, he finds a sharp divergence between the views of politicians and voters on sociocultural issues. 

Burn-Murdoch also writes that 

My analysis of decades of data on public perceptions and immigration levels shows that concern consistently tracks irregular migration and failed integration, not people coming to work and study. But Guenther’s research corroborates the consistent finding that the public does not want large flows of arrivals without visas, or a growing share of the population unable to speak the language (both of which have happened). A similar pattern is clear with crime, where rates of arrest and prosecution have fallen in several countries and lower-level disorder is on the rise. Sustained failure to curb these trends under governments of both the centre left and centre right has signalled to the public that the political class either doesn’t see this as a problem or is incapable of addressing it.

In another article, Burn-Murdoch has shown how “populist parties on the right combine rightwing positions on social issues with left-wing positions on economics”. 

In a third article, he points to declining fertility levels among progressives as a possible explanation for the world becoming more socio-culturally conservative.

I find that the assumption that birth rates are falling across society in general is not really true. From the US to Europe and beyond, people who identify as conservative are having almost as many children as they were decades ago. The decline is overwhelmingly among those on the progressive left, in effect nudging each successive generation’s politics further to the right than they would otherwise have been… A growing left-right birth rate gap will slow that liberalising conveyor belt, and could result in societies and politicians that are less liberal and less concerned with the environment than would otherwise be the case.

The dissonance between the political parties and their voters on socio-cultural issues is surprising, given the importance politicians tend to attach to public opinion surveys. It begs the question as to why parties are unable to recalibrate their positions to reflect the views of their electorate. Also, what explains the dissonance being confined to socio-cultural issues and not to economic issues?

An important reason for the failure to incorporate public perceptions, as I have blogged here and here, is that the leadership of mainstream political parties have become captives of certain interests. This is especially true of the centre-left or social democratic parties, whose leadership largely consists of the beneficiaries of the capitalist economic system. Their social and cultural proclivities are towards the liberal positions on immigration, diversity, minority rights, etc. Sample this description of the Democratic Party leadership in the US.

Since 1980, among all Democratic candidates for president and vice-president of the US, Tim Walz, Kamala Harris’s running mate, was the first not to have a law degree. During the same period, none of the four Republican presidents had a legal background: the first, Ronald Reagan, was an actor and the other three were businessmen. In the US, lawyers are rivalled only by politicians as the most hated professional group. Is it any wonder, then, that the lawyers’ party was overwhelmed? That a platform entirely conceived by lawyers, centred on the defence of democratic procedures and respect for minority rights, whose main argument consisted in the lawsuits against the Republican candidate, was swept away by the recriminations of Trump supporters: inflation, illegal immigration, class contempt? 

It’s not unsurprising then that in the aggregate, left-wing parties tend to fare better with elites than with the masses on both sides of the Atlantic. 

Burn-Murdoch points to the idea that class has been replaced by education as the new defining cleavage in politics. 

In their book Polarized by Degrees, political scientists Matt Grossman and David Hopkins set out how the realignment of the political divide from class to education has formed strong new alliances that are likely to survive changes in political personnel. While arts and entertainment elites have long leaned leftward, academia has veered further to the left of the general population over recent decades. Conservatives have become a rare breed in journalism, and corporate bosses are increasingly aligned with the left.

While the occupational base of Republican Presidents and candidates may have been more diverse, their economic class base is narrower and has several common features with their Democratic Party counterparts. The traditional left-wing mass electoral base of factory and service industry workers, and the right-wing mass base of primary sector and hinterland residents, are characterised by their lower levels of education, especially compared to the political leadership of both Parties in the US. This explains the comparable levels of dissonance between them and their respective electoral bases on socio-cultural issues. The class dominance has come in the way of their remaining connected with the social views of their electorate.

However, as Rana Faroohar writes, there’s an important, unmistakable emerging political reality arising from the deepening of the class-based dissonance. It’s called populism, of either variants. 

Whatever the outcome, it’s clear that future elections are going to be won or lost on who can convince working people that they will fight for them. For example, the issue of healthcare affordability — surveys show premiums will probably rise by 10 per cent or more next year — is driving the launch of “TrumpRx”, a federal website through which Americans will be able to purchase discounted drugs (ironically taking a page from Obamacare). The affordability crisis is also behind the rent freezes and municipally owned groceries suggested by (Zohran) Mamdani.

The alignment on economic issues is more intriguing, especially given the clearly widening inequality and rising relative deprivation in the US. Besides, there are clear faultlines along education levels between political leadership in both Parties and their respective electorates. 

I’m inclined to argue that while the dissonance between political leadership and electorate will be less likely (at least for now) on broad principles like support for the capitalist system with a social welfare net (as captured in the survey mentioned above), it’s likely to be more pronounced on issues like business concentration and anti-trust actions, or tax cuts and welfare squeezing, or deregulation and quality of job creation.

