Growing inequality powers the rise of New America

Summary: Five years ago I wrote my first article about the problem of rising inequality in America. Now it’s become big time following a speech by President Obama. Today we review the evidence about the problem Additional information added Sunday morning, and the post broken into two. This is now part one. Part Two looks at its effects, and the inevitable pushback.

Wealth distribution of USA
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Contents

  1. Comparing America with our peer nations
  2. “Being Smart Isn’t Always Enough to Make it in America”
  3. Even worse news: a trend of greater inequality
  4. For More Information
  5. Another perspective

(1)  Comparing America with our peer nations

The Rise and Consequences of In equality in the United States, Alan B. Krueger Chairman, Council of Economic Advisers, 12 January 2012 — Introduces the Great Gatsby Curve.

Recent work by Miles Corak finds an intriguing link between the Intergenerational Income Elasticity (IGE) and in come inequality at a point in time. Countries that have a high degree of inequality also tend to have less economic mobility across generations. We have extended this work using OECD data on after-tax income inequality, as measured by the Gini coefficient.

This next figure shows a scatter diagram of the relationship between income mobility across generations on the Y-axis (measured by IGE) and inequality in the mid-1980s, as measured by the Gini coefficient for after-tax income, on the X- axis [Figure 7]. Each point represents a country. Higher values along the X-axis reflect greater inequality in family resources roughly around the time that the children were growing up. Higher values on the Y-axis indicate a lower degree of economic mobility across generations.

I call this the “Great Gatsby Curve.” The points cluster around an upward sloping line, indicating that countries that had more inequality across households also had more persistence in income from one generation to the next.

Great Gatsby Curve
2012 Economic Report of the President

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For more about this see “Income Inequality, Equality of Opportunity, and Intergenerational Mobility“, Miles Corak (Prof of Economics, U of Ottawa), Journal of Economic Perspectives, Summer 2013. See his other research here.

(2)  “Being Smart Isn’t Always Enough to Make it in America”

Being Smart Isn’t Always Enough to Make it in America“, Kevin Drum, Mother Jones, 12 December 2013, about  a chart from “Seven Steps Toward Social Mobility in President Obama’s Speech“, Richard V. Reeves and Kerry Searle Grannis, Brookings, 6 December 2013:

The chart below is a little tricky to read, but basically it shows how likely you are to make more money than your parents. You’d naturally expect smart kids to do better than dimmer kids, so it tracks that too.

Take a look at the green column on the far left. It’s for kids who grow up in the very poorest families. If you have high cognitive ability, you have a 24% chance of becoming a high earner as an adult. That’s not too bad. But if you come from a high-income family, you have a 45% chance of becoming a high earner as an adult. Same smarts, different outcome.

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No society will ever get this perfect. Still, there’s a huge difference between 24% and 45%. Better schools, more extracurricular opportunities, different skin color, bigger networks of connected friends, higher odds of going to college, and the simple ability to get in the door all give richer kids a huge leg up that poor kids don’t have. We obviously have a ways to go before everyone has an equal opportunity to succeed in America.

Education and Social Mobility
Seven Steps Toward Social Mobility in President Obama’s Speech, Brookings, December 2013

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For more about this see “The Great Divide: Schooling Ourselves in an Unequal America“, Rebecca Strauss, New York Times, 16 June 2013.

(3)  Even worse news: a trend of greater inequality

(a) Inequality and Incomes, Continued“, Paul Krugman, New York Times, 14 December 2013:

… look, first, at the long-term trend in inequality. Piketty-Saez have the income share of the bottom 90%  falling from two-thirds in 1979 to one-half now; that’s roughly 0.9% lopped off their income growth per year, for more than three decades. CBO’s numbers aren’t exactly comparable, but they show the income share of the bottom 80% declining from 57 to 47% over 1979-2007, which means income growth 0.7 percentage point per year slower than in the constant-inequality case.

Those are big numbers. They’re big enough that even if we restrict ourselves to the period 2007-13 — that is, to the Great Recession and the Not-So-Great Recovery — they suggest that the decline in middle-class incomes owes as much to rising inequality as it does to the depressed state of the economy. And this is true even though we’ve suffered the worst economic crisis since the 1930s!

(b)  “Trends in the Distribution of Household Income Between 1979 and 2007“, Congressional Budget Office, 25 October 2011 — “CBO examines the trends in the distribution of household income between 1979 and 2007. Those endpoints allow comparisons between periods of similar overall economic activity.”

