Tag Archives: social mobility

Three ways inequality is making life worse for everyone

As the 2016 election approaches, the debate among the intelligentsia appears like it will center around the question of inequality. While income is distributed unequally in the country, what few people know is how much more unequally wealth, financial assets and inheritances are distributed. As the chart below shows, income is only part of the problem.

A deeper problem is that the wealth of most Americans, and particularly those at the bottom, has decreased dramatically in the wake of the great recession. A 2013 study found that, while in absolute terms, the recession impacted the rich the most, in relative terms it fell on the “lower-income, less educated, and minority households.”

Here are three concrete ways that inequality makes America worse off.

Income and wealth inequality can have toxic effects on upward mobility, growth and democracy.

1) It reduces upward mobility

While much of the original research on inequality focused on how differences in income affected upward mobility (I covered that work extensively here), research has now also tackled the relationship between wealth and mobility. Gregory Clark, for example, findsthat wealth takes generations to dissipate. Meanwhile, W. Jean Yeung and Dalton Conleyfind that, “Liquid assets, particularly holdings in stocks or mutual funds, were positively associated with school-aged children’s test scores.” Another study, by Juan Rafael Morillas finds that the differences in earnings between black and white Americans “arises partly from the wealth inequality in assets ownership of blacks and whites.”

In a pioneering paper, Fabian Pfeffer and Martin Hallsten examine the effect of wealth on upward mobility in three countries (Germany, the United States and Sweden). They find that “parental wealth is also associated with both a reduced risk of intergenerational downward mobility and increased chances for upward mobility.” Michael Lovenheimfinds that families use household wealth to finance college, and that an increase in $10,000 in home equity boosts college enrollment by 0.7 of a percentage point on. The effect is even stronger for low-income families. The result of both high income inequality and high wealth inequality is more unequal opportunity.

Indeed, a 2013 World Bank study, Paolo Brunori, Francisco Ferreira and Vito Peragine find that, “an important portion of income inequality observed in the world today cannot be attributed to differences in individual efforts or responsibility.” Instead, “it can be directly ascribed to exogenous factors such as family background, gender, race, place of birth, etc.” They conclude, worryingly, that “[c]ountries with a higher degree of income inequality are also characterized by greater inequality of opportunity.”

 

2) It decreases economic growth

The implications of stalling upward mobility have implications for economic growth. When inequality presses down on opportunity, many low-income people can’t fully develop their capacities. As Stephen Jay Gould once noted, “I am, somehow, less interested in the weight and convolutions of Einstein’s brain than in the near certainty that people of equal talent have lived and died in cotton fields and sweatshops.” Today, even in a wealthy country like America, millions of bright young children have their cognitive development stunted by poverty. Wealthy parents invest heavily in their children, while low income families have less to spend. Further, as Miles Corak notes, the United States funds education at the local level, meaning that wealthier kids go to better schools than low-income kids.

We saw above that inequality reduces equality of opportunity. This is important because unequal opportunity has been linked to lower overall economic growth.

In one study, Gustavo Marrero and Juan Rodriguez examined inequality of opportunity in the 23 American states. They find that states with higher inequality of opportunity also had slower growth.

In a recent conference paper building on the Marrero and Rodriguez work, Katharine Bradbury and Robert Triest find confirmation that inequality of opportunity slows growth. They struggle to find a causal relationship between inequality of outcomes and upward mobility (citing Deirdre Bloome’s recent work on the subject), but do suggest that it can reduce inequality of opportunity. For his book, “Our Kids,” Robert Putnam asked them to examine two cities with dramatically different rates of upward mobility — Salt Lake City (high mobility) and Memphis, Tenn. (low mobility) – to see how these differences affected growth. They find that if Memphis had the same levels of intergenerational mobility as Salt Lake City, the 10 year growth rate of real per capita income would grow by 27 percentage points.

There are other causal mechanisms by which inequality could reduce growth, depending on the causes of inequality. After surveying the literature, Heather Boushey and Carter Price find that, “studies that look at the longer-term growth implications find that inequality adversely affects growth rates and the duration of periods of growth, while those that focus on short term growth find that inequality is not harmful and may be associated with faster growth.” Worryingly, though, inequality particularly affects those atthe bottom of the distribution, suggesting that the wealthy may have little incentive to boost opportunity.

