Growing inequality powers the rise of New America

Larry Kummer, Editor

13 years ago

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.

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Contents

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

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.

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.

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.”