RESTORING THE ART OF COMPROMISE

The Great Gatsby Curve: The Economics Debate Du Jour

In American Competitiveness, Economic Policy, Prosperity on January 23, 2012 at 12:00 pm

The world of economics debating, blogging, and discussing is alive this week with a debate involving what the Chairman of the Council of Economic Advisors, Alan Krueger, referred to in a January 12 speech at the Center for American Progress as the “Great Gatsby Curve.” Everyone is getting into this debate; first it was Scott Winship, then Miles Corak, then Tyler Cowen, then Scott Winship again, then Miles Corak again, then Scott Winship once more and at some point Paul Krugman and Matt Yglesias added some commentary.

First of all perhaps an image of the GG Curve is in order.

Essentially this graph says that as inequality grow, intergenerational earnings elasticity grows; in other words, as Krueger described it, “countries that had more inequality across households also had more persistence in income from one generation to the next.”

The implications of the data seem self-evident. Reduce inequality to increase economic mobility. But the methodology behind the chart makes the facts much more hazy. Without regurgitating what is said in the posts linked above, their are several criticisms of the data that supports this chart. Particularly intergenerational earnings elasticity is difficult to measure and is tracked inconsistently across countries. Furthermore the relationship between the data points isn’t extremely strong (this actually shows up most in Tom Friedman’s graph which shows an r-squared value of 0.76 – which isn’t weak but certainly isn’t strong).

From a logic perspective, Tyler Cowen made an interesting observation:

Why do many European nations have higher mobility?  Putting ethnic and demographic issues aside, here is one mechanism.  Lots of smart Europeans decide to be not so ambitious, to enjoy their public goods, to work for the government, to avoid high marginal tax rates, to travel a lot, and so on.  That approach makes more sense in a lot of Europe than here.  Some of the children of those families have comparable smarts but higher ambition and so they rise quite a bit in income relative to their peers.  (The opposite may occur as well, with the children choosing more leisure.)  That is a less likely scenario for the United States, where smart people realize this is a country geared toward higher earners and so fewer smart parents play the “tend the garden” strategy.  Maybe the U.S. doesn’t have a “first best” set-up in this regard, but the comparison between U.S. and Europe is less sinister than it seems at first.  “High intergenerational mobility” is sometimes a synonym for “lots of parental underachievers.”

This of course is not necessarily supported by the data, but it isn’t ruled out either.

In some ways this chart goes to the point made by Reihan Salam in November. It, in some ways, considers the relationship between absolute and relative mobility (assuming the data is reliable and the methods used in developing the data set are reliable).

Of course a really important lingering question from this is that of causality. Is it that inequality creates a lack of intergenerational mobility or are they both products of a common cause (educational structure, tax policy, prevalence of natural resources, government structure, or perhaps some combination of the these and others).

The real purpose of this post is to help bring attention to one of the most interesting discussions going on in popular economics right now. I will continue to follow developments on this issue and keep all of the blog’s readers up-to-date.

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  1. [...] too long ago I posted about the “Great Gatsby Curve”; this week Jim Manzi has made a very good statistical [...]

  2. [...] that talks more about the correlations behind the “Great Gatsby Curve,” which I have discussed before. This led me to look at the correlations for Generational Income Elasticity for the countries [...]

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