The Inequality Puzzle

Flickr/DonkeyHotey

In January, a team of prestigious economists published an authoritative study showing that there had been no decline in intergenerational mobility during the past three decades. The paper, by Harvard’s Raj Chetty and three colleagues, using some 40 million Internal Revenue Service records, found that if you were born in the bottom fifth of the income distribution in 1980–1982, you had about the same chance of moving to the top quintile (about 1 in 12) as someone born at the bottom 30 years earlier.

This result was surprising. In recent years, the ability of the affluent to pass along class advantage has intensified in countless ways. Young people from wealthy families are more likely to get into elite colleges and less likely to finish college hobbled with debt. Parents can subsidize unpaid internships useful for networking. The children of the affluent can get help with starter homes, in districts with excellent public schools. And when (grand) children come, they often can count on Mom and Dad to pay for good preschool, and so on. 

The wider the income extremes, the more money the elite has to spend assuring that their progeny stay in the family social class. The worse life becomes for ordinary people, the more incentive the rich have to extend privilege to their kids.

Meanwhile, the opportunity ladders that help young adults without affluent parents have been kicked away. College tuitions have increased far faster than incomes, school loans have been substituted for grants, housing has become less affordable, pay scales for entry-level jobs have flattened, spending on social supports for the poor has declined.

So how could intergenerational mobility not have worsened? Conversations with several longtime students of the subject, including Christopher Jencks of Harvard, Tim Smeeding of the University of Wisconsin, and Miles Corak, a visiting scholar at the Russell Sage Foundation, suggest the following caveats.

First, the optimism is premature. Inequality began widening in the mid-1970s. The data in the Chetty paper end with young adults born in the early 1980s, people now in their early thirties. Typically, however, income peaks in one’s late forties or early fifties. The true statistical verdict on declining mobility won’t be in for a few decades, as today’s young complete the life course.

Second, a comparison of different countries suggests that greater inequality produces greater immobility. A recent study by economist David Howell, published by the Center for American Progress, demonstrates that in countries with more equal income distributions, such as Denmark or Finland, people who begin life at the bottom have at least double the chance of making it to the top as their American counterparts. The same social supports that produce a more equal society give young people from humble origins a better shot at surpassing their parents. By contrast, a highly unequal America is a highly immobile America.

Third, because inequality has become more extreme, the consequences of getting stuck at the bottom are more severe. During the postwar boom, we had both rising economic growth and increasing income equality. There was more mobility, in the sense that your living standards improved over time, even if you stayed in the same quintile as your parents. By contrast, polarization today produces stagnation in both senses.

Finally, even if intergenerational mobility has not worsened statistically (yet), it was already dismal three decades ago in the Reagan era and is nothing to be proud of. All of which raises the question, why aren’t we doing more to remedy these extremes?

Something is profoundly wrong with both the economy and the democracy when ordinary people can’t get ahead because nearly all of the gains go to the top. America as the land of opportunity is our national myth. Does any serious person doubt that America would be a more attractive place if family incomes rose with average productivity? If they did, median household income would be well over $80,000, instead of stuck around $50,000. And can anyone argue that our (meager) rate of growth depends on the astronomical paydays of investment bankers and corporate CEOs?

Some say that structural changes—globalization, technology—are behind the rising inequality. Even so, these could be offset with sensible policy. For instance, if we properly regulated the abuses of Wall Street, the top 1 percent would not capture so much of our total national income. If we restored progressive taxation and spent the money on opportunity programs and public infrastructure, we could create both more economic ladders and more good jobs. 

The most important fact to appreciate is that concentrated wealth translates into concentrated political power. The remedies that could reverse the increasing inequality are outside mainstream politics today, because the wealthy get to define what’s mainstream. Even Democrats like President Barack Obama are advised not to use the word inequality, for fear of their sounding like class warriors.

So economic inequality is far from hopeless. But before we can fix our unequal economy, we need to fix our unequal politics.

Comments

The continuing drop in labor’s share of income — and the average person's political pull -- is reversible only one way …

… LEGALLY MANDATED, CENTRALIZED BARGAINING …

as instituted by post WWII continental industrialists (presumably very right wing) to stave off a European labor race-to-the-top so more money could be diverted to rebuilding.