3) It degrades democracy

Inequality also undermines democracy. As some individuals become increasingly powerful, they may use that influence to shift the political system. As Theodore Rooseveltonce noted, “The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase power.” As his cousin put it, “We know now that Government by organized money is just as dangerous as Government by organized mob.”

There is evidence that our growing inequality has eroded the foundations of democracy. In his seminal book, “Affluence and Influence,“ Martin Gilens suggests that, “the growth in income inequality might play some role in explaining increases in responsiveness to the affluent during the 1980s and beyond.” He notes, however, that this wouldn’t help explain changes in responsiveness between the 1960s and 1980s. It’s very difficult to tell across time how inequality affects democracy. However, we can see inequality affects democracy at the state level. In a recent paper, Patrick Flavin finds that, “states with lower levels of income inequality tend to weigh citizens opinions more equally than states with wider income differences.” That is, in states with less income inequality, policy is less biased in the favor of the rich. He tells me, “The effect of income inequality is stronger than just about any other state contextual factor that I’ve looked at. “

Some inequality is good. If inequality is the result of innovation and hard work, it can make society better. The problem is that most of our rising inequality isn’t due to hard work; it’s due to changing government policies that benefit the rich at the expense of the middle class. And the result can be deadly. Recent research suggests that “people in unequal communities were more likely to die before the age of 75 than people in more equal communities, even if the average incomes were the same.” In “The Spirit Level,” Richard G. Wilkinson and Kate Pickett lay out comprehensive evidence showing how equal societies perform better on a range of social indicators. To restore democracy, and opportunity, we need to clamp down on inequality.

This piece originally appeared on Salon

The myth destroying America: Why social mobility is beyond ordinary people’s control

In America, there is a strongly held conviction that with hard work, anyone can make it into the middle class. Pew recently found that Americans are far more likely than people in other countries to believe that work determines success, as opposed to other factors beyond an individual’s control. But this positivity comes with a negative side — a tendency to pathologize those living in poverty. Indeed, 60 percent of Americans (compared with 26 percent of Europeans) say that the poor are lazy, and only 29 percent say those living in poverty are trapped in poverty by factors beyond their control (compared with 60 percent of Europeans).

Such beliefs are just that: beliefs. While a majority of Americans might think that hard work determines success and that it should be relatively simple business to climb and remain out of poverty, the reality is that the United States has a relatively entrenched upper class, but precarious, ever-shifting lower and middle classes. While many Americans might hate welfare, the data suggest they are fairly likely to fall into it at one point or another.

In their recent book, “Chasing the American Dream,” sociologists Mark Robert Rank, Thomas Hirschl and Kirk Foster argue that the American experience is more fluid than both liberals and conservatives believe. Using Panel Survey of Income Dynamics (PSID) data — which has tracked 5,000 households (18,000 individuals) from 1968 and 2010 — they show that many Americans have temporary bouts of affluence (defined as eight times the poverty line), but also temporary bouts of poverty, unemployment and welfare use. (The study includes food stamps, Medicaid, Temporary Assistance to Needy Families/Aid to Families with Dependent Children, Supplemental Security Income and any other cash/in-kind program that relies on income level to qualify.) The researchers conclude that a large number of Americans eventually fall into one of these categories, but that very few Americans stay for long. Instead, the social safety net catches them, and they get back on their feet.



The authors also find that the risk of poverty is higher for people of color. (Since the PSID began in 1968, most non-white people in the survey have been black.) And while most Americans will at some time experience affluence, again, this experience is segregated by race.

In a study published earlier this year, Rank and Hirschl examine the 1 percent, and find that entry into it is more fluid than previously thought. They find that 11 percent of Americans will enter the 1 percent at some point in their lives. However, here again, access is deeply segregated. Whites are nearly seven times more likely to enter the 1 percent than non-whites. Further, those without physical disability and those who are married are far more likely to enter the 1 percent.

