Inequality and Mobility, Again

June 26th, 2013 at 1:53 pm

As I noted yesterday, Greg Mankiw’s defense of the top 1% maintains that while some may be unhappy with our high levels of inequality, those levels are economically benign and a result of the high value-added of the winners relative to the losers.  I challenged the latter claim in yesterday’s post.  This post briefly takes on the more serious first claim (more serious because a) it has generational implications, and b) you’ll be very hard pressed to convince some economists that pay doesn’t equal marginal product).

There are at least three arguments why our historically high levels of inequality are far from benign:

–they reduce access to opportunities and thus reduce economic mobility;
–they lead to slower macro-economic growth;
–they violate basic fairness as those who are growing the size of the pie end up with smaller slices.

I have a long paper on the second concern coming out soon.  The third point is especially compelling to those who focus on the fact that median income or earnings used to track productivity growth up until around three decades ago.

But the first concern is one I raised well before we had any data for it (I first worried about this in chapters of EPI’s State of Working America, of which I was a co-author of many editions).  Here at OTE, you can see references here, here, here, here.

The economist Miles Corak has an excellent new article forthcoming that collects what’s known about the relationship between inequality, opportunity, and mobility.  I’ll let you page through the facts and figures, some of which are familiar from these pages.  While Mankiw sees little evidence that inequality has reduced opportunities, Corak comes to a far different conclusion:

Inequality lowers mobility because it shapes opportunity. It heightens the income consequences of innate differences between individuals; it also changes opportunities, incentives, and institutions that form, develop, and transmit characteristics and skills valued in the labor market; and it shifts the balance of power so that some groups are in a position to structure policies or otherwise support their children’s achievement independent of talent.

If that’s where you are, the next question is what can and should public policy do to level the opportunity playing field.  Here, Corak points out that relative to other advanced economies, our public expenditures are less effectively targeted toward enhancing the opportunity and mobility of the less advantaged.

He quotes the OECD on this point: “Currently the United States is one of only three OECD countries that on average spend less on students from disadvantaged backgrounds than on other students. … Moreover, the most able teachers rarely work in disadvantaged schools in the United States, the opposite of what occurs in countries with high-performing education systems.”

This imbalance is particularly problematic given the impact that inequality is having on children at the starting gate, as it were.  Researchers have found important differences in vocabulary, behavior, and parental investments in their children’s enrichment by income class.  In other words, as inequality increasingly exacerbates these differences at the beginning of life, the education system is less prone to offset them.

A new set of figures from the Hamilton Project provides highly compelling visuals of the above policy dynamics.  I urge you to take a close look at this evidence, but here’s a rough summary:

–Figure 2 shows a strong negative correlation between income inequality and social mobility: correlation is not, of course, causation, but this is the relationship that you would expect if the model that I’ve stressed here is true.

–Figure 5 shows the growing gap in enrichment expenditures that families make on behalf of their kids.

–Figure 6 shows that after stabilizing in the 1960s, when the inequality trend was flat, the achievement gap between high- and low-income students has grown almost 40% since 1970.

–Other figures show the increased disparity of college completion by income quartile (#7), how less well-off kids are sorted into less selective colleges (#8), and the critical role that these disadvantages re college attendance play on earnings and economic mobility (Chapter 3).

So why am I constantly going on about all this?  Because for years, I and others would hold up pictures of worsening inequality and explain the causes as best we could and pretty much leave it at that.  We were operating largely from concern #3 above—fairness.  I got into this in the 1980s when economists were first connecting inequality to sticky poverty rates (why weren’t poverty rates falling as the economy was growing?).

I still consider this an important and valid concern but over the years, I’ve come to see the consequences of our inequality problem as running deeper, striking at opportunity and mobility in a manner that should cause grave concern among anyone who’s paying attention, regardless of their political stripes.  There is nothing benign about it.