Weekend reading links

1. Fascinating tweet thread by Ed Conway about the Bretton Woods System that pegged the exchange rates of 44 countries with the IMF entrusted the responsibility of managing it. This graphic illustrates the remarkable currency stability among these countries in the 29 years of its existence.

This currency stability combined with a few other things resulted in a period of remarkable economic prosperity. This is a striking graphic about productivity and compensation in the US.

2. Good article that evaluates the semiconductor chips making in India, specifically the partnership between Tata Electronics and PSMC, one of the smaller Taiwanese chip manufacturing companies.

This is unlike the venture the other big player, Taiwan SemiconductorManufacturing Company (TSMC), is undertaking abroad – the company’s new fab in the Japanese city of Kumamoto, two $40 billion facilities in Phoenix, Arizona, and a commitment to invest nearly $4 billion to build a fab in Dresden, Germany. In these new fabs, apart from significant equity investment, TSMC, the ninth-most valuable business in the world, is an equity partner, and has invested in the ecosystem; it has taken along its key vendor base of some 25-30 companies to each of these locations, and is also undertaking large-scale training of manpower on the nuances of chip fabrication, a high tech-intensive job. In the Tata-PSMC venture, much of the heavy lifting is done by the Tatas, who have no real experience in chip manufacturing so far... The fact is, for TSMC to be successful outside Taiwan, it takes more than just its expertise. It takes its suppliers along so that an ecosystem develops locally for the construction expertise, material supplies, and equipment deliveries. For instance, TSMC has moved around 40 Taiwanese companies to Japan (for the new plant in Kumamoto), and taken around 30 of them to Arizona for the new plants.

3. NYT has an interview with Robert Putnam.

We looked at long-run trends in connectedness, trends in loneliness, that sort of thing, over the last 125 years. And the short version is, it’s an upside-down U curve. We were socially isolated and distrustful in the early 1900s, but then there was a turning point, and then we had a long upswing from roughly 1900 or 1910 till roughly 1965, and that was the peak of our social capital. People were more trusting then, they were more connected then, they were more likely to be married then, they were more likely to join clubs then, etc. And then for the next 50 years, that trend turned around...

That trend in political depolarization follows the same pattern exactly that the trends in social connectedness follow: low in the beginning of the 20th century, high in the ’60s and then plunging to where we are now. So now we have a very politically polarized country, just as we did 125 years ago. The next dimension is inequality. America was very unequal in what was called the Gilded Age, in the 1890s and 1900s, but then that turned around, and the level of equality in America went up until the middle ’60s. In the middle ’60s, America was more equal economically than socialist Sweden! And then beginning in 1965, that turns around and we plunge and now we’re back down to where we were. We’re in a second Gilded Age. And the third variable that we look at is harder to discuss and measure, but it’s sort of culture. To what extent do we think that we’re all in this together, or it’s every man for himself, or every man or woman? And that has exactly the same trend.

He makes the distinction between bonding and bridging social capital.

Ties that link you to people like yourself are called bonding social capital. So, my ties to other elderly, male, white, Jewish professors — that’s my bonding social capital. And bridging social capital is your ties to people unlike yourself. So my ties to people of a different generation or a different gender or a different religion or a different politic or whatever, that’s my bridging social capital. I’m not saying “bridging good, bonding bad,” because if you get sick, the people who bring you chicken soup are likely to reflect your bonding social capital. But I am saying that in a diverse society like ours, we need a lot of bridging social capital. And some forms of bonding social capital are really awful. The K.K.K. is pure social capital — bonding social capital can be very useful, but it can also be extremely dangerous. So far, so good, except that bridging social capital is harder to build than bonding social capital. That’s the challenge, as I see it, of America today.

4. In an interesting reversal of fortunes, developing countries have become more fiscally prudent compared to their developed counterparts, and central banks across developing countries are exhibiting greater responsibility and independence. Sample this from Gavekal.

Across the emerging markets, political leaders with populist leanings are calling for looser fiscal policy. Many are also berating local central banks for failing to do more to support growth, and leaning on them to loosen monetary policy. For the most part, central bankers, jealous of their independence, are pushing back and keeping monetary conditions relatively tight to counter inflation. This raises the prospect of loose fiscal, tight monetary policy settings in a number of key emerging markets, argues Udith Sikand. It also throws the contrast between emerging and developed market central banks into sharp relief. Arguably, developed market central banks have caved in to fiscal dominance, keeping real rates for the most part low or negative over recent years to prevent public debt burdens from becoming unsustainable. By contrast, emerging market central banks are likely to maintain positive real rates in order to attract funding to cover growing fiscal deficits. The bottom line is that this sets up conditions for a potential triple merit scenario in emerging markets over the coming years, with local risk assets and currencies rising strongly.

