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How to Ratchet Down the Great Gatsby Curve

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How to Ratchet Down the Great Gatsby Curve

February 5, 2014

Over the past two years, President Obama has consistently tied the opportunities of poor and middle class Americans to rising income inequality, and his State of the Union address stayed true to this narrative. However, that case has always been based on indefensibly weak evidence.

In our essay, “The Collapse of the Great Gatsby Curve,” we show just how much it has collapsed under the weight of recent findings.

 

 

In our essay, we review the development of the Administration’s anti-inequality campaign, describing the implosion of an early effort to claim mobility was declining as a consequence of rising inequality. The Great Gatsby Curve was unveiled by then-chair of the Council of Economic Advisors Alan Krueger one month later at a Center for American Progress speech in early 2012. Derived from a chart developed over several years by Canadian economist Miles Corak, the Curve was put to innovative use by the Administration.

 

 

The chart plots a measure of income inequality on the horizontal axis; countries further to the right have more inequality, and countries further to the left have less. On the vertical axis, the Great Gatsby Curve shows countries’ immobility levels; countries with more immobility (less mobility) are toward the top, and those with less immobility are toward the bottom. Each of the dots in the chart represents a single country. The awkwardly-named “curve” is just the best-fitting straight line through the ten dots, shown in the above chart and also as Line One in the chart at the beginning of this essay. The Great Gatsby reference turns out to be ironically apt for a chart that, like its namesake, works hard to obscure upward mobility in the presence of inequality.

Krueger was not simply illustrating that countries with more inequality tend to have less mobility, he was enlisting the Great Gatsby Curve to show that since inequality in the U.S. has been rising, diminished mobility will be the logical consequence. By predicting tomorrow’s mobility from today’s inequality using the Curve, Krueger visually “showed” that today’s children will experience much lower mobility compared with contemporary levels. The dot in the upper-right corner of our opening chart shows the level of mobility he projected—a steep increase in immobility from that we have today.

However, Line Two in our prefatory chart, shown with more detail below, illustrates that the steepness of the Curve—and, hence, the projection of future mobility—is sensitive to which of several sets of imprecise mobility and inequality estimates are included. For each of the eleven countries common to three Gatsby-Curve analyses, including Corak’s, we averaged the mobility estimates across the studies. We also switched to inequality estimates from the Luxembourg Income Study, which has taken great care to make each country’s measure as comparable as possible. Since it is flatter, projecting future mobility levels from Line Two yields a much smaller rise in immobility than the prediction from the Administration’s line.

 

 

Even more problematic is the mobility measure conventionally used in these charts, called the “intergenerational elasticity,” or IGE. The IGE is an indicator of how much income gaps between children typically close in adulthood. These income gaps tend to close between generations because children are re-ranked between childhood and adulthood, so that richer and poorer children trade places. But even with re-ranking, income gaps will close less when inequality rises between childhood and adulthood than when it falls or is stable. It is possible for one country to experience more re-ranking than another but a bigger increase in inequality, with the result that the IGE shows less “mobility” in the country that has more re-ranking.

We might expect, then, that a “mobility” measure that is affected by inequality trends would show a relationship to inequality levels. The upward slope of the Great Gatsby Curve is to some extent baked into the cake.

What policymakers really want to know is whether it is less common for rich and poor children to change places in adulthood when the gap between rich and poor is greater in childhood. Answering the question calls for a version of the Great Gatsby Curve based on a pure measure of “relative mobility” (re-ranking). Fortunately, a new paper allows us to create such a chart, though only looking at a few countries. Line Three in the chart at the top of this essay shows the Great Gatsby Curve for the U.S., Canada, and Sweden using the IGE from this new paper. It is a little flatter than Line Two, but not greatly different.

As shown in Line Four, however, when we plot the inequality levels of the three countries against their relative mobility levels (using a measure called the “rank correlation”), the Great Gatsby Curve indicates that higher inequality corresponds with less immobility, not more. The Curve points downward, and a projection from it would suggest a higher rate of mobility for today’s children rather than a decline. Sweden and the United States—at the left and right extremes of the chart in terms of inequality—have the same relative mobility.

These blockbuster findings come from Miles Corak, the paper’s first author. A version of it was presented nearly three months to the day after Krueger rolled out the Great Gatsby Curve and Corak highlighted an expanded version of it on his website.

Evidence suggests that the U.K. and the U.S. have similar relative mobility levels. Recent analyses also provide a relative mobility estimate for Denmark that is reasonably comparable to those in the Corak paper. Line Five in our opening chart gives the Great Gatsby Curve using relative mobility, assigning the U.K. the same mobility as the U.S. and Sweden and adding Denmark. It shows that higher inequality corresponds to very slightly higher immobility. The dot in the lower-right side of the chart indicates the projected mobility of today’s children implied by the Curve—barely worse than current levels and far better than the Administration’s projection in the upper-right corner.

Our essay goes on to discuss recent evidence undermining the idea that rising inequality has hurt economic mobility, describing the accumulating evidence that mobility has been stable and that there is little robust correlation between inequality and mobility levels across geographic areas. We argue that instead of trying to construct an unsupportable case that mobility is falling and that inequality is to blame, Democrats should simply point to the insufficiently high mobility levels experienced by poor children. A growing number of Republicans share concern over this problem, and a productive policy debate could ensue on these terms.

 

Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here. Donald Schneider is a research assistant in the Center for Policy Innovation at the Heritage Foundation. You can follow him on Twitter here.

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