The Great Gatsby curve and a glimpse of America’s dystopian future
In recent years, there has been an explosion of novel and sobering research on intergenerational mobility and equality. We have learned that a child born in 1986 to parents whose income was in the bottom fifth of earners had only a 9 percent chance of ending up in the top fifth. We have also learned that these aggregate figures mask troubling differences across race.
For example, a white male born to parents in the bottom fifth had a 10 percent chance to end up in the top fifth, while a Black male had only a 2 percent chance. Black males born to parents in the top fifth are also far less likely to remain in the top fifth (17 percent) than are white males (40 percent).
How should we make sense of these stark facts, which describe the class dynamics of our capitalist society? Karl Marx and Friedrich Engels believed that class dynamics and conflict were the driving force of human history. Modern economics embraces mathematical models rather than the dialectical method, but even a simple model – an economist’s parable – can reveal two truths about the deeper, long-run structure of class society with which Marx and Engels might agree. First, class mobility ultimately determines class structure. That is, class mobility determines the relative fractions of rich and poor in a society. Second, class interests are fundamentally antagonistic.
Suppose that in a country called Amerika, there are only two social classes: those who are rich and those who are poor. Amerika was founded on the idea of economic mobility, but it is a racially divided country. Consistent with the recent mobility data, suppose that in White Amerika, 10 percent of those who are born poor become rich as adults, while 40 percent of those who are born rich remain rich as adults. For Black America, these numbers are 2 percent and 17 percent, respectively.
Assuming that households are segregated by race, what will happen to Amerika over time? That is, what will be the long-run ratio of rich to poor if each generation transitions out of wealth and poverty at these rates?
A little algebra reveals that even if White Amerika starts out as a highly egalitarian country, over time it will end up as a highly unequal country in which 86 percent (=(1-.4)/(1-.4.+.1)) are poor and 14 percent are rich. Meanwhile, Black Amerika will end up even more unequal, with 98 percent (=1-.17)/(1-.17+.02)) poor and 2 percent rich.
These numbers for Black Amerika illustrate an empirical finding that economists call the Great Gatsby curve: Societies with lower mobility tend to exhibit greater inequality.
Therefore, in Amerika class mobility completely determines class structure, and class structure can vary dramatically across races if they are segregated by household. Moreover, because Amerika has no long-run economic growth, class interests are fundamentally antagonistic. For example, in White Amerika, for every 1,000 persons, 86 persons born poor will eventually become rich. But because the long-run fractions of rich and poor are constant, this means 86 persons born rich must also become poor. In other words, upward mobility always equals downward mobility.
What can we conclude from this economic parable of Amerika? Today’s economic mobility numbers give us a glimpse into a possibly dystopian future, one with wide and permanent economic inequality, organized by class and race, in which a minority controls the resources of society to its benefit. In this future, the rich understand that maintaining their absolute and relative position as a minority elite requires a low rate of upward mobility. Indeed, this future may already have arrived.
How can this future be avoided? First, institutions that enhance upward mobility, such as early childhood education and quality, mid-tier public colleges, should be expanded. What is just as important, institutions that entrench inequality, such as many private schools and universities, should be circumscribed by taxation and regulation. In general, per capita expenditures on young people should not vary so much by zip code and race that they create an uneven playing field from the start.
Second, to avoid the zero-sum logic of class conflict, the distribution of the gains from economic growth must change fundamentally, through tax policy but also through policies at the firm and sector level that create greater equality in pre-tax earnings.
Thankfully, America’s future lies neither in the stars nor in its recent mobility statistics. We can choose a different path.
Prasad Krishnamurthy is a professor of law at U.C. Berkeley school of law.
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