5. India's long tail of corporate tax distribution

A total of 353 companies earning above Rs 500 crore accounted for 55.7 per cent of the Rs 14.7 trillion in gross total income recorded by all companies in 2018-19. A total of 842 companies made more than Rs 500 crore in 2023-24 and accounted for 62 per cent of the Rs 34.6 trillion in gross total income recorded by all companies.

6. India's textile industry facts of the day

India's textile industry, valued at USD 250 billion, provides jobs to 50 million people. The sector is divided into three broad categories - Textiles (fibre, yarn, and fabrics); Garments and; Made-ups (Bed sheets, curtains etc.). India is present across all parts of the value chain. In 2023, China exported USD 114 billion worth of garments, followed by the EU (USD 94.4 billion), Vietnam (USD 81.6 billion), Bangladesh (USD 43.8 billion), and India with just USD 14.5 billion. From 2013 to 2023, Bangladesh's garment exports grew by 69.6 per cent, Vietnam's by 81.6 per cent, and India's by only 4.6 per cent. "As a result, India's global market share in garment trade has declined from 2015 to 2022. The share of knitted apparel dropped from 3.85 per cent to 3.10 per cent, and the share of non-knitted apparel decreased from 4.6 per cent to 3.7 per cent," GTRI founder Ajay Srivastava said. He said that the garment imports too surged by 47.90 per cent, from USD 1.06 billion in 2018 to USD 1.56 billion in 2023. Textile imports also saw a notable increase of 20.86 per cent, from USD 5.77 billion to USD 6.97 billion. 

7.  A new NBER working paper points to more evidence of price markups in the US economy. It uses data on price data from more than 100 distinct product categories in the US in the 2008-19 period. 

We estimate demand with flexible consumer preferences and recover time-varying markups for individual products under the assumption of profit maximization. Our results indicate that markups increased by about 30 percent during our sample period. This reflects within-product changes and is primarily due to reductions in marginal costs, rather than increases in (real) prices. Changes in marginal costs, along with declining consumer price sensitivity, account for the vast majority of the time series variation in aggregate markup changes between 2006 and 2019. Our model indicates that consumer surplus has increased despite rising markups, though the increases are concentrated among higher-income consumers.

8. Interesting snippet about the Bill and Melinda Gates Foundation

Between 2006 and 2023, Mr. Buffett had given more than $39 billion to the Gates Foundation. By comparison, Mr. Gates and Ms. French Gates gave $39 billion between 1994 and 2022, including $22 billion to get the foundation going in 2000. In some years, the former couple gave less than half a billion. In 2021, they pledged $15 billion to the foundation’s endowment, and the following year, they transferred that money, as well as another $5 billion Mr. Gates had contributed.

9. Important point made by Richard Rorty (HT: Rana Faroohar)

National pride is to countries what self-respect is to individuals: a necessary condition for self-improvement. Too much national pride can produce bellicosity and imperi­alism, just as excessive self-respect can produce arrogance. But just as too little self-respect makes it difficult for a person to display moral courage, so insufficient national pride makes energetic and effective debate about national policy unlikely.

10. An important trend to be kept in mind as we follow China, the sharply increasing Chinese emmigration.

The number of Chinese citizens living in Malaysia has almost doubled over the past three years, driven by a jump in students and new investors, according to government officials, academics, schools, and business and community associations... China’s slowing economic growth as well as a more heavy-handed approach to business have driven more of its citizens to seek new lives abroad. Wealthy Chinese citizens have flocked to destinations such as Singapore and Malta where they have acquired citizenship through investment, and they make up the largest source of golden visa applicants in Portugal and Greece. Chinese citizens also form one of the largest groups of illegal migrants attempting to enter the US from Latin America...

Malaysia... is home to a centuries-old Chinese diaspora that makes up about 23 per cent of its 34mn citizens. Most new Chinese arrivals are middle-class families who see south-east Asia as a more affordable destination, or students shying away from anti-China sentiment in the west, making Chinese people the largest group of foreign students and long-stay residents in Malaysia. Universities and international schools in Malaysia are reporting soaring demand. The nation’s higher education institutions had 44,043 Chinese students enrolled last year, up 35 per cent from 2021, according to the education ministry... the number of Chinese pupils in international schools more than doubled in the same timeframe from 2021 to 2023. More than 56,000 Chinese immigrants now hold Malaysia My Second Home long-stay visas, more than double last year’s number. Chinese investors are also contributing to the boom in expatriate numbers. There are about 45,000 owners, managers and workers of Chinese companies in Malaysia, up from an estimated 10,000 in 2021, according to a Chinese trade official... The rise in Chinese residents mirrors an earlier trend in Thailand. Sivarin Lertpusit at Thammasat University in Bangkok said the number of new Chinese immigrants in Thailand was “rapidly increasing”, reaching 110,000-130,000 living in the country in 2022, most of them entrepreneurs, employees, students and their family members as well as lifestyle migrants.