MAGIC: requiring all employees doing similar work in the same geographic locale to negotiate one common contract with all employers prevents the race-to-the-bottom just a well. Used for 60+ years around the world (including French Canada).

I will pay anyone on this blog who can prescribe any other labor setup that might reform BOTH the course of labor AND politics in this country 64 thousand (Martian) dollars — it doesn’t have to be better than centralized bargaining; it just has to work some way at all. Bet nobody collects.

The Teamsters have something like this in their National Master Agreement.

Anybody got a better idea? Never mind better; any other idea at all to reform both?

I need to quickly indicate my surprise at the your introduction to this piece of research. Maybe I am not reading enough punditry, but who in their right minds (no pun intended) would read this research as good news for America, it ain't as bad as we think? This research smashes to pieces all the blame the victim arguments for poverty that are the intellectual bank for the high and low minded prejudices that make up public talk on politics and "policy". Okay, we are not accelerating toward plutocracy. We are already there, and have been for some time. The best thing you could do is post a link to Chetty's one hour talk at the World Bank. It's fascinating and revolutionary. http://live.worldbank.org/improving-equality-opportunity

How can you have a conversation about inequality and not mention immigration, especially illegal immigration. If you consider the strong likelihood that there are at least 20,000,000 illegals (it was estimated in 2007 that it was 20 million then...now more likely 30 million) working currently in America. The total population of no retired working Americans is around 200,000,000, so illegals represent 10% of America's workers. But if you look at the working poor in America it is closer to 40%. How can you talk about such a huge segment of the American work force and leave out 40%, I can tell you how, if you don't like the conclusions. That number of low wage workers driving down wages has an absolute negative effect. It is certainly not the only pressure on wages but is certainly one of them. Do us a favor, when you talk about the middle class, get real and be honest about all those things that effect it, not just those effects that also promote your agenda.

It seems to me that it is wrong to conclude from Chetty's work (comparing over time the rate of people rising from the bottom fifth to the top fifth) that there has been no change in intergenerational mobility measured in other ways. For example, this study tracked the correlation between parents' incomes and sons' incomes. http://stateofworkingamerica.org/chart/swa-mobility-figure-3u-elasticities-family/ The correlation shank from 0.40 in 1950 to 0.32 in 1980 and then rose to 0.58 in 2000. Both studies could be accurate, but this one seems more representative of the experience of many people while the Chetty study measures only the experience of a few.

Minimum wage would be $21.72 per hour, according to 2012 report by John Schmitt at CEPR.org, if it had tracked productivity gains since 1968. Today it would be $22.81 an hour. Read his report: http://www.cepr.net/documents/publications/min-wage1-2012-03.pdf
For 32 years, 1947 to 1979 wages and productivity growth matched each other. After 1979 non-supervisory workers wages went no where, stagnated according to EPI.org research.
Not only would your neighbors be earning $80,000 a year, they would have about $300,000 in net worth instead of $80,000 or $0. Half of U.S. household own 1.1% of all wealth. Meyerson's article is good in this issue, but I prefer a financial transaction tax that is applied to direct jobs program to achieve 4% unemployment at high labor participation. Chicago Political Economy Group proposes this. -- http://www.cpegonline.org/workingpapers/CPEGWP2009-1.pdf

The after-tax disposable per capita income growth from 1979 to 2011 was 79%, I just looked it up at BEA.gov. It went from $20,248 to $36,293. A household of four, on average, has after taxes $145,172 to spend! That's how affluent our nation is. In contrast, wages went up by 4% to 6% depending on the table between 1979 and 2011. The median household income increased by 5%, from 1979 to 2011 increased from $47,527 to $50,054 (Figure 2.A at State of Working America/Income). This is the BIG STINK. That's also why if the minimum wage had been matching inflation and productivity growth since 1968, it would be $22.81 not $7.25 per hour. This is the big stink. This is the major missing rung in the ladder of opportunity. What is wrong with our politics and media that they don't pick up on this more? I read Meyerson's article on wage growth strategies, he said research had shown that the top 10% in household income had received ALL of the growth since three decades ago. Mishel at EPI shows that the top 1% received 59.9% of economic gains. This should be the major theme of debate -- how to reverse that trend. Similarly, the Secular Stagnation concept that Krugman and L. Summers talk about is all about wage stagnation. I suggest a financial transaction tax on a large scale to be applied to fund a direct jobs program. I think it's politically palatable.

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