The researchers didn’t measure how being born into wealth effects an individual’s chances, but there are other ways to estimate this effect. For instance, a 2007 Treasury Department study of inequality allows us to examine mobility at the most elite level. On the horizontal axis (see below) is an individual’s position on the income spectrum in 1996. On the vertical level is where they were in 2005. To examine the myth of mobility, I focused on the chances of making it into the top 10, 5 or 1 percent. We see that these chances are abysmal. Only .2 percent of those who began in the bottom quintile made it into the top 1 percent. In contrast, 82.7 percent of those who began in the top 1 percent remained in the top 10 percent a decade later.

One recent summary of twin studies suggests that “economic outcomes and preferences, once corrected for measurement error, appear to be about as heritable as many medical conditions and personality traits.” Another finds that wages are more heritable than height. Economists estimate that the intergenerational elasticity of income, or how much income parents pass onto their children, is approximately 0.5 in the U.S. This means that parents in the U.S. pass on 50 percent of their incomes to their children. In Canada, parents pass on only 19 percent of their incomes, and in the Nordic countries, where mobility is high, the rate ranges from 15 percent (in Denmark) to 27 percent (in Sweden).

There is reason to believe that Chris Rock is correct that wealth, which is far more unequally distributed than income, is also more heritable.

In his recent book, “The Son Also Rises,” Gregory Clark explores social mobility in societies spanning centuries. He finds, “current studies… overestimate overall mobility.” He argues that,

“Groups that seem to persist in low or high status, such as the black and the Jewish populations in the United States, are not exceptions to a general rule of higher intergenerational mobility. They are experiencing the same universal rates of slow intergenerational mobility as the rest of the population. Their visibility, combined with a mistaken impression of rapid social mobility in the majority population, makes them seem like an exception to a rule. The are in instead the exemplary of the rule of low rates of social mobility.”

Clark finds that the residual effects of wealth remain for 10 to 15 generations. As one reviewer writes, “in the long run, intergenerational mobility is far slower than conventional estimates suggest. If your ancestors made it to the top of society… the probability is that you have high social status too.” While parents pass on about half of their income (at least in the United States), Clark estimates that they pass on about 75 percent of their wealth. Thus, what Rank and Hirschl identify, an often-changing 1 percent, is primarily a shuffling between the almost affluent and the rich, rather than what we would consider true social mobility.

The American story, then, is different than normally imagined. For one, Americans live increasingly precarious existences. In another paper, Hirschl and Rank find that younger Americans in their sample are more likely to be asset poor at some point in their lives. But more importantly, a majority of Americans will at some point come to rely on the safety net. Rather than being a society of “makers” and “takers,” we are a society of “makers” who invest in a safety net we will all likely come in contact with at one point or another. However, there are some who don’t.

The Gini Coefficient measures how equally distributed resources are, on a scale from 0 to 1. In the case of 0, everyone shares all resources equally, and in a society with a coefficient of 1, a single person would own everything. While income in the U.S. is distributed unequally, with a .574 gini, wealth is distributed far more unequally, with a gini of .834 — and financial assets are distributed with a gini of .908, with the richest 10 percent own a whopping 83 percent.

Wealth and financial assets are the ticket to long-term financial stability; those who inherit wealth need never fear relying on the safety net. And it is these few individuals, shielded from the need to sell their labor on the market, who have created the divisive “makers” and “takers” narrative. Using race as a wedge, they have tried to gut programs that nearly all Americans will rely on. They have created the mythos of the self-made individual, when in fact, most Americans will eventually need to rely on the safety net. They treat the safety net as a benefit exclusively for non-whites, when in reality, whites depend upon it too (even if people of color are disproportionately affected).

As I’ve noted before, the way the welfare state works (primarily inefficient tax credits for the middle class) has made this delusion tenable. It is therefore not that Americans believe themselves to be “temporarily embarrassed millionaires,” but rather “self-made men” (with a dose of racism), that drives opposition to the welfare state. The problem is that most people will eventually realize they won’t become millionaires, but few will realize the way government has benefited them throughout their lives.

This piece originally appeared on Salon

On Income Inequality: An Interview With Branko Milanovic

Branko Milanovic is a World Bank economist and development specialist. He’s currently a visiting presidential professor at CUNY’s Graduate Center and a senior scholar at the Luxembourg Income Study Center. His book, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality, examines—as the title suggests—income inequality. Milanovic and Demos Research Assistant Sean McElwee recently discussed Milanovic’s research and the major shifts within the inequality research field.