11. The week saw a US federal judge ruling on a DoJ suit that Google spent billions of dollars on exclusive deals to maintain an illegal monopoly on search, a sector where it handles more than 90% of online queries. The judge, Amit Mehta, of the US District Court for the District of Columbia, said, "Google is a monopolist, and it has acted as one to maintain its monopoly."

The DoJ argued the search giant paid tens of billions of dollars a year for anti-competitive deals with wireless carriers, browser developers and device manufacturers — and in particular Apple. These payments, which cemented Google as the default search engine, totalled more than $26bn in 2021, according to the decision... The proceedings will now enter a second phase in which the court will determine what remedies Google needs to take. The DoJ has not yet indicated what penalties it would seek, but it may focus on curbing Google’s ability to strike the deals at issue in the case. The decision is the biggest win against Big Tech by US antitrust enforcers in decades... the DoJ’s antitrust division, led by Kanter, has sued Apple and has a second case pending against Google, accusing it of allegedly exercising monopolistic control of the digital advertising market. The second Google trial is set to begin next month. The Federal Trade Commission, chaired by Big Tech critic Lina Khan, has also filed lawsuits against Amazon and Meta. 

Google’s years-long agreement with Apple to make it the default search engine on the iPhone’s Safari browser has long drawn scrutiny. Unsealed court documents showed that Google paid Apple $20bn in 2022 alone. This would amount to a substantial portion of Apple’s $85bn-a-year services business, which includes its App Store and Apple Pay... Also at issue in the case were contracts the tech giant reached over the years with browser developer Mozilla, Android smartphone makers Samsung, Motorola and Sony, and wireless carriers AT&T, Verizon and T-Mobile... The ruling strikes at the heart of Google’s most prominent business. The company made $175bn in revenue from its search-based advertising last year, more than half its $307bn of total revenue... Google’s “distribution agreements foreclose a substantial portion of the general search services market and impair rivals’ opportunities to compete”, Mehta said in the ruling. “Google has not offered valid pro-competitive justifications for those agreements.” The deals deny competitors “scale”, he said, which is “the essential raw material for building, improving, and sustaining” a general search engine. Google benefits from a “feedback loop” in which parties “routinely renew” exclusive distribution deals with the company, Mehta added. “That is the antithesis of a competitive market.”

Judge Mehta pointed to three ways in which Google distorted competition

The company’s grip over 90 per cent of the search market enabled it to make super-profits from advertisers. Its business model, based on surveillance advertising, compromised user privacy, which rival search engines might otherwise prioritise. And its massive payments to Apple, and other tech companies, for default distribution of Google search on their devices and services in effect buy off potential competitors, stifling innovation.

This about the extent of Google's dominance

According to Mehta’s decision, nearly 90 per cent of US search queries flowed through Google in 2020, and 95 per cent for mobile. It has no serious rivals — the next closest, Microsoft’s Bing, accounted for just 6 per cent. The advertising business Google has built around its search business generates enormous revenue: $175bn last year, more than half its $307bn total. It has spent lavishly to protect its cash cow: Google’s total payments to the likes of Apple and Mozilla to make it their default search engine reached more than $26bn in 2021 alone, Mehta said.

This is a summary of the cases against the other Big Tech companies. 

12. This blog has long held that India's objective should be to grow at 6% for the next 30 years, and use the occasional tailwinds to opportunistically engage for episodes of slightly higher rates. TT Rammohan points to the WDR 2024 and makes this important point.

The WDR 2024 report complements the findings of a study carried out by the World Bank in 2008 under the leadership of Nobel Laureate Michael Spence. That study showed that growth of over 7 per cent for over 25 years from any starting point, not just from a MIC starting point, is a tall order — only 13 economies had been able to do so. Of these, nearly half were small economies. The economies that had grown rapidly had had the benefit of a post-World War II world environment that was substantially open to free trade.

M Govinda Rao points to the accounting challenges with India's growth aspirations

According to the World Bank’s definition, a developed country in fiscal 2025 has a per capita gross national income (GNI) of $14,005. India’s GNI is estimated at $2,600, implying that to leapfrog into the developed country club, India must multiply its per capita GNI by 5.3 times. This translates into an average annual growth of about 7.5 per cent in per capita GNI or about 9 per cent per year in overall GNI for the next 23 years... Accelerating growth requires the economy to enhance both investments and productivity. At the present incremental capital-output ratio of 5, the investment rate must increase to 40 per cent of gross domestic product (GDP) from the prevailing 34 per cent. Any shortfall will have to be compensated by increasing productivity.