CBO: changing Income Distribution
“Trends in the Distribution of Household Income Between 1979 and 2007”, CBO, October 2011

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(4)  For More Information

(a)  Data about Inequality:

  1. OECD research: “A Family Affair: Intergenerational Social Mobility across OECD Countries“, 2010
  2.  The Betrayal of the American Dream by investigative journalists Donald L. Barlett and James B. Steele (2012)
  3. Labor’s Declining Share of Income and Rising Inequality“, Margaret Jacobson and Filippo Occhino, Cleveland Federal Reserve, 25 February 2012
  4. Recommended:  “A Guide to Statistics on Historical Trends in Income Inequality“, Chad Stone et al, 5 December 2013
  5. Why Inequality Matters“, Paul Krugman, New York Times, 15 December 2013

(b)  Posts about inequality:

  1. A sad picture of America, important for us to understand, 3 November 2008 — About social mobility
  2. An opportunity to look in the mirror, to more clearly see America, 10 November 2009
  3. Graph of the decade, a hidden fracture in the American political regime, 7 March 2010
  4. America, the land of limited opportunity. We must open our eyes to the truth., 31 March 2010
  5. Modern America seen in pictures. Graphs, not photos. Facts, not impressions., 13 June 2010
  6. Jared Bernstein examines the economic impact of raising taxes on high-income households, 30 April 2012
  7. How clearly do we see the rising inequality in America? How do we feel about it? Much depends on these answers., 27 September 2012
  8. Ugly truths about income inequality in America, which no politician dares to say, 2 October 2012
  9. Glimpses of the New America being born now, 18 June 2013
  10. Why Elizabeth Bennet could not marry Mr. Darcy. Nor could your daughter., 12 July 2013
  11. For Thanksgiving, Walmart shows us the New America, 19 November 2013
  12. Back to the future in New America: our new class structure, 27 November 2013
  13. Learning not to trust each other in America, and not to trust America, 4 December 2013

(5)  Another perspective

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Income inequality
By Steve Greenberg

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26 thoughts on “Growing inequality powers the rise of New America

  1. Why are you so obsessed with equality? Humans aren’t equal -period. I understand about the gov making noises about equality to keep the retards from revolution but short of that, who cares? The dummies can sit in their section 8 housing, playing xbox, on their iPhones eating cheap food and won’t do SHIT. We them pay them to breed more of the same and you’re SHOCKED that inequality is rising. Get a helmet and grow the fuck up.

    1. Realpolitic,

      “also a struggle that has been ongoing since time immemorial”

      That is true in a general sense. It is true of most or all of the large problems of society. But social problems wax and wane over time, so their severity — and their threat — varies.

      During the long post-WW2 expansion inequality was low and stable. Other domestic issues, such as civil rights, were on the front burner.

  2. Wow, hats off to the white house for putting this out there!

    One potential point of confusion… social mobility (meritocracy?), vs equality. Not exactly the same, though seems like you can’t fix one without touching the other.

    Potential responses for those who are afraid of this kind of talk:

    Social Mobility:
    If I succeed in life, I deserve to give my kids a head start. Naturally. But if the guy next door succeeds instead of me, I don’t want his kids to have such a big head start that mine don’t have a chance. So it must be a balance. The idea is that, today, we are on the side of the non-winner’s kids not having a chance at all, and we are moving even further in that direction.

    Equality:
    Noone is saying we will make everyone the same by cutting down the tall people. That’s a strawman.
    It’s equality of opportunity. This is not only a word for affirmative action, it’s also a bigger idea. Best explanation I’ve seen, though long winded, was by Rawls. http://en.wikipedia.org/wiki/A_Theory_of_Justice.

    If this is “right”, it should be explained in a way that’s easy to understand, and without triggering the fear reflex that now comes with the term “equal opportunity”.

    1. oh also, a thing to look out for would be the situation where the winner’s corporate children are actually given an additional head start, actively amplified by tax $$, beyond what their “parents” can buy themselves from their savings/winnings.

      If this is true, would be nice to pull this phenomenon out to be examined all by itself, so it’s not mixed in with any kind of general principles of social mobility and equality, which are a little bit controversial after all and would face more resistance.

    2. asdf,

      “social mobility (meritocracy?), vs equality. Not exactly the same…”

      Low social mobility is a driver of future inequality.

      Low social mobility is considered unjust by most Americans, even some of those who do not consider as problematic high levels of inequality.

    3. Yes exactly…

      And the two can be intentionally mixed up to make it sound more scary in a debate.