Sean McElwee: You’ve been researching inequality for a long time. Inequality as a topic, for a while, was very unpopular. How has the way that inequality is discussed changed in the last decade?

Branko Milanovic: Well, yes, I’ve been researching inequality, income inequality to be precise, for many years. One could even argue that since the late 1970s to early 1980s it was a topic that had no particular appeal to economists. That is, until five to six years ago.

SM: So then, what happened to change this?

Branko Milanovic: What happened is, I think, first and foremost, the recession. Secondly, the mainstream economics became discredited, not because it could not predict or prevent the crisis, but because it was actually saying, until the very last moment, that the crisis cannot and will not happen.

Plus the realization by many people, when the crisis hit and they could no longer borrow as before, that their incomes had not grown in many years, is what really brought up the issue of inequality. Like, “how is it that some people’s incomes have increased a lot and my income stood still?” It was, of course, known by those few who dealt with income distribution before, but it never penetrated much into the economics profession nor into people’s consciousness. Then, with the crisis, things suddenly changed.

SM:  One of the things that I thought was most interesting about your work is this idea of the citizenship rent.

You said something like 60 percent of your income is determined at birth and then 20 additional percent by how rich are your parents. I was curious if we included race and gender in that, what percentage of your income do we know before you even begin your pre-K.

Branko Milanovic:  Global inequality studies were made possible by two events that occurred at about the same time, in the mid-1980s. First, for the first time ever we had income distribution data for most of the countries in the world. Before, you didn’t have household surveys from the Soviet Republics, China and most of Africa. That changed around mid 1980s/late 1980s.

The second thing that changed was, of course, globalization, the inclusion of China and formerly Communist countries in the world market, and thus much greater awareness of the large income gaps between countries and peoples, and of course greater competition.

The graph (for year 2008) shows on the horizontal axis a person’s position in their own country’s income distribution, and on the vertical axis, a person’s position in global income distribution. Thus, the poorest Americans (points 1 or 2 on the horizontal axis have incomes that put them above the 50th percentile worldwide). Note that 12% of the richest Americans belong to the global top 1%.

It turns out that—depending on the year and how detailed your data are—some 50 to 60 percent of income differences between individuals in the world is due simply to the mean income differences between the countries where people live. In other words, if you want to be rich, you’d better be born in a rich country (or emigrate there). You can see that in the figure here, where very poorest people in the United States have an income level which is equal to that of the middle class in China or even upper middle class in India.

So that’s very striking. At least half of your income is determined by where you live, which for most people is where you were born. Then about 20 percent is due to the income level of your parents. So, your citizenship plus your parental background explain around two-thirds or even 70 percent of your income.

Then, obviously, if I had data for gender, race, ethnicity and other things, which are similarly exogenously “given” to an individual, that percentage would go up, perhaps to more than 80 percent.

Sean McElwee: So it’s at least 80 percent, possibly more?

Branko Milanovic:  I am quite confident that if you were to add other things which, I underline, you did nothing to deserve or to be penalized for, you would go, probably, over 80 percent of your income being thus determined.

The lion’s share of that is due to citizenship, or for the individuals like myself who are just residents of rich countries and still get all the benefits, to the residency. This is what I call “the citizenship premium” or “citizenship rent.”

SM: There is more or less a way to deal with inequalities within countries, but how do we deal with inequalities across countries, especially given the way there’s the borders? The fact is, if we’re worried about the rich controlling the U.S. political system, the rich nations, very much control the international political system.

Branko Milanovic: For global equality there’s no mechanism, there are no clear tools, because there is no global government.

Essentially if you think of global inequality, you might say that you have, other than aid, two other tools. One is increase in the growth rate of the poor countries. And this is how, interestingly, you end up in a very curious position, from having started to worry about inequality ending up worrying primarily about economic growth of poor countries.

The second thing is migration. Migration reduces overall inequality on the assumption that when people from poor countries go to rich countries, their incomes go up.

Obviously, migration, while needed to reduce both global poverty and global inequality is not a panacea. Not everything is rosy: first, it could be that the incomes of the people that stay behind are reduced if most skilled people emigrate. This may still reduce global poverty and inequality but it does raise moral issues since we may end up with some countries that would, in the era of globalization, have to disappear: everyone will be better off if they migrated.