13. Some striking numbers about the role of state in today's capitalist society.

Sovereign Wealth Funds (SWFs) controlled more than $11.8 trillion in 2023, beating hedge funds and private equity firms combined, up from $1 trillion in 2000. State-owned enterprises (SOEs) had assets worth $45 trillion in 2020, the equivalent of half of global gross domestic product, up from $13 trillion in 2000. The Organization for Economic Cooperation and Development calculates that half of the world’s 10 biggest companies and 132 of its 500 biggest are SOEs...

For the most part, these SOEs are different from the state-owned bureaucracies of old. The state acts as a passive shareholder (sometimes with a majority but often with a minority share) rather than as a hands-on owner. The chief executives tend to have MBAs from fashionable schools and, in many cases, experience in the private sector. And the companies participate fully in global markets rather than, like old fashioned state-owned companies, hiding behind national walls... Big European SOEs have been buying up smaller private companies across Europe: France’s SNCF and Deutsche Bahn AG have purchased British railway companies, creating the oddity of foreign state companies running Britain’s privatized railways, while Spain’s Telefonica SA has expanded across Europe and the Americas. The Norwegian sovereign wealth fund is so big, controlling more than $1.7 trillion in assets, that it owns almost 1.5 per cent of the shares in all the world’s listed companies.

14. Some interesting snippets about China's priortisation of science education and applied research in areas close to the country's strategic priorities. 

A majority of undergraduates in China major in math, science, engineering or agriculture, according to the Education Ministry. And three-quarters of China’s doctoral students do so. By comparison, only a fifth of American undergraduates and half of doctoral students are in these categories, although American data defines these majors a little more narrowly... China’s lead is particularly wide in batteries. According to the Australian Strategic Policy Institute, 65.5 percent of widely cited technical papers on battery technology come from researchers in China, compared with 12 percent from the United States. Both of the world’s two largest makers of electric car batteries, CATL and BYD, are Chinese. China has close to 50 graduate programs that focus on either battery chemistry or the closely related subject of battery metallurgy. By contrast, only a handful of professors in the United States are working on batteries...

The roots of China’s battery successes are visible at Central South University in Changsha, a city in south-central China and a longtime hub of China’s chemicals industry. Central South University has nearly 60,000 undergraduate and graduate students on an extensive, modern campus. Its chemistry department, once in a small brick building, has moved to a six-story concrete building with labyrinths of labs and classrooms. In one lab, which is filled with glowing red lights, hundreds of batteries with new chemistries are tested at the same time. Electron microscopes and other advanced equipment occupy other rooms... Peng Wenjie, a professor, has set up a battery research company nearby that employs more than 100 recent doctoral and master’s program graduates and over 200 assistants. The assistants work in relays for each researcher so that the testing of new chemistries and designs continues 24 hours a day... Building and equipping an electric-car battery factory in the United States costs six times as much as in China, said Robin Zeng, the chairman and founder of CATL. The work is also slow — “three times longer,” he said in an interview.

It would be useful to go back and check on similar articles that compared the scientific research focus in the Soviet Union and its comparison with the US. The Communist Party recognised the importance of higher education and research, and the USSR was a leader in basic sciences education and in applied research, competing on level terms in many of the cutting-edge areas of technology. We now know that it didn't go much far. 

Not saying that the same fate awaits China. But it's useful to keep history in mind and judge such trends with some perspective, and not in any absolute terms. 

Family is destiny - evidence from college admissions in the US

I have blogged many times on the ovarian lottery, the disproportionate importance of family connections in determining life outcomes. Family is destiny.

Raj Chetty, David Deming, and John Friedman have just released a new Opportunity Insights study (pdf here and NYT illustration here) using college admissions data from 1999 to 2015 from 12 elite colleges (Ivy League, MIT, Duke, U Chicago, and Stanford) that illustrate the outsized nature of preferential treatment that children of alumni (legacy applicants) enjoy in Ivy League undergraduate admissions. The authors used detailed anonymised internal admissions assessments data, SAT and ACT scores, and incomes of parents and post-graduation incomes of students. A summary of their findings

Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. In contrast, children from high-income families have no admissions advantage at flagship public colleges. 

The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families... we show that attending an Ivy-Plus college instead of the average highly selective public flagship institution increases students’ chances of reaching the top 1% of the earnings distribution by 60%, nearly doubles their chances of attending an elite graduate school, and triples their chances of working at a prestigious firm. Ivy-Plus colleges have much smaller causal effects on average earnings... Adjusting for the value-added of the colleges that students attend, the three key factors that give children from high-income families an admissions advantage are uncorrelated or negatively correlated with post-college outcomes, whereas SAT/ACT scores and academic credentials are highly predictive of post-college success. 

