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 of opportunity, 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."
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