And there is a political issue of absorption of migrants in the recipient countries. Still, migration today, despite much attention it receives, has been relatively stagnant and small. In the last quarter of century, the percentage of people who live in the countries where they were not born has been stable at between 2 and 3 percent. Or to go back to your previous question, for 97% of the people in the world, half of their income is decided at the moment when they are born.

SM: Catherine Rampell in her New York Times review of your book, noted income mobility, and I think it gets at this distinction you like to make between good inequality and bad inequality. 

Branko Milanovic:  The bad or undeserved inequality would be the one that arises from the factors over which you have no control: what was the income level of your parents, whether you were born male or female, what is your race, and things like that.

The good inequality is inequality of effort, work, luck and so on.

SM: Okay. So let’s talk about your paper. There’s been a lot of recent research on GDP growth and inequality and it’s actually kind of shifted almost to the left, it sounds like, with more inequality leading to lower GDP growth. You find that actually it is a little more nuanced than that.

Branko Milanovic: I think that with the paper you mention, which I did in collaboration with Roy van der Weide from the World Bank, the novelty is that we “unpack” both growth and inequality.

In the past, the use of these two aggregate and “unnuanced” measures like GDP per capita and Gini coefficient, regressed on each other across countries, yielded the results that were all over the place: from a positive relationship between high inequality leading to higher growth to a negative relationship, to a very weak or non-existent relationship.

We thought of unpacking both growth and inequality. What does it mean? We don’t look at the growth of the mean only; we look at the growth rate at different points of the income distribution, we look at the growth rate of the very poor, say bottom 20 percent of people, we look at the rate of growth of the median, or among the top 10 percent or 5 percent, or top 1 percent.

Then, similarly, [we] disaggregate overall inequality into inequality among the poor, among the rich.

I think our most interesting finding—based on the U.S. data from 1960 to 2010, huge micro-censuses, conducted once every ten years and which include one percent of the U.S. households—is that if you look at income growth of the bottom 20% or bottom 40% of the population in period  “t+1”, that income growth is negatively correlated with inequality which existed in period “t”.

Let me put it in simple terms. Let’s suppose I’m a guy who is poor. I live in Massachusetts in 1990. Then the rate of growth of my income between 1990 and  2000, would be negatively correlated with income inequality that existed in Massachusetts in 1990. So we do it across all fifty U.S. states. Obviously, overall growth rates have declined over the last 50 years; also the shape of the growth rates across various income levels (the poor, the middle, the rich) has changed, as you can see here in the graph, but the negative correlation between inequality and subsequent real income growth of the poor remains.

It used to be that the U.S. growth was pro-poor, in the sense, that the growth rates among the poor were higher than amongst the rich. Now it’s the opposite. But that particular relationship between inequality and growth of the poor, we find it throughout the entire period. We can only speculate what are the reasons that make inequality be so bad, pernicious even, for the growth at low levels of income.

GrowthRate

Now, when you move to the top of income distribution, the story changes. Inequality may not be bad for the rich; actually, it’s positively correlated with their growth rates. So if you’re really a rich person in Massachusetts in 1990, then your growth rate, between 1990 and 2000 is going to be positively correlated with inequality which existed in Massachusetts in 1990.

In other words, the bottom-line is that we believe is evidence there to show that the rate of growth of the poor people is negatively affected by high inequality.

SM: The argument by many people who are center-left has been, “Oh, we now know that inequality is bad for growth, so the rich should get behind measures to reduce inequality,” but if you’re correct they actually do not have that political incentive.

Branko Milanovic: That’s a very good point, that’s your point, we don’t make it in the paper, but it’s very true. If you take what we find in the paper, that the growth coefficient on inequality for the rich is positive, then they don’t have an incentive to fight inequality. For their growth rate, inequality is good. It undermines the case for a sort of self-interest of the rich to be more accommodating.

This interview originally appeared on Policyshop.