We conclude that... highly selective private colleges serve as gateways to the upper echelons of society in the United States. Because these colleges currently admit students from high-income families at substantially higher rates than students from lower-income families with comparable academic credentials, they perpetuate privilege across generations.

The graphic below captures the admissions advantage enjoyed by legacy students

That the legacy status is large is borne out by the finding that the legacy advantage enjoyed over other non-legacy applicants is much higher than the same students' admission prospects in other elite colleges 

They also compared legacies’ chance of admission at the colleges their parents attended versus similarly elite schools. They found that they were slightly more likely to get in to the other colleges than applicants with the same test scores. But that was dwarfed by the advantage they got at the school their parents attended.

The study goes further and examined the income tax records of graduates of these colleges and analysed their post-college outcomes. 

They estimated that legacy students were no more likely than other graduates to make it into the top 1 percent of earners, attend an elite graduate school or work at a prestigious firm. If anything, they were slightly less likely to do so.

Needless to say, legacy students are more likely to be white and more likely to come from rich families. The study found that even among the legacies, the richest had an advantage. One in six Ivy League students has parents in the top 1%.

The legacy status builds on an already entrenched advantage arising from these students having access to much superior schooling, tuition, coaching, exposure and so on. Unsurprisingly, the study finds that even without legacy status, these students would still be about 33% more likely to be admitted than applicants with the same test scores, based on all their other qualifications. In fact, even without legacy, family wealth already has a stunning relationship with elite college admissions.  

The study looks at the non-academic credentials like extracurricular activities, internships, volunteering, recommendations etc of students admitted to these colleges.

The academic ratings of richer students didn’t vary much from other students with the same test scores. But richer students were vastly more likely to earn high marks on nonacademic measures like extracurricular activities and recommendation letters... At one of the colleges that shared admissions data, students from the top 0.1 percent were 1.5 times as likely to have high nonacademic ratings as those from the middle class... The biggest contributor was that admissions committees gave higher scores to students from private, nonreligious high schools. They were twice as likely to be admitted as similar students — those with the same SAT scores, race, gender and parental income — from public schools in high-income neighborhoods. A major factor was recommendations from guidance counselors and teachers at private high schools... Recommendation letters from private school counselors are notoriously flowery... and the counselors call admissions officers about certain students... Nobody’s calling on behalf of a middle- or lower-income student. Most of the public school counselors don’t even know these calls exist.

Even after adjusting for higher SAT scores, finely honed resumes, higher application rates etc, they were still over-represented. 

For applicants with the same SAT or ACT score, children from families in the top 1 percent were 34 percent more likely to be admitted than the average applicant, and those from the top 0.1 percent were more than twice as likely to get in.

The new data shows that among students with the same test scores, the colleges gave preference to the children of alumni and to recruited athletes, and gave children from private schools higher nonacademic ratings. The result is the clearest picture yet of how America’s elite colleges perpetuate the intergenerational transfer of wealth and opportunity... In effect, the study shows, these policies amounted to affirmative action for the children of the 1 percent, whose parents earn more than $611,000 a year.

The study finds that the elite nine flagship public universities were much more equitable. 

At places like the University of Texas at Austin and the University of Virginia, applicants with high-income parents were no more likely to be admitted than lower-income applicants with comparable scores.

The paper points to the share of individuals who attended Ivy-Plus colleges in leadership positions across different realms. Though these twelve colleges made up less than 1% of all college admissions in the US, their dominance is widely present across leadership positions.

The striking statistic is the dominance of Ivy graduates in public service leadership positions. About three in four US Supreme Court judges graduated from Ivy Pls colleges! In simple terms, the influential positions that inform public issues have vastly disproportionate representation of Ivy-plus graduates. 

One of the authors, Raj Chetty, captured the findings best

“Are these highly selective private colleges in America taking kids from very high-income, influential families and basically channeling them to remain at the top in the next generation? Flipping that question on its head, could we potentially diversify who’s in a position of leadership in our society by changing who is admitted?”

This Mathew Effect has two implications - wealth begets wealth, and also wealth shuts out the rest. To borrow Peter Turchin's framework in his latest book, End Times, the former leads to elite overproduction and the latter leads to mass immiseration. At a macro-level, the former is a dynamic of capitalism, especially the modern globalised economy with its economies of scale and knowledge-based sectors with their network effects. And the latter is accentuated by the elite capture of the establishment and the rules -making process. As I have blogged on several occasions, it's this latter dynamic that's the most disturbing aspect of modern capitalism - Big Tech and Wall Street invariably end up capturing the rules-making process and corroding the social contract. 