      Also just thought of a pretty real difference, besides the inter-generational aspect:

      Social mobility is measured in terms of your rank relative to everyone else, meaning you’re in “15th place” out of 100. While inequality is the difference in what you actually have when you’re in 10th place vs what you actually have in 90th place, etc.

      Something like the choice between public education vs progressive taxation, for example – affects one more than the other. The correlation on that scatter plot wasn’t super tight…

      Anyway, I don’t mean to confuse. Thanks for the article!

    4. Asdf,

      “Social mobility is measured in terms of your rank relative to everyone else, meaning you’re in “15th place” out of 100. ”

      No, that is not the usual way to measure mobility. See the references here, or the more detailed posts in the For More Information section.

  3. Figure 6-7: It’s stupid and nonsensical to include Germany in it because of the reunification. The data point may be for West Germany only, but that would still be very much disrupted by reunification.

    1. SO,

      Since a Germany is dead on the curve of other similar nations, that is a minor point. Less than a quibble.

      But it is a nice demonstration of people’s refusal to see the obvious.

    2. I don’t attack the general conclusion, but the inclusion of Germany is simply very bad practice because it’s nonsensical.

      It’s also bad practice to show that regression line without any details. One could just as easily use an exponential curve to describe the cloud. What’s the confidence?

      27 years as “generation” is also obscure. I’m used to 25 or 30 years as “generation”, but with 27 years it smells like cherry-picking even though the data likely doesn’t fluctuate much within a mere two years.

      Everybody can draw lousy diagrams; a study of such a calibre should meet higher standards. It’s inviting criticism and doubts unnecessarily. Sloppy work.

    3. SO,

      You are giving criticisms of a widely cited paper by a respected economist (again) without reading the paper. I appreciate your self-confidence but not your judgement.

      You could find the paper easily by reading either of the documents cited. But to make it easy, I added a link to the original paper. Direct your critiques to Professor Corak or the Journal of Economic a Perspectives.

      Please spare us more of this.

    4. (1) Why do you assert the impossible knowledge about whether I read the paper or not?

      (2) Did you read the paper yourself? If so, why don’t you realize nothing in it counters my criticism?

      (3) I didn’t even mention that regressions with only 13 datapoints risks a failing grade if an undergraduate does it in his homework without pointing out that confidence in the regression is necessarily low.
      Example; remove Spain only and suddenly an exponential regression curve would look much more reasonable than a linear one. This is hardly a robust regression line.

      (4) Corak titled a diagram after a regression curve and then fails to deliver any statistical info on it (no confidence interval or Pearson correlation coefficient, for example).

      These diagrams do not meet high standards in statistical analysis. I say this and I don’t even dislike the conclusion of these papers.
      This kind of critique isn’t what gets published in peer-reviewed journals. It’s what economists exchange informally. That’s why it’s plain bad practice to publish such a both sloppy and attention-attracting work.

    5. SO,

      “Everybody can draw lousy diagrams; a study of such a calibre should meet higher standards. It’s inviting criticism and doubts unnecessarily. Sloppy work. … risks a failing grade if an undergraduate does it in his homework without pointing out that confidence in the regression is necessarily low. … Corak titled a diagram after a regression curve and then fails to deliver any statistical info on it … These diagrams do not meet high standards in statistical analysis.”

      Congrats also on your self-esteem, seeing things that the economists citing the paper are too ignorant to see what you see.

      There is nobody here interested in your amateur criticism, or capable of discussing it. There are dozens of websites of professional economists discussing these issues. Or you can write them up and submit them (I frequently see such letters in journals, contradicting your absurd claim otherwise).

      Or you can email the author. I often do so, and frequently (not always) get a detailed response.

      However, no more of that here. I have lost patience after years of responding to amateurs declaring wrong the work of economists, climate scientists, area experts, etc (my favorite is people saying that climate scientists don’t know high school-level science). I have found these discussions to be a waste of time, and no longer indulge.

    6. Actually, I have a degree (Dipl.-Ök.) in economic science (Wirtschaftswissenschaften) from Hannover University (Lower Saxony, Germany).
      One of my three chosen specializations was on “growth and (income) distribution”, the others were fiscal policy and economic policy. My dissertation was longer than some other sciences’ doctoral dissertations and graded at 1.3 (1.0 being the best possible).
      I’ve blogged often on economics for years.

      I wasn’t the amateur in this discussion and it’s not my self esteem that mattered most in this discussion. Finally, strawman attacks don’t work on me.

    7. SO,

      (1) “I wasn’t the amateur in this discussion”

      That’s not relevant to what I said.