Republicans are wrong about inequality

President Obama has recently attracted attention by acknowledging the problem of inequality and calling for a more aggressive, populist approach. But as he pivots toward income inequality and upward mobility, it’s an important time to demolish one of the most pervasive myths in our society, that there can be a distinction made between equality ofopportunity, and equality of outcome. The line goes something like this:

Equality of opportunity provides in a sense that all start the race of life at the same time. Equality of outcome attempts to ensure that everyone finishes at the same time. To slightly change what the Dodo said in Alice in Wonderland, “Everybody must win and all must have prizes.” [Italics in original]

In truth, outcome determines the next generation’s opportunity. Hence, Obama is right to point out that inequality harms the American Dream. Life isn’t a sprint, it’s a relay race. And where one generation finishes, the next begins.

Great Gatsby Curve

Miles Corak is a Canadian economist most famous for producing a chart showing that income inequality and upward mobility are correlated across nations. When Alan Krueger, then president of the Council of Economic Advisers, dubbed it “The Great Gatsby Curve,” economic wonks took notice.

There are four broad theories about how parents pass on advantage to their children.  One way would be genetic: intelligence, attractiveness, height. Next would be culture: Parents could inculcate a strong work ethic, honesty, extroversion. Then there would be investment: tutoring, job connections, additional safety net. Finally there is the political system: reducing tax brackets, investing in local education, cutting capital gains.

Generally speaking, the first two variables would not be affected by an increase in inequality. That is, as a society becomes more unequal, wealthy parents wouldn’t become more successful at passing on their genetic material or virtues to their children. But more economic power would allow them to entrench their wealth through investment and the political process.

Gregory Mankiw, whose role as an economist appears to be signing off on whatever absurdity the GOP is promoting at the time, has come out heavily in favor of the genetic explanation and argued that there is still lots of opportunity for upward mobility. Charles Murray, the right’s old angry dad-in-chief, has lined up behind the latter explanation. But the thesis that America is teeming with upward mobility and that rich people are just more able to take advantage of it (because of either biological superiority or virtuousness) is patently absurd. It allows elites to absolve themselves of responsibility for the inequality and stagnant mobility they created with their neoliberal policy prescriptions, and claim that the American Dream is vibrant.

But the biological thesis is in dire straits. Nathaniel Hendren, assistant professor of economics at Harvard University, tells Salon that his research with Raj Chetty, Emmanuel Saez and Patrick Kline finds:

We can absolutely reject that theory. In order to believe that theory, you have to believe that the spacial differences across the U.S. are differences in some kind of transmission of genes. Suppose you move from one area to another and you have a kid. Does your kid pick up the mobility characteristics of the place you go to? Now obviously, your genes don’t change when you move. What we find is that kids start to pick up the mobility characteristics of the place they move to, and they do so in the proportion to the amount of time they end up spending in that place. The majority of the differences across places are casual. If people lived in different places, they would have different outcomes.

The cultural thesis may also struggle to explain how increasing inequality would diminish mobility, for a similar reason. If Murray is right that virtues like religiosity and hard work explain the persistence of inequality, are we to accept that moving from one city to another makes parents less virtuous? While the number of two-parent households in a census zone correlates highly with mobility, in areas with large numbers of one-parent households, two-parent households also struggle. So even families who make the right moves may be hampered by the mobility characteristics of the area in which they live.

Although these two explanations strain to describe reality, they represent the concern of “Serious People” because they obscure the role of the neoliberalism that economics elites like to tout. Murray, for instance, has written an entire book that amounts to post hoc ergo propter hoc (i.e., mistaking cause and effect). He argues that a cultural decline has made it harder for the middle class to get ahead, when in fact the struggles of the working class explains its perceived decline in virtue. Take one example. He argues that the working class has abandoned the virtue of “marriage” and points to high rates of teen pregnancy to explain why the working class isn’t upwardly mobile and increasingly poor. But research shows the causation goes the other way; it is poverty and inequality that make the working class more likely to bear a child out of wedlock. Because of this research, parental investment and political rent-seeking best explain how inequality and mobility are correlated.

Parental Investment

Parental investment plays a huge role in how inequality is passed from one generation to another. Miles Corak explains,

What you see in the U.S. is as the labor market has changed and as incomes become more polarized, some families have a lot more resources and there is a bigger incentive to worry about the education of their children. Labor market inequalities shadow themselves in the investment kids get. That’s important in the early years, and that has an influence on longer-term outcomes.

