Pethokoukis, Economics, U.S. Economy

Great Gatsby! The killer chart at the core of Obamanomics may not show what Obama says it does

Credit: The White House

Credit: The White House

“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.

42 thoughts on “Great Gatsby! The killer chart at the core of Obamanomics may not show what Obama says it does

  1. Ah yes, those cultural differences. Not only is college tuition free in Denmark but students also receive a stipend for living expenses of about $1,000/month, or half that if they live with their parents.

    I daresay college is growing more expensive in the 48 metro areas Mr. P would substitute for foreign countries. So there you have it. Some cultures eat their seed corn. Some do not.

    • Todd, are you saying that the rich eat our seed corn by stockpiling wealth, or are you implying that we should spend more tax money on tuition rather than food stamps? If college is uniquely “growing more expensive”, could it be our educational instutitions who are eating that seed corn? Last I heard, planting seed corn promises to increase the level of supply, driving prices down.

      • The topic is upward mobility. In Denmark, all that is required to get a college degree is ability. In my youth, the US was also a meritocracy, but that America is under assault by people like Paul (I got mine; who gives a sh*t about you?)

        Yes, higher education is part of the problem. The question is what is DonR willing to do about it besides use it as a excuse to condemn poor kids to a life of food stamps?

          • If I were as powerful as Mesa assumes, I’d give the Tinman a heart, the Lion some courage and Mesa a brain.

          • If Toad only had a brain…..

            No, seriously Toad, higher ed is clearly a vast right wing/libertarian conspiracy, right?

            Right wingers and libertarians have controlled faculty and curricula for decades, right Toad?

            If Toad only had a brain……

        • Turd,

          It’s charming you would bemoan the loss of a meritocracy you leftists spent the half century trying to bury. Are you really that self-unaware? Or perhaps you are confused by the terminology. That explanation would shed some light on your otherwise inexplicable claim to be a libertarian.

          “(I got mine; who gives a sh*t about you?)”

          We’ve seen the horrific results with the trillions in taxdollars you redistributionists were given to spend in places like Detroit, Birmingham, East St Louis, and even your hometown. You moral superiority exists only in your fevered imagination.

          • The short guide to Tea Party logic. I don’t want to pay taxes. It’s broke anyway. The other guy broke it. So I am not a selfish b@stard.

        • Higher education is the problem – just as HS education – just as our entire educational system – it is crap!

          Many students didn’t have college on their horizon growing up – usually from economic and social realities. A college education used to be demanding and of high quality (pre 1930). College was not for everyone for that reason alone. I attended college at 44 years of age. The morons I saw well on their way to degrees was to say the least shocking!! The teachers even more so!

    • Veritas liberabit vos

      Toad Manson commented
      (in response to Toad Manson: )
      “I am often wrong…”

      Toad you are always wrong, and you base your arguments on complete lack of self-awareness. Someone mentioned that recently, and it describes you perfectly.

  2. The article seems to say the Danes are better than us and we cannot consdier accomplishing what they have, or was the author saying they do not have a lot of black people (ethnically homogenous) holding them back. The idea of just looking at metro areas rather than the nation is laughable as city pollution are much more fluid and many people who earn in a city to not reside in it.

    • Removing blacks from demographic studies in the USA makes enormous differences in things like crime rates, incarceration rates, life expectancy, childbirth deaths, obesity and on and on.
      On can only imagine…

    • Do your research. Denmark is a much smaller nation (around 5 million Danes), with a less productive economy (adjusting for local purchasing power, the average Dane makes around $10,000/year less than the average American). More productive economies usually mean higher average per capita GDP, but also more productive economies are more complex, which means greater income distribution.

      So, are you willing to accept a less productive economy in return for greater income equality? Should we accept a 20% decrease in average (i.e. middle class) income if that’s what it takes to cut the offensively wealthy down to size?

      • I guess Forbes didn’t get the word on backward Denmark, ranking it fifth in the world in best countries to do business, vs tenth for the US. (One major edge over the US: little to no corruption.) As for the disparity in purchasing power, always a suspect measure, it ignores what Danes get for free, principally healthcare and education.
        My take on Denmark is everything there costs too much, but the trickle downers have some splaining to do. A 50 percent tax rate should be fatal in the supply side view of the world, but its not in Canada, number 1 in Forbes’ list, Sweden (7) or Norway (8).

  3. By only including 10 data points, and perhaps excluding dozens of other points (there are, after all, dozens of other countries in this world), Chart 1 makes what seems, on the surface, to be a compelling argument.