Most of the disturbing economic, social and political trends we see today across the world have these two factors as important contributors. The rise of populism and widening inequality threatens to destroy the social fabric and usher in the crisis that the likes of Turchin and Neil Howe write about. 

Instead of their mindless and almost unconstrained pursuit of market capitalisation, executive compensation, profits maximisation, tax reduction and avoidance, deregulation, efficiency maximisation, automation, technology led lifestyles, union busting, etc elites need to realise that the ship is entering very stormy waters and could sink. Karl Marx may turn out to have the last laugh, if only a few decades late. 

Update 1 (05.08.2023)

From David Brooks

A 2018 study found that more than 50 percent of the staff writers at the beloved New York Times and The Wall Street Journal attended one of the 29 most elite universities in the nation.

Weekend reading links

1. The pace of diffusion of ChatGPT

Artificial intelligence chatbot ChatGPT has become speedily popular, amassing 1mn users within five days of its launch according to the company itself. A UBS study found that two months after its launch, ChatGPT had reached 100mn active users.

2. FT points to a big concern with the transition from IC engine to EVs, job losses.

Though built in England, the petrol engine of a Mini is a map of Europe: engineered in Germany, containing an alternator from France, an ignition coil from Italy and a coolant pump from Austria. Each step in this process involves a person, if not several. Yet not one of them will be required in as little as seven years when the brand goes fully electric. The same is true of those who supply engines for Volvo Cars, Mercedes-Benz, Jaguar, Ford or any of the brands that have set end dates for engine-car sales in Europe. That electric vehicles take fewer people to make and design is well documented... Ford this month announced plans to cut 40 per cent of its entire European engineering team... Today, Europe’s auto industry employs 3.5mn people directly in manufacturing. Ford chief executive Jim Farley estimates that EVs require 40 per cent fewer people to make — the equivalent of 1.4mn jobs if applied across the industry. These are high-skilled, high-productivity, well-paid positions that are often in geographic areas that would otherwise be economic backwaters. Just look at Nissan’s Sunderland plant or in Slovakia, which has four plants that turn out one car for every five people living in the country annually.

3. Singapore is benefiting from Hong Kong's inward turn

... though much catch remains to be done.

4. The rise and rise of Indian Americans,

In 2013, the House of Representatives had a single Indian American member. Fewer than 10 Indian Americans were serving in state legislatures. None had been elected to the Senate... Ten years later, the Congress sworn in last month includes five Indian Americans. Nearly 50 are in state legislatures. The vice president is Indian American. Nikki Haley’s campaign announcement this month makes 2024 the third consecutive cycle in which an Indian American has run for president, and Vivek Ramaswamy’s newly announced candidacy makes it the first cycle with two... By and large, Indian Americans have been elected on the Democratic side of the aisle. All five Indian Americans in Congress, and almost all state legislators, are Democrats... Indian American voters are overwhelmingly Democratic: 74 percent voted for Joseph R. Biden Jr. in the 2020 presidential race, more than voters of other Asian backgrounds, according to a survey by AAPI Data, APIAVote and Asian Americans Advancing Justice.

5. The changing contributors to inflation in the US (HT: Adam Tooze)

As the supply shocks have eased, the demand side pressures have been rising. 

This on the different contributors to inflation in the US and Europe, 

The inflation problems facing the Fed and ECB are different, however. In the US, inflation has been driven chiefly by a stimulus-fuelled surge in demand after the end of lockdowns and the question for policymakers is whether higher wages can be justified by improved productivity. In the eurozone and UK, the dominant issue is the energy price shock caused by Russia’s invasion of Ukraine. Dramatically higher spending on energy has made societies poorer overall, and the question is how that cost is shared between companies, workers and taxpayers. In this context, even if wages lag behind inflation, they could still be too high for companies to bear without raising prices further.

Wage growth in the US has been declining.

6. Just 25 million of Nigeria's population of 220 million voted in the just concluded Presidential elections, a voter turnout of just 27%. The winner, Bola Tinbu of the ruling party won with 8.8 million votes. 

7. China's health insurance explained,

China has two main kinds of health insurance: employee hospitalization insurance and so-called residents insurance. The employee hospitalization insurance is the better of the two and used by a quarter of the country’s population. It covers the urban employees and retirees of state-owned enterprises, as well as the current employees of some private-sector businesses. In contrast to the United States, employee insurance in China is not managed by companies. Instead, a municipal government typically forms an employee insurance pool to cover hospitalization and a few outpatient expenses. Companies typically contribute to the pools an amount equal to as much as 9.8 percent of a worker’s salary. Employees do not contribute to the insurance pools themselves.

In addition, those who qualify for employee plans typically have what are called personal health accounts. The money in them can be spent on medicine and further outpatient treatments. The employee insurance pools currently forward about a third of the money they receive from employers to personal health accounts, and spend the remaining two-thirds on hospitalizations and other expenses. Employees also put about 2 percent of their paychecks into their health accounts until they retire.