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16 comments in reply to "Inequality and Mobility, Again"

  1. smith says:

    Could we please treat inequality and opportunity as separate issues. It’s a classic chicken and egg thing, so lets acknowledge that and move on, you need to fix both to fully fix either.

    Inequality is a lot about labor issues, especially giving office workers, including professional and technical workers, the same rights and leverage as factory workers.

    Opportunity means making college the same as high school, free. Charge some fee if benefits are wasted, i.e. you drop out. Make this independent of parental support (as did the WWII G.I. Bill)

    As everyone goes to college, the shortage of low skilled workers should create rising wages there.

    Americans need to boycott goods made in foreign countries without labor protections (so probably everything made in China, Indian sub-continent) It won’t hurt those populations or our consumers if the boycotts are selectively targeted at distinct companies.

    • smith says:

      I left out, while it may be true that “inequality leads to slower macro-economic growth” I’d argue it’s of little or no consequence if it didn’t or if we found greater equality leads to slower macro-economic growth. A slower growing economy that provides more benefit to 80% of the people is better than a faster growing economy that benefits just the top 1% or even the top 20%.
      It is a zero sum game plus 1%/year historical productivity growth. But that means you do have 1% a year to play with without actually taking anything from anyone.

  2. Perplexed says:

    Its really encouragin to see this discussion brought to the forefront Jared! It appears we’re only seeing the “tip of the iceberg” with regard to what we actually know about the process underlying such enormous wealth and income concentration and that these “marginal product” assumptions have led us far astray from truly understanding how the economy actual operates in the real world.

    You mention that “b) you’ll be very hard pressed to convince some economists that pay doesn’t equal marginal product,” but you’ll also be very hard pressed to get some people to believe in evolution or to believe that man can have an enormous impact on altering average temperatures of the earth’s atmosphere. How do they hold these beliefs in the face of the evidence to the contrary? Do they claim that there are no rents or that rents are justifiably included as a component of marginal product? Neither claim seems remotely plausible; is there actual evidence that either claim should be taken at all seriously? Since economists choose not to actually measure rents, on what basis are these claims of marginal products made? As 17+% of the Nations’ income now goes to 1% of families, do economists really expect us to believe that none of it is rents? Is the assumption that rents are 0 built into their models? Some very basic statistics would tell us that this assumption can’t possibly stand up to scrutiny. In fact, with no additional information or measurements, the number is just as likely to be 100% rents as it is to be 0. Mathematically, with no additional information, the expected value of the rents would be 50%. Why aren’t we using this number unless these economists can show evidence that a more likely estimate exists? Maybe if we start using the best estimate in the absence of additional information, some economists will think it worth the effort to actually measure what it is (or will they fear it could be considerably higher?) With all of the money Americans spend on developing statistics and measurements of economic activity, who decides that “We the People” don’t need to know this information and on what basis? Is the ideology that we live in something close to a meritocracy so important to us that we’ll refuse to measure or look at any evidence that might threaten this theology? Sounds pretty “scientific” doesn’t it?

    Our wealth GINI is already .87; when do we begin to take our “heads out of the sand” and start working seriously on explaining what’s really going on with our economy? Reinhart & Rogoff were big on “finding” the “tipping point” for debt. What’s the “tipping point” for a plutocracy or oligarchy? Is it .90, .95, or is it .7 and we’re really hoping no will notice how long ago we crossed it? Where do the economists that cling so hard to the “pay = marginal product” theology believe it is? What’s the most plausible theory of how its going to just “fix itself” somehow?

    Unfortunately, it has progressed for so long now and to such an extreme level that to many, a solution already seems beyond the realm of possibility. Larry Lessig maintains that, although its an enormous task, there is really no choice but to take it on. He suggests that the 1st step though, must be restoring our republic so that “We the People” are again in control of our republic and our destiny. Until and unless we do that, what we think or say about it matters little. It may just be the most important “economic” topic we need to discuss:

  3. Bill Gatliff says:

    The following thought occurred to me yesterday, after browsing “Inequality and Mobility, Again”. By coincidence, the TV happened to be playing an advertisement for another one of those reality-competition-to-win-something shows; the winner was gifted with a restaurant franchise, I think.