He cites the work of economist Greg Duncan, who shows how parental investment for the top quintile has increased dramatically while the parental investment of poor children has remained stagnant. To maintain equality, the government would have to step in and fill the gap. Without investment, many children who have potential are crushed. The great paleontologist Stephen Jay Gould writes, “I am, somehow, less interested in the weight and convolutions of Einstein’s brain than in the near certainty that people of equal talent have lived and died in cotton fields and sweatshops.”

Parental investment also occurs as children transition to the labor market; Corak cites the work of economist Paul Bingley, which shows that the children of wealthy parents are far more likely than poor middle-class children to get a job in their parent’s firm.

 

Such accumulated advantages have been described as “opportunity hoarding” by the American sociologist Charles Tilly. Brookings Institution fellow Richard Reeves warns that the wealthy create a glass floor that can easily become a glass ceiling for others.

The Political Process

The other explanation that comports with the Great Gatsby Curve is the outsize political influence of elites. The idea, forwarded by economist Paul Krugman and political scientists Jacob Hacker and Paul Pierson, among others, is that economic inequalities shadow themselves through the political system. Professor Larry Bartels has shown that policymakers are more responsive to the interests of the rich, so it’s not entirely inconceivable that as the rich get richer, they can start to influence the political process to their favor. The wealthy can work to undermine minimum wages, reduce their tax burden and use government power to quash unions. Such actions were common during the first Gilded Age, and there is evidence that they are back. The U.S. redistributes far less income downward than other developed nations.

To see how inequality shapes public policy, it’s useful to look at a concrete example, like free trade. Dr. John Schmitt, an economist at the Center for Economic and Policy Research, tells me that “the whole mechanism for improving the average income in the economy through trade is through depressing the wages of one group of workers and raising the wages of other groups of workers.” But he notes that the workers exposed to foreign competition are never doctors or lawyers; rather, they are factory workers.

As Dean Baker writes in the New York Times,

Nafta could have been structured to bring the pay of doctors and other highly paid professionals more in line with their pay in other wealthy countries by removing barriers. This would have produced substantial economic gains to the economy as a whole (it’s the exact same model as economists use to show gains from the Nafta we have), except these gains would be associated with a downward rather than an upward redistribution of income. The doctors and their allies among the elite have been able to prevent such a deal from being considered by the politicians in Washington, American workers don’t have that power.

This is particularly significant because a recent paper by economists Michael W. L. Elsby, Bart Hobijn and Ayşegül Şahin finds that, “Our analysis of a range of factors behind and explanations for the recent decline in the labor share highlights that the decline of the labor share over the last 25 years is largely driven by U.S. producers facing increased import competition. Thus, if globalization continues during the next decades, then the labor share will most likely continue to decline, especially in sectors that face the largest increases in foreign competition.” That is, the greatest driver of inequality has been the free-trade neoliberal policies pushed for by economic elites, who reap rewards.

Economists Josh Bivens and Larry Mishel show that the dramatic rises in wages for the top 1 percent don’t represent increasing productivity, but rather rent-seeking behavior. They argue that:

In short, the financial sector illustrates that in one of the most important sectors to drive top 1 percent incomes in recent years, there was an extraordinary divergence between what top managers took home and even what shareholders (surely a privileged group compared to the wider U.S. economy) gained. This type of divergence seems like powerful evidence to us that a substantial part of the extraordinary rise of top 1 percent incomes is not a result of well-functioning markets allocating pay according to value generated, but instead resulted from shifting institutional arrangements leading to shifting of rents to those at the very top.

As eminent historian Richard Hofstadter notes, “Once great men created fortunes; today a great system creates fortunate men.” Elsewhere, I’ve written about how seemingly benign policies like patents could be considered rent-seeking behavior. But we subject the poor to free markets, not the rich.

There’s the issue of political donations, too. One study finds that the Adelson family spent more money on the 2012 federal election cycle than all the residents from 12 states combined. Political scientists Martin Gilens and Larry Bartels have both shown that policymakers are more responsive to the concerns of their wealthier constituents. In 2005, Larry Bartels examined how responsive senators were in the 101st, 102nd and 103rd Congress to the preferences of various constituents. His findings are summarized in the chart below.