The less fortunate three-quarters of China’s 1.4 billion people have urban or rural residents insurance. Residents insurance is for farmers and migrant workers, as well as for children, who are seldom covered by their parents’ health insurance plans. It is also for the many workers whose private-sector employers are not making contributions for them... People with residents insurance generally do not get personal health accounts. Less than 4 percent of China’s population has no health insurance at all. This portion tends to be migrant gig workers who live at the fringes of society... Chinese health insurance plans have narrow restrictions on what is covered, high co-payments and very low coverage maximums... Chinese law says that when a municipality’s pooled employee insurance fund runs a deficit, the city government has to cover the shortfall... 

While the pooled employee funds in many cities are depleted, personal health accounts across China have accumulated more than $130 billion. So the central government wants municipalities to put less money into personal health accounts and redirect some of that money to hospitalization funds. At the same time, the employee pooled hospitalization plans are taking responsibility for more outpatient expenses for serious illnesses and covering more purchases of medicine.

The three year of zero-covid have depleted the employee insurance pool and left the municipalities with growing liabilities. 

Demographic changes in China have complicated the task. The number of births each year has dropped by nearly two-thirds since the late 1980s. Fewer young workers support more and more retirees who require ever more health care. Cities are now cutting how much money their hospitalization plans transfer to the personal health accounts of retirees. Wuhan’s reduction of transfer amounts by a little more than two-thirds is particularly steep. Local governments are also introducing or increasing deductibles. Wuhan has begun requiring retirees to pay the first $75 of expenses each year and current workers to pay the first $100.

8. Manufacturing's share of value add has been declining in India and that too from a low base, in contrast to the trends in other major peer competitors.

When China and Vietnam began their textiles and clothing export booms, respectively in the mid-1990s and the mid-2010s, foreign inputs made up more than 40 per cent of their exports. For India in 2015 the equivalent number was just 16 per cent.

An example of the challenge faced,

At a casings factory in Hosur run by Indian conglomerate Tata, one of Apple’s suppliers, just about one out of every two components coming off the production line is in good enough shape to eventually be sent to Foxconn, Apple’s assembly partner for building iPhones, according to a person familiar with the matter. This 50 per cent “yield” fares badly compared with Apple’s goal for zero defects. Two people that have worked in Apple’s offshore operations said the factory is on a plan towards improving proficiency but the road ahead is long.

9. Good graphic on the prices of Starbucks Tall Latte across different countries

10. This from an article about the recent high-profile jury conviction of Alex Murdaugh for the murder of his wife and son in Hampton County in South Carolina's Lowcountry, does not seem out of place for several parts of India or other developing countries.

They have enormous sway because, it turns out, the Murdaughs are like royalty in Hampton. For nearly a century, a Murdaugh has been the chief criminal prosecutor for the surrounding district. At the same time, the family has operated Hampton’s biggest civil law firm. In essence, the Murdaughs are the law in Hampton. They are also fantastically wealthy, with multiple homes, boats, their own 1,700-acre hunting estate, an arsenal of guns, and other baubles.

11. Finally, from an Indian Express investigation on the forest produce certification system in India about green-washing of such certifications

Forest certification is a sunrise industry, driven by a growing preference to avoid any product that can be linked to deforestation or illegal logging. In India, the forest certification industry is growing at 8 to 10 per cent every year, mainly catering to exporters wanting to tap the US and European markets that have strict regulations to ensure the legality of wood products coming in. Only processed wood is allowed to be exported from India, not raw wood... The investigation revealed that certifications in India were mainly a tool to bypass regulatory requirements in Europe and the US, where India’s forest-based products have an export market worth Rs 4,000 to Rs 5,000 crore every year. “It is easy to obtain forest certifications in India, if you are willing to pay the fees. There are several unscrupulous operators who are willing to make a quick buck. In fact, because of the intense competition amongst certification bodies, it is largely a buyers’ market. If you negotiate hard enough, you can drive down the costs of certification considerably,” said an executive of the India-based office of a foreign certification body... 

The main seekers of certifications have been exporters of wood products and other forest-based goods... Forty per cent of all certificates issued in India by two of the largest global certification systems – FSC or Forest Stewardship Council, and PEFC or Programme for Endorsement of Forest Certifications – have not been renewed... FSC and PEFC, and others like them, are developers and owners of certification standards, much like the International Organisation of Standardisation (ISO) or the Bureau of Indian Standards (BIS). The actual work of evaluation, recommendation of certifications, and monitoring of compliance is carried out by certification bodies and their subcontracted auditors.

This is a good reminder about the limitations of industry self-regulation.