    Anyhow, I wonder if the uptick in demand for these get-a-new-life shows is any way reflective of the state of inequality in our economy? That somehow competing with other “contestants” in a lottery or cooking show is your best hope of upward mobility vs. saving, working, and investing wisely?

    I know the concept of these shows isn’t new. But it seems like we made a pretty quick jump from just The Price Is Right to a hojillion iterations of The Apprentice. I wonder if that transition aligns with anything in the economic universe?

    I even wonder if one explanation could be the TV distributors trying to find channels to capture increasing advertising dollars, which emerged as vendors tried desperately to shore up their declining markets as the bad economy set in.

    Just some thoughts. I’ll go back to my caffeine now.

    • Bill Gatliff says:

      “That somehow competing with other “contestants” in a lottery or cooking show is your best hope of upward mobility vs. saving, working, and investing wisely?”

      VIEWED as one’s best hope, I mean.

    • Jared Bernstein says:

      You’re probably onto something.

    • purple says:

      It’s just a replacement for tent revivals. Our religion is money, basically. Pentecostal-style faith healing is just too embarrassing nowadays for those with middle class pretensions.

  4. Kevin Rica says:

    As long as we have an immigration system being specifically redesigned to assure that certain completely necessary, but dreary, dull, or dangerous jobs are low-paid just because they can be given to immigrants — inequality is not a bug — it’s a feature.

    The blue cards that just passed the Senate today mean that if no one want to clean urinals and wash floors for low wages, the normal market mechanisms won’t be allowed to raise wages: The Chamber of Commerce and Chuck Schumer won’t allow it!

    We are supposed to have an underclass! Don’t blame capitalism: Talk to Chuck!

    • purple says:

      It’s not just low wage jobs, it’s increasingly every sector of society but the Ivy League network. ‘Americans are too lazy to do this, too dumb to do that’. And the American-born children of immigrants will be tossed overboard as well.

      Truly, the U.S. will rot from within, aka Detroit or any small town. It will not be toppled by some external “other” such as China.

  5. Chris G says:

    I read Edsall’s analysis of Burkhauser and company’s “Levels and Trends in United States Income and Its Distribution” in the NY Times today. Any comments? (On Burkhauser et al.’s paper, not so much on Edsall’s analysis.)

    • Jared Bernstein says:

      The Burkhauser study yields absolutely implausible results. I’ll post on it soon, maybe. How they could publish it is beyond me.

      • Kevin Rica says:

        Most of what people publish today is nonsense. The important thing is that we please those who pay the bills.

        Think of the recent CBO study on the fiscal impact of the immigration bill. Is it plausible that even the poorest pay more in taxes than they get in benefits? Wouldn’t that make deficits impossible?

        • Chris G says:

          > Is it plausible that even the poorest pay more in taxes than they get in benefits? Wouldn’t that make deficits impossible?

          It is theoretically possible. Feudal state economics: Tax the poor and the proceeds go to the rich. No deficit necessary. QED.

  6. Kevin Rica says:

    –Figure 6 shows that after stabilizing in the 1960s, when the inequality trend was flat, the achievement gap between high- and low-income students has grown almost 40% since 1970.

    The 1960s was when immigration reached its low point for the century. 1970 was when the trend reversed.

  7. purple says:

    You need a strong minor league system to have as strong major league team.

    The offspring of the rich are too small a group numerically to contribute much in the way of new innovations. The potential talent pool is just too thin.

  8. Tom in MN says:

    Here’s an interesting read show the CEO pay appears to be rent collecting and not value added:

    If CEO’s are leaving the 0.1% behind, imagine what that means relative to the rest of us.