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Inequality, Immobility and Living Standards Are Not the Same Things

Pedestrians walk past Occupy Wall Street protesters sleeping at the Trinity church in New York, September 16, 2012 (REUTERS/Eduardo Munoz).

The debate about inequality kickstarted by the president has become messy, because as I argued yesterday, his "defining challenge" turns out to be three challenges: inequality, immobility and living standards.

Causality Proves Fiendishly Elusive

The problem is that, often for political reasons, people strive to show how these three challenges are really just one challenge, by making causal connections. If we reduce the gap between rich and poor, social mobility will improve; if we raise the minimum wage, the income gap will narrow; and so on. The trouble is, the causal links are weak, which leads to weak arguments.

  1. As Jared Bernstein finds, there is no evidence that income inequality and growth are related, in either direction. The left-wing search for evidence that a big rich-poor gap impacts GDP in a negative direction has proved as elusive as the right-wing search for a positive connection. It is striking that Krugman does not, in the end rest his argument on these direct casual grounds. He makes the more interesting argument that inequality has made for bad macroeconomic policy, since the rich elite have pushed the political classes towards austerity-oriented policies that have killed job growth.
  2. The jury is still out on whether income inequality and rates of intergenerational mobility are related. The "Great Gatsby Curve" shows an association between the two internationally. But no causal connection has been established, and there is enough variation to doubt its existence: as Miles Corak shows, Canada and Australia do pretty well on the mobility stakes, despite high inequality. Another analysis finds that country size has just as big an effect on mobility. And the recent work by Chetty and colleagues at Harvard finds little evidence for an inequality-immobility link in different parts of the US.
  3. Measures required to tackle Challenge 3 – wages, family leave, health care and so on - are squarely aimed at improving the quality of life and economic security of ordinary Americans. But on the face of it, there is no reason to think such measures will seriously impact on upward mobility: they are more about making middle class life better than improving the movement of people into that class. Nor are they likely to influence income inequality, which has been largely driven by the rapid income growth at the very top of the income distribution.

The Real Challenge: Social Mobility

This debate will go better which of the three challenges we are really motivated by: or put differently, if we could make progress on just one, which would we choose? And it will probably help if we are explicit about the moral claims underlying our preference. For me, the "defining challenge" of our times is not income inequality or the squeeze on middle-income Americans (important though both are). It is the shocking, illiberal, immoral transmission of poverty and affluence from one generation to the next.

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