    By picking the “right” 10 points from Chart 2, I bet you I can make it look just like Chart 1 with a high r-squared and a sharp upward slope.

    Data and statistics can tell any story you want to want them to tell.

  4. Okay, I’m confused about the Gatsby chart.

    On one axis we have inequality. Fine.

    On the other axis, we have social mobility. Fine.

    So it looks like the higher the inequality, the higher the social mobility, which also sounds fine. The less equal we are, the more likely people are to move between classes.

    The chart helpfully adds the arrows “Parental Income a Big Factor” and the reverse, but I’m not sure how that correlates with amount of social mobility. Why would parental income be a bigger factor the more social mobility exists? I would think it would be quite the reverse.

    If that’s the case, then this chart indicates the opposite of what the administration wants us to think. The more inequality, the more mobility. So in an unequal society we have entrepreneurs who get rich, and in an equal society we have corporate drones who stay in the same job for their entire lives.

    Seems to me we are currently living in accordance with American values, which prefer entrepreneurs. Nothing wrong with that.


    • High social mobility is a good thing, I would think. What that should mean is the ability to become rich within a society. Where class lines are rigid due to guilds or unions and their influence on the attitude of the next generation, there is little mobility. I remember when an American opera singer at our college visited the Soviet Union in the 1970′s. Our singer had worked his way through college by working as a butcher. The soviet citizens were amazed. A butcher would never be able to become an opera singer in former USSR in 1970′s. Class lines were too fixed.

  5. An economist is a man who knows the price of everything and the value of nothing. How about just doing the right thing, which is to let those who earn money keep it? Leftists don’t understand the term ‘earn’ because so few of them have ever earned a dollar by producing anything.

    • And an idiot is a guy who thinks Yale legacies earned anything, or will contribute anything after Dad makes the introductions.

      • So, Todd, if we end all legacies and other forms of AA, and make every kid wanting to go to college earn their way the old fashioned way – test scores – and make it free to boot, do you think that would markedly change the current results?
        I don’t.
        As the farmer said, the cream will always rise to the top.

        • The Irish immigrants who poured into the US in the 1840s heard plenty of cream analogies. In Philadelphia, the nativist riots were led by an earlier generation of protestant Irish immigrants who bashed (and bemoaned) their ignorant, unskilled, unwashed Papist cousins.

          Said cousins who gave us Jack Welch, John Kennedy,Nolan Ryan, Bishop Fulton Sheen, Sandra Day O’Connor, Ulysses Grant, Walt Disney, to name a few.

          Oh yes, and F. Scott Fitzgerald.

          • Remind me again, Turd, how the 1840′s Irish were given a leg up with welfare, affirmative action, and other government handouts?

          • In Philly they formed their own savings societies (banks), hospitals and colleges aided by the Catholic church and activist priests (or leftists as Paul likes to call anyone who has a flicker of empathy.) You will see the same self-help motif in immigrant communities today. But the college part is pretty much out of reach today, the price of electron microscopes being what it is.

  6. I’m afraid you lost me back at “economic mobility”. Why exactly is it a good thing if people’s relative economic positions change with time?

    • More precisely, economic mobility is the opposite of economic stratification. In a society with high economic mobility, a poor kid who studies hard, goes to college, and doesn’t earn a useless degree–or the smart kid who builds a computer in his garage–can succeed wildly. He can also sell his company, invest his profits in a new venture, and fail miserably. Of course most people succeed and fail less dramatically, but the point is that in an open economy with high mobility, planning and hard work will bring success; anyone can climb the economic ladder, even if it’s just from the ghetto street to a middle-management position.

  7. It is hard to argue, just looking at the Gatsby Graph, that decreasing income inequality will really increase income mobility. Just looking at the 10 countries chosen, it is very hard to say that there is a close correlation between income distribution and income mobility. The US has the highest income distribution but has higher income mobility than the UK (like Denmark, a country with free higher education). The UK, France, and Japan have almost identical income distribution spreads, and markedly different income mobility numbers. Sweden has the lowest income distribution spread, but Finland, Norway, and Denmark (all Scandinavian countries), beat its income mobility scores. I would like to see another 30 countries plotted on this graph.

    • There is a trick for political effect. You wouldn’t expect such a chart to show the truth would you.

      The trick is this, for the USA they show income before taxes and government expenses. When that is factored in the rate difference goes way down, because in the USA we have one of the most progressive taxes in the world.

      • Every one of the countries marque2 mentions has a higher top marginal tax rate than the US, ranging from 45 percent (UK) to 57 percent (Sweden).

        Honestly, does anyone here care about facts?