      (2) “it’s not my self esteem that mattered most in this discussion.”

      You are not getting my point, which I thought was quite clear. I’ll explain it again in #4 and #5 below.

      (3) “Finally, strawman attacks don’t work on me.”

      “Strawman attack” does not mean what you appear to think it means. This is an “appeal to authority”.

      (4) I suggest posting comments on one of the many websites run by professional economists. No doubt they eagerly await your rebuttal to their work, and especially hearing your description of their work as incompetent.

      (5) It’s the description of their work as incompetent that to me disqualifies you as anyone worth bothering with. In my experience that is the most reliable warning sign.

      Years of patience with comments by people insulting the work of experts has taught me these discussions are a waste of time. Reading similar discussions elsewhere (e.g. solar scientist Leif Svalaard at Watts Up with That) provides further evidence. Such people tend to be (i.e., almost always) are confident that they are correct, the experts wrong, and nothing experts say dissuades them.

      Climate science and economics and astronomy and biology, etc.

      Here we discuss implications of the various theories. People who wish to debate experts — especially explaining how they’re incompetent — can find other venues, since there is nobody here capable of responding, or interested in doing so.

    8. (1)
      F B: “There is nobody here interested in your amateur criticism”
      S O: “I wasn’t the amateur in this discussion”
      F B: “That’s not relevant to what I said.”
      O rly.

      (2)
      S O “it’s not my self esteem that mattered most in this discussion.”
      F B “You are not getting my point”
      You are not getting mine, obviously. I focused on methodology, while you went into full counter-offensive mode based on basically nothing.

      (3)
      F B “I have lost patience after years of responding to amateurs declaring wrong the work of economists, climate scientists, area experts, etc (my favorite is people saying that climate scientists don’t know high school-level science).”
      S O “Finally, strawman attacks don’t work on me.”
      F B ““Strawman attack” does not mean what you appear to think it means. This is an “appeal to authority””
      To imply a similarity to climate deniers is either a strawman attack (misrepresenting the level of my arguments) or an ad hominem attack. Make your choice.

      (4)
      What makes you believe I don’t tell my opinion to other economists? You seem to like using unsupported assumptions.

      (5)
      F B ” It’s the description of their work as incompetent that to me disqualifies you as anyone worth bothering with. In my experience that is the most reliable warning sign.”

      You don’t seem to have understood science. A paper is only reputable until flaws are exposed. A critique of methodology or presentation is analogue to a critique of content (falsification).
      Now if you applied competence in statistical analysis or in economic science, you would have understood that’s what I did.
      I phrased the critique as it suits a comment on a blog or a private discussion, of course. Publications in peer-reviewed papers are only the last step in criticising a paper. The first step is to voice the opinion to other economists during lunch break or whenever the sloppy work is being cited.

      Also, your comment is the only one yielding a return to a search for “incompetent” on this page.

      Look, you bought into those sources, and their interpretations of data may actually be correct. But I’m somebody who spent years learning the tools of that trade and I can see that those sources you rely on were not written for scientific precision, but as tools of argumentation. The works were obviously meant for a larger audience than merely economists with specialisation on the field and are thus lacking essential info and are taking risks (such as drawing a regression curve with only 13 data points).

      This kind of research result is at great risk of being replaced within ten, twenty years when additional data is available. A reader should understand that the confidence in this kind of work ought to be small.

  4. My guess is that when you factor in indirect ownership through mortgages, real estate investment trusts and other vehicles, the actual land ownership(or at least control) by the 1% is quite similar to the map in the first figure. Since they pretty nearly control the federal lands through their control of government it may well be worse than illustrated.

  5. I think the analyses would be a lot more revealing if the 1% were put to one side as a different category. In fact, that category should probably apply to everybody who is mega-wealthy (net worth exceeding, say, $50 million).

    Now, what can we learn about the present and previous division of wealth between about 97% of the US populace. Has it changed? Is inequality widening? What are the drivers?

    The inclusion of rare and exceptional cases like tech billionaires only leads astray the core analysis. If we want to deal with them by some sort of policy change, it will certainly be a very different solution than that which applies to the generality of Americans. Any concerted attack on their earnings capacity would almost certainly lead to a change of citizenship without much apparent gain to the US. But given the very high philanthropy propensity amongst this handful, they might even be seen as more of a blessing than a curse.

    1. Barry,

      If you read the actual reports you will see that the issues you raise are dealt with in great detail.

      Also, this is not about “tech billionaires”. Just the six Walmart heirs have more wealth than the bottom 30% of Americans.

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