Great Gatsby curve

The Great Gatsby curve is a chart plotting the (positive) relationship between inequality and intergenerational social immobility in several countries around the world.

The curve was introduced in a 2012 speech by chairman of the Council of Economic Advisers Alan Krueger,[1][2][3] and the President’s Economic Report to Congress,[4] using data from labor economist Miles Corak. The name was coined by former Council of Economic Advisers (CEA) staff economist Judd Cramer,[5] for which he was given a bottle of wine as a reward.[6] The curve plots "intergenerational income elasticity"—i.e. the likelihood that someone will inherit their parents' relative position of income level—and inequality in the United States and twelve other developed countries,[7] though some versions of the curve include developing countries.[8] Countries with low levels of inequality such as Denmark, Norway and Finland (all located in European Scandinavia) had some of the greatest mobility, while the two countries with the high level of inequality—Chile and Brazil—had some of the lowest mobility.

The name of the curve refers, somewhat ironically, to Jay Gatsby (born Gatz), the character in F. Scott Fitzgerald's novel The Great Gatsby. Jay shows a high degree of mobility, rising from being a bootlegger, to leading the Long Island north shore social set .[9]

Cover of the first edition of "The Great Gatsby" by F. Scott Fitzgerald (1925)
Cover of the first edition of "The Great Gatsby" by F. Scott Fitzgerald (1925)

Journalist Robert Lenzner and lawyer Nripendra Chakravarthy call it "a very frightening curve that requires policy attention."[9] Krueger predicted that "the persistence in the advantages and disadvantages of income passed from parents to the children" will "rise by about a quarter for the next generation as a result of the rise in inequality that the U.S. has seen in the last 25 years."[7]

Journalist Timothy Noah argued the effect results from growing inequality:

you can't really experience ever-growing income inequality without experiencing a decline in Horatio Alger-style upward mobility because (to use a frequently-employed metaphor) it's harder to climb a ladder when the rungs are farther apart.[7]

Another journalist argued that a connection between income inequality and low mobility could be explained by the lack of access for un-affluent children to better (more expensive) schools and if this enabled access to high-paying jobs; or to differences in health care that may limit education and employment.[10]

However, some argue that the apparent connection may arise as an artifact of heterogeneous variance in ability across nations, questioning the need for intervention. It was shown that the manner in which the intergenerational income elasticity is defined, is by design associated with inequality.[11] Harvard economist Greg Mankiw noted that "this correlation is not particularly surprising", showing that comparisons of more diverse groups (like the USA) with less diverse groups (like the population of Denmark) will automatically exhibit this phenomenon even when there are in fact no differences in the processes of mobility between these groups, i.e., the curve is an artifact of diversity.[12] His quote:

Germans are richer on average than Greeks, and that difference in income tends to persist from generation to generation. When people look at the Great Gatsby curve, they omit this fact, because the nation is the unit of analysis. But it is not obvious that the political divisions that divide people are the right ones for economic analysis. We combine the persistently rich Connecticut with the persistently poor Mississippi, so why not combine Germany with Greece?[12]

A blog[13] by M.S. at The Economist replied to Mankiw's counter-argument as follows:

The argument over the Great Gatsby curve is an argument about whether America's economy is fair. With his Germany/Greece and Mississippi/Connecticut analogy, Mr Mankiw has stumbled on a very convincing point: whether you are rich or poor in Europe or America depends to a great extent not on your own qualities or efforts, but on where you happen to be born. America is not a meritocracy, Mr Mankiw is saying; not only do those born rich tend to stay rich and vice versa, just being born in one state or another makes a huge difference to your lifelong earnings. Amazingly, he seems completely unaware that this is the case he's just made.

Economist Paul Krugman has also countered Mankiw's arguments in his column.[14]

Carter Price of the WCEG suggests "the line to serfdom" as an alternative name on the grounds that it may better convey the meaning of the correlation.[15]

See also

Notes

  1. ↑ The Rise and Consequences of Inequality in the United States Alan Krueger, 12 January 2012
  2. ↑ The Great Gatsby Curve Paul Krugman, 15 January 2012
  3. ↑ The Great Gatsby Curve - Explained Bloomberg visualization of Gatsby curve | 6 October 2013
  4. ↑ Economic Report of The President. Transmitted to Congress
  5. ↑ The 1 Percent Plays us for Suckers: There is no Meritocracy and They've Strangled the American Dream Jay Baron Nicorvo, 19 April 2015
  6. ↑ The Gatsby Curve: How Inequality Became a Household Word | 12 December 2013
  7. 1 2 3 White House: Here's Why You Have To Care About Inequality Timothy Noah | tnr.com| January 13, 2012
  8. ↑ Corak graphs 25 countries, Krueger limits his to developed countries and lists 10
  9. 1 2 </ref name=chakravarthy> Income Inequality From Generation To Generation|Robert Lenzner| forbes.com| 26 March 2012
  10. ↑ Harder for Americans to Rise From Lower Rungs | By JASON DePARLE | January 4, 2012
  11. ↑ Berman Y, The Great Gatsby Curve Revisited - Understanding the Relationship Between Inequality and Intergenerational Mobility, August 11, 2016. http://ssrn.com/abstract=2796563
  12. 1 2 Mankiw, G. (2013). Observations on the Great Gatsby Curve July 18, 2013.
  13. ↑ The Great Gatsby curve - Don't worry, old sport| M.S | The Economist blog - Democracy in America | July 22nd, 2013
  14. ↑ Greg Mankiw and the Gatsby Curve| Paul Krugman June 22nd, 2013
  15. ↑ A response to another attack on the Great Gatsby curve—and can we call it the “line to serfdom” instead? | Carter Price | equitablegrowth.org | 11 March 2014
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