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How The Great Gatsby Curve got its name

Great Gatsby Curve

On January 4th, 2012 The New York Times published an article called “Harder for Americans to Rise from Lower Rungs.” I had spent a considerable amount of time during the New Year’s holidays talking with Jason DeParle about the comparative literature on intergenerational income mobility, and was pleased to see his article on the front page.

So pleased that I emailed Alan Krueger, the Princeton University economist who at the time was the Chairman of the Council of Economic Advisors, to draw his attention to it, though I don’t know why I imagined that Krueger and his staff in the White House would not be reading The Times.

That is how “The Great Gatsby Curve” was born.

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Sons of low-income parents are more likely to grow up to be poor than daughters

Children of low-income parents are more likely than not to grow up to be low-income adults. This is true for both boys and girls, but more so for boys.

the-intergenerational-cycle-of-low-income-for-boys-and-girls

(Click on the image to enlarge.)

This figure shows the rankings of children from low-income Canadian families, what fraction stand on each of the 100 rungs defined to equally divide the population across their adult income distribution. Their parents stood on exactly the bottom 5th rung of their income ladder, and the likelihood of them not advancing very much or even falling lower is clearly evident.

If adult incomes were completely independent of family income background, then we would expect 1 percent of these children to be on each of the 100 divisions of their income distribution. If this were the case children of low-ranking parents would be as likely to rise to middle incomes, or even to the very top, as they would be to stay on the same rung as their parents, or fall lower.

But in fact, this cohort of Canadians (those born in the 1960s) are much more likely to be the low-ranking adults of the next generation and are more likely to repeat the experiences of their parents.

This inter-generational cycle of low-income is more likely for boys. Although there is considerable upward rank mobility among these children, men raised by parents who were outranked by 95 percent of their counterparts are most likely to fall even lower, to be outranked by 99 percent of their cohort. Their chances of falling to the bottom 1 percent are more than 4 percent.

They are most likely to remain in the bottom 10 percent of the income distribution. Although an intergenerational cycle of low-income is also the most likely outcome for women, the chances are significantly lower, hovering in the neighbourhood of 2 percent for each of the rungs up to about the 10th.

[ This post is an edited excerpt from a forthcoming paper I have written called “‘Inequality is the root of social evil,’ or maybe not? Two stories about inequality and public policy”, which will soon be published in Canadian Public Policy. If you have any feedback please feel free to let me know in the comments section. ]

Should we worry about the top 1%, or praise them?

Every Statistics Canada data release on the share of the economic pie going to the top 1% elicits strong opinions, the most recent being no exception. Do top earners elicit rather dishonourable sentiments such as envy that should be given little weight? Or do they challenge our need for community and inclusion, influencing the way we live our lives in more fundamental ways? Should we praise the top 1% or worry about them?

It depends. We would be in a better position to answer this question if we put aside questions of merit and just deserts and focused more on the sources of social mobility and the capacity to conduct policy to support it in an era of higher inequality.

Earnings mobility for children from the very broad middle—parents whose income ranges from the bottom 10 percent all the way to the cusp of the top 10 percent—is not tied strongly to family income. These children tend to move up or down the income distribution without regard to their starting point in life. This may be one element of insecurity among the middle class: in spite of their best efforts, their children may be as likely to lose ground and fall in the income distribution as they are to rise.

the-intergenerational-transmission-of-priviledge

Children raised by parents in the top 1% are most likely to grow up to be the next generation of top earners

The situation is very different for children raised by top-earning parents, as the above figure illustrates. It shows the intergenerational cycle of privilege, the percentile rank in adulthood of children raised by top-1-percent parents. This playing field is clearly not level. If it were, all the points in the figure would be the same, all lining up along the dashed horizontal line drawn for reference at 1 percent.

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How much social mobility for America? More, but it won’t happen without inclusive growth

shania-twain

Shania Twain, the legendary country-pop music star, personifies the “rags to riches” mobility at the core of the American Dream, and what’s so amazing she’s not even American. (Click image to read her bio.)

A common way to think about social mobility is in terms of “rags to riches” movement, a type of mobility that is central to the great defining metaphor of the United States, “The American Dream.” Indeed, policy makers often frame their discussion of social mobility in these terms, as for example in a May 2016 speech by the Chairman of the Council of Economic Advisers.

Upward movement is a natural way to think about social mobility, and Americans should have more of it. But this won’t happen without lowering the chances of intergenerational cycles of poverty, and promoting inclusive economic growth.

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Economics is a science

cartoon-falisfying-theory

(Click on image to enlarge.)

When asked to list the five books that have most influenced his writings, the acclaimed British novelist Ian McEwan put a book called “What Science Offers the Humanities” on the top of his list. He goes on to suggest that science is “a matter of beauty”, to be admired just as we admire our favourite painting, song, or novel. He’s right. Science is beauty, and I would add, economics is a science.

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Macroeconomics celebrates its 80th birthday this year

 

John Maynard Keynes

John Maynard Keynes, the father of macroeconomics.

Macroeconomics was born exactly 80 years ago this year, in 1936.

John Maynard Keynes (pronounced “Canes”) published The General Theory of Employment, Interest and Money in 1936, and it was arguably one of the most influential books of the 20th century.

Macroeconomics was born almost out of necessity. Keynes purposed a new theory of the overall level of employment that sought to explain the sharp rise of joblessness during the late 1920s, and its stubborn persistence in the following years. But even if it was motivated by real life challenges, this was a book about theory, with the good professor from Cambridge University in the United Kingdom clearly stating in the opening sentences of the book’s preface:

This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice. for if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises. Thus I cannot achieve my object of persuading economists to re-examine critically certain of their basic assumptions except by a highly abstract argument and also by much controversy. I wish there could have been less of the latter. But I have thought it important, not only to explain my own point of view, but also to show in what respects it departs from the prevailing theory. Those, who are strongly wedded to what I shall call ‘the classical theory’, will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new.

In other words, move aside Dude, I’m starting a revolution. Keynes targets the hapless Arthur C. Pigou, who makes a cameo appearance as the stand-in for the classical theory in the famous Chapter 2 of The General Theory.

The opening pages of Chapter 2 of Keynes's General Theory

The opening pages of Chapter 2 of Keynes’s General Theory. (Click on image to expand.)

The classical model assumes a market for labour services that works like any other perfectly competitive market.  The price of labour—the wage rate—will move up or down to clear any excess supply, or alleviate any excess demand. Unemployment doesn’t really exist, or if it does it is fleeting and transitory, reflecting frictions as workers move between jobs, needing time to gather information and find them. If unemployment persists, it must be because workers are for some reason refusing to take a cut in wages. There is an excess supply of labour—that is, unemployment—because the wage rate is too high.

Keynes objects to this blame-the-victim argument: “the contention that the unemployment which characterizes a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts” (Keynes 1936, page 9). The classical theory does not work, and we need something new, a new set of assumptions and logic that explains the facts.

There are two parts in today’s lecture. In the first we talk about the birth of macro-economics, and show that the high and persistent unemployment of the 1930s which motivated The General Theory, also characterizes what some of the rich countries have been through in the past eight or nine years. In the second, we begin our discussion of some of the basic vocabulary of macroeconomics, particularly the measurement of the macro-economy with national income accounting. Your prime objective is to fully understanding the meaning, the uses, and the abuses of “Gross Domestic Product.”

Rely on the readings listed in the course outline, and be prepared to discuss the meaning of unemployment and inflation for next class. The assignment will help guide you.

 

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