There is nothing wrong with inequality … until it starts limiting opportunity.
Well that might be a bit too strongly put, but it is certainly one thing to live in an unequal society where the chances of changing places with the rich, of seeing your children move on and upward, are high. Indeed, if this is the case we may even want a certain degree of inequality: people would have both the incentive and the possibility to better their situation.
But it is another thing altogether to live in an unequal society where there is little chance of moving on, where there are barriers preventing our talents and energies from being rewarded, where the accident of birth determines a child’s life chances.
This type of inequality should worry Occupiers and the 99% because it cuts sharply against what we commonly understand to be the American Dream.
In fact, the United States is among the most unequal of the rich countries, and also among the least mobile.
In 1992 the American Economic Review published two path-breaking articles, one by Gary Solon and another by David Zimmerman. Their results illustrate a disconnect between the way Americans see themselves, and the way the economy and society actually function. The playing field is a good deal stickier than many believe.
Subsequent research has brought this disconnect into particular relief by placing the United States in an international context.
Now, no one statistic can characterize or describe the American Dream, but this literature has drawn our attention to one particular number that describes the fraction of a parent’s income advantage that gets passed on to the children. This is a good indicator of generational mobility: the higher the fraction, the stronger the tie between parent-child earnings, the more family background matters.
Consider this picture from a paper I have just finished for a book edited by Robert Rycroft . It shows the relationship between inequality and its persistence across generations. Across the bottom from left to right, we are moving from low inequality to high inequality; from bottom to top we are moving from high mobility to low mobility: Latin American countries are the most unequal and the least mobile societies; Denmark sits at the other extreme.
In general, the more unequal a society, the lower generational mobility: in other words, the more likely the members of the next generation will occupy the same position in the earnings distribution as their parents. (This particular graph refers to fathers and sons.)
But the other thing to notice is that the United States is among the most unequal and the least mobile of the rich countries, with about 50% of a father’s earnings advantage (or for that matter disadvantage) being passed on to the son.
In Canada this is about 20%, less than half the US figure. The Canada – US comparison is probably the most apt, and I discuss the details in a research paper published by the Economic Mobility Project of the PEW Charitable Trusts. The reason for the difference: in the United States children of the very rich are more likely to grow up to be rich, and children of the poor are more likely to stay poor.
These facts are finally starting to percolate into the American consciousness. Joseph Schumpeter, the Harvard University economist who taught during the 1930s, is often cited as saying that recessions are like cold showers: they clear the economy of inefficiencies, make the existing structures more apparent, and set the conditions for change.
But recessions have social as well as economic consequences. The current recession has shaken some people awake, and Occupiers signal the decline of the American Dream in our consciousness, a manifestation of underlying realities, and the demand for a change in the way of doing business.
(If you want more information about generational earnings mobility, and the use of other indicators, check out the post by Scott Winship of the Brookings Institution. He summarizes the major themes of the PEW research project, which he seems to suggest has focused on policies to promote movement from the bottom without paying much attention to the implications of the rich staying rich across the generations. I will take this up in the next post.)