Inequality begets inequality, according to the Economic Report of the President

On a warm evening last spring I found myself at a dinner party in the lush suburbs of a small Ivy League town not far from New York City.

The main concern of a fellow economist was the trouble his son was having raising his new family: that would be the son living in Manhattan, the one making $10 million a year.

It appears there is a bidding war for spaces in good kindergartens and, as we all know, prices skyrocket when demand outstrips supply.

And demand has been rising. We also know that.

So the most striking claim in the Economic Report of the President for 2012 is not that the share of earnings accruing to the top 1%—a share that was about 8% during the early 1980s—stands at close to 20%. After all, this is old news, the stuff of Occupy Wall Street.

No, the most striking claim is that the rest of America should care, and in particular that the shrinking middle class, the typical families whose incomes have been steadily declining since 1999, should care.

Typical families typically didn’t care about equality of outcomes because they believed in equality of opportunities, that over the years and across generations there would be a vigorous trading of places as new talents and energies express themselves and are rewarded in the marketplace.

The Economic Report of the President, released on Friday, highlights that there is less of this sort of mobility across the generations than many Americans think.

Economic outcomes are significantly tied to family background, with about one-half or more of a father’s income advantage (or for that matter, disadvantage) being passed on to his son. This makes family background more important than in many other rich countries, playing more than twice the role than it does, for example, in Canada.

But the Report goes further and links growing inequality with declining opportunity: more inequality in outcomes goes hand-in-hand with less equality of opportunities.

“The confluence of rising inequality and low economic mobility over the past three decades poses a real threat to the United States as a land of opportunity. Social and economic opportunity across generations are at risk of declining unless concerted efforts are devoted to providing more opportunities for those born into lower-income households.”

This is the first major government report in North America to recognize that inequality today is related to inequality tomorrow. And while it implies that this has something to do with access to good quality education, it only briefly sketches out the reasons.

My dinner partner’s grandson will certainly be bought the best education money can buy, but the child will also surely benefit from more than money: he will also benefit from a richness of opportunity, of expectation, and of networks.

The odds are that this start in life will lead to a series of successes that will expand capabilities and resources with each stage of development. It also won’t hurt that the university where his grandfather teaches, from which his father graduated, and to which he will surely apply, has a “legacy” program that will likely give his application a little boost.

I briefly explain the reasons why inequality of outcomes influences equality of opportunities in a paper called “Inequality from generation to generation the United States in comparison” that is cited in Chapter 6 of the Report. Families, labour markets, and public policy all have a role to play. A much more detailed and careful discussion of these themes is offered by Ron Haskins and Isabel Sawhill of the Brookings Institution in their book Creating an Opportunity Society.

A couple of other relevant sources for understanding the underlying causes are—with specific reference to education—a book edited by Greg Duncan and Richard Murnane called Whither Opportunity?, and another dealing with cross-country comparisons edited by Timothy Smeeding, Robert Erickson and Markus Jantti called Persistence, Priviledge, and Parenting. Both of these are published by the Russell Sage Foundation.

For example, here is a picture from the Duncan-Murnane book showing the evolution of “enrichment expenditures”: the amount of money families spend on books, computers, high-quality child care, summer camps, private schooling, and other things that promote the capabilities of their children. The gap between families in the top 20% and the bottom 20% of the income distribution has widened considerably since the 1970s.

Not only do the well-to-do now have more resources to devote to their children relative to other families, they also now have more incentive to make these investments because they expect that the labour market will more generously reward children with a higher education.

In some countries, like Canada, public policy has done more to attenuate these differences than it has in the United States. Accessible high quality education and other social investments in children not only increase opportunities for lower income children, they also imply higher post-secondary graduation rates. Inequalities in wage outcomes are not as great because the supply of more educated workers is keeping up with demand. As a result broad-based political support for public goods is maintained, and a virtuous circle keeping the playing field relatively level rolls on into the next generation.

The New York Times ran a front page article summarizing some of the findings in Whither Opportunity? The article concluded on a pessimistic note concerning the possibilities for public policy by citing one observer who was reported to have said: “No one has the slightest idea what will work. The cupboard is bare.”

But another perspective is that in sketching the reasons for the link between inequality and opportunity these studies suggest there is no shortage of ideas and policies to increase opportunity. The real challenge facing public policy in the United States is whether they are politically possible.

Inequality of resources is also inequality of political power. In their book Winner Take All Politics, Jacob Hacker and Paul Pierson describe how the rules of the game, particularly tax policy and other regulations, have responded to the concerns of the super-rich. These concerns make meaningful reforms a harder sell in the United States than they would be in other countries: that new parents should have parental leave; that education should be financed more broadly than through narrowly defined property taxes; that teaching should be a highly regarded and well-paid profession; that the tax-transfer system should be more progressive.

All this is to say that political choices also determine the link between inequality and opportunity, and this is likely one more reason why the Economic Report of the President—version 2012, the last before an election—is arguing that the middle class should care.