        • Marginal tax rate is not tax burden. You might want to gather some facts before you disparage me. The reason our taxes look lower is because we don’t have nearly as many wink wink deductions.

          • Also it should be pointed out that almost 50% of our working population does not pay taxes. Where else in the world do they not tax the middle and lower middle class?

    • You are reading the y axis backward. The scale measures how much parental income determines income class; ergo, a high value translates to less mobility rather than more,

      • I am not reading the graph wrong: “up” on the graph means less income mobility. That’s BAD. “Down” means more income mobility. That’s GOOD. There is less income mobility in the UK than there is in France and Japan despite income distribution being roughly the same. Ignoring the 2010 projection since the other nations posted are not also projected, the US has both a wider income distribution and more economic mobility than the UK. And Sweden has less income mobility than the other Scandinavian countries despite having the lowest income distribution. That’s BAD.

        Of course, Sweden beats the US in both income mobility and income equality. Good for them. The average Swede also earns $9,000/year less than the average American. Again, in a free-market system less productive economies tends to be less complex and therefor have a tighter income distribution, less distance between the haves and have-nots.

        So which would you rather have? More haves and fewer have-nots? Or Fewer haves and more have-nots? You could be nuanced about it: arrange for the haves to have less and the have-nots to have more (which of course exactly what a tighter income distribution spread means). Just be aware that if you go that route then you are also deciding that collectively we will all have less.

        And that is far from being the only tradeoff you need to make.

        • My bad. Apologies. But your tradeoff isn’t as obvious as you think because “average” means less in countries with wide income distribution. Move it to median, purchase-parity-equivalent, household income per capita, and the difference between the U.S and Denmark shrinks to $3k/head. Or 1 ER visit for chest pain without benefit of insurance. Or one semester at a community college. Granted, the more elaborate international comparisons are the less reliable they become. Thing is they don’t make your point either. Could be that Median Joe wouldn’t give up anything if the US became Canada overnight. I believe think the notion of greater good refers to people.

          • I’m glad to hear that you believe the greater good refers to people. I’m sure that everyone who has posted here believes the same thing. In fact I’m sure that Rand Paul, whom you have characterized as saying “I got mine; who gives a sh*t about you?”, also believes that the greater good is about people. I say this as one who is not a special fan of Rand Paul.

            My best and oldest friend is, at times, a raving lefty. We are still friends because I know that she, like me, believes that the greater good is about people. She believes the same about me. One of us is obviously wrong on many things and it may be me, but my beliefs are sincere, as are hers.

            Whenever I get into a political debate when I cannot see how my opposite number could possibly believe the way he does, I remember my friend and remember that two rational, moral people, can disagree. It is harder to agree to disagree–since obviously I am right–but I also try and remember Cromwell’s famous plea to the Scots Presbyterians: “I beseech you, in the bowels of Christ, think it possible that you may be mistaken.”

          • I am often wrong, and hold only one part of this debate as dogma. College is the great leveler, and its being leveled by Republican legislatures. Penn State costs $17k/yr today, and the state slashed its subsidy by another 30 percent this year.

            Ross Perot used to say that it costs more to keep a young man in prison than it does to send him to Harvard. (Pause for effect.) “Fine. Let’s send him to Harvard.” But the folks here aren’t interested in solutions.

            BTW the Paul in my reference is the poster who calls me turd, and not Rand or Ron Paul. I am happy to report that Paul has lightened up on the homophobic slurs lately.

          • “But the folks here aren’t interested in solutions.”

            Todd, I doubt sending everyone to Harvard is any solution at all. What gives Harvard the reputation it has is selectivity. Remove that and it becomes any community college.

            “College is the great leveler”

            To a certain extent maybe, but I have a number of friends who never took a college course in their lives and done very well professionally. I also know many college graduates who tend bar, wait tables and sell cars. And I’m talking of people who graduated, or at least attended college, years ago.

            “Penn State costs $17k/yr today, and the state slashed its subsidy by another 30 percent this year.”

            The question would be, why the slash? I didn’t check, but I bet the state of PA collects more revenue today than it ever has. Where does all that money go? It isn’t that people here “don’t look for solutions”, it is people here spend an inordinate amount of time fixing or complying with the “solutions” those on the left have given us since FDR.

  8. If we had income equality wouldn’t there be zero economic mobility? One is a snapshot of a point in time. The other represents movement between points in time. If income equality stays the same from point to point there is no economic mobility. Or am I totally not getting the concept. The more I think about it the less clear that WH chart becomes. Does measurement on the 2 dimensional chart prove anything really?

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