Great Gatsby! The killer chart at the core of Obamanomics may not show what Obama says it does
“Whenever you feel like criticizing any one,” he told me, “just remember that all the people in this world haven’t had the advantages that you’ve had.” — “The Great Gatsby” by F. Scott Fitzgerald.
For many on the left, economic inequality is an intrinsically bad thing, a manifestation of deep social injustice. “This growing inequality,” President Obama said during his recent Knox College speech, “is not just morally wrong, it’s bad economics.” The 1% are fighting a class war against the 99%, and the 1% are winning.
But the moral argument alone doesn’t cut enough ice with aspirational America, which is why Obama needed the addendum about the “bad economics” of inequality. Specifically, the Obama White House argues that there is a connection between concentration of wealth in one generation and the ability of those in the next generation to move up the economic ladder compared to their parents. Shorter: income inequality impedes economic mobility. As former White House economist Alan Krueger has put it:
The fortunes of one’s parents seem to matter increasingly in American society. Children of wealthy parents already have much more access to opportunities to succeed than children of poor families, and this is likely to be increasingly the case in the future unless we take steps to ensure that all children have access to quality education, health care, a safe environment and other opportunities that are necessary to have a fair shot at economic success.
Team Obama’s argument-ending proof? The Great Gatsby Curve — see above chart — which supposedly “shows that children from poor families are less likely to improve their economic status as adults in countries where income inequality was higher – meaning wealth was concentrated in fewer hands – around the time those children were growing up.”
Look where Scandinavia is vs. America! Outrage!
But cross-country comparisons can be tricky. As economist and inequality expert Miles Corak has blogged: “There is no way the United States can mimic the outcomes of Denmark in the way Danes have made that accomplishment: a geographically small country, ethnically homogenous, with high levels of trust, and a labour market notably more structured is not a guide for American public policy.”
For a more apples-to-apples comparison, then, inequality researcher J. D. Vance uses US city data from the new Equality of Opportunity study by Professors Raj Chetty and Emmanuel Saez. First Vance’s chart and then an explanation:
There are 48 dots, one for each of the largest metropolitan areas in the United States. The numbers on the bottom, .38 to .52, measure inequality — the higher the number, the higher the inequality in a given area. The numbers on the left measure absolute mobility – the expected income percentile of a child born poor in those cities. Higher numbers mean greater upward mobility. As you can see, as inequality increases, nothing really happens. There are cities with high inequality and high mobility, low inequality and low mobility, and everything in between. … In short, in our 48 largest metro areas, there is no meaningful relationship between inequality and upward mobility.
There have been other critiques of the Great Gatsby Curve. Jim Manzi was able to use a variety of variables, including country size, to mimic the GGC’s results. And other research finds the rise in top-end inequality the result of technology and globalization rather than greedy CEOs and bankers.
Then there’s this: remember how all of liberaldom gang tackled economists Carmen Reinhart and Kenneth Rogoff last April for an error in their research on the correlation between high levels of public debt and slower economic growth? But beyond a spreadsheet coding mistake, what really bugged left-liberal/progressive types all along was that Reinhart and Rogoff, in their view, were effectively arguing — without proof — that there was a causal relationship between high debt and low growth.
Hopefully the Great Gatsby Curve, the mother-of-all-public-policy charts driving the Obama White House, will attract similar investigation and scrutiny of its author’s conclusions.