 

While neither party is particularly responsive to the needs of poor Americans (the number is negative, meaning that if poor Americans desire the policy, it’s actually less likely to happen), Republicans are marginally better than Democrats at responding to the desires of the middle class. Even after controlling for political knowledge and voting behavior, the results held, indicating that wealth, not education or political activism, is what makes politicians respond. Political scientist Martin Gilens has developed such research into a recently released book, “Affluence and Influence,” which records similar findings. Giles finds that, “Policies favored by 20 percent of affluent Americans, for example, have about a one-in-five chance of being adopted, while policies favored by 80 percent of affluent Americans are adopted about half the time. In contrast, the support or opposition of the poor or the middle class has no impact on a policy’s prospects of being adopted.”

Political scientist Frederick Solt researched political responsiveness and participation internationally and finds that higher levels of inequality decreased voter turnout and narrowed the political discussion, with poor and middle-class voters becoming disenchanted. Further, inequality separates the social ties of the rich and poor, creating an “empathy gap” that makes it harder to pass policies that could increase mobility. Political scientists Bo Rothstein and Eric Uslaner note in a fabulous paper for World Politics, “The best policy response to growing inequality is to enact universalistic social welfare programs. However, the social strains stemming from increased inequality make it almost impossible to enact such policies.” The lack of social trust caused by inequality makes increasing opportunity harder (as I’ve noted above), which further erodes social trust and increases inequality.

Wealthy citizens see themselves as “makers” and the poor as “takers,” while the poor see the rich as selfish. Rothstein and Uslaner continue later, “Unequal societies find themselves trapped in a continuous cycle of inequality, with low trust in others and in government and policies that do little to reduce the gap between the rich and the poor and to create a sense of equal opportunity.” All of these factors work together to decrease mobility while inequality increases. As Schmitt said, “It’s not just economic power that’s been concentrated over the last four decades. It’s also political power and the political power is crucial, because it is what allows us to reproduce the economic inequality we have. All of these political policies are being reinforced because the people who have significant economic power also wield significant political power and they change the rules of the game.”

The False Solution: Education

In debates about inequality, education is generally considered to be somewhat of a silver bullet. One of the five correlations the Chetty team found was that a good education system facilitates mobility. Miles Corak noted in our interview that,

If you have an education system that relies very heavily on local property taxes, and that characterizes the U.S. more than other countries, the quality of schooling is going to vary tremendously across neighborhoods and this is in part why there are regional differences. In Canada, the funding of education is more broadly based, and there is more of a tendency to divert resources to poorer neighborhoods. In the United States, it’s actually the opposite, the most underprivileged children get lower quality resources. So the United States spends more money on education than other countries, but it spends it more unequally.

The role of public policy in alleviating inequality will be most effective if it tries to pull the poor up; policies that keep the rich down will be politically unpopular. But while education is generally seen as a key equalizer, it cannot alone create upward mobility (see chart).

The chart shows that, while education certainly helps poor people move upward, they would still be better off being born without the degree but in the top income bracket. The furthest red column to the right shows that 25 percent of the children born in the top quintile who do not get a college degree stay in the top bracket. In contrast, the leftmost blue bracket shows that only 10 percent of the children born in the poorest bracket who obtain a college degree make it to the top 20 percent.

So while education is an important step, it isn’t the only one. It is the preferred policy of the economic elite because it’s easy and safe. It doesn’t threaten their illusion that their success is based on gritty determination and above-average intellect. A real agenda for upward mobility will include higher taxes on the wealthy and capital gains to discourage rent-seeking behavior, a more equitable distribution of educational resources, a higher minimum wage, political reforms for a more open process, more unionization, universal pre-K, paid family leave, a more robust unemployment system and a more extensive social safety net.

For too long in American politics, astronomical levels of inequality have been tolerated because of the mythical American Dream. People always say that you should “dress for the job you want.” In America, most people also vote for the income you want. That’s why bus drivers in El Paso vote for tax breaks in Park Avenue. But now we know that inequality hampers mobility, and that the wealthy are creating barriers to entrench their wealth. These barriers must be broken down if we want real mobility. If the government does act, it still makes a choice: to allow plutocrats to create a system that excludes others. As George Carlin said, “The owners of this country know the truth: It’s called the American Dream because you have to be asleep to believe it.”