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SCHNEIDER: The not-so-Great Gatsby Curve
Once again, the White House is trotting out the “Great Gatsby Curve.” That’s surprising given the extensive criticism it drew from scholars on both the left and the right when it was unveiled last year by Alan Krueger, the outgoing chairman of the President’s Council of Economic Advisers.
The GG Curve purportedly shows that high income inequality inhibits economic mobility while lower levels of income inequality seemingly spur mobility. Those yearning to “spread the wealth around” immediately embraced the curve. After all, if income inequality is the only obstacle to upward mobility, they can simply redistribute wealth all the way to prosperity.
But there is a big dispute about whether the apparent relationship between income inequality and mobility reflects actual “cause and effect.” In a piercing deconstruction of the curve, the Manhattan Institute’s James Manzi recreated almost all of the relationship simply by substituting population size for income inequality. And no one is jumping to blame population size for deficient economic mobility.
Scott Winship, a scholar at the Brookings Institution, casts further doubt on the curve. He notes that the curve’s data reflect income inequality when the sample population reaches adulthood — not conditions that prevailed as they were growing up. As a result, Mr. Winship notes, “extrapolations using the Great Gatsby Curve” to project future mobility are “uninformative.”
Additionally, much of the explicit motivation for redistribution embodied in the curve is dubious. Mr. Krueger talks about how “the three-decades’ long stagnation in real income for the bottom half of families threatens our long-cherished goal of equality of opportunity.” But meticulous, peer-reviewed research of income measurement refutes that assertion. After accounting for factors such as taxes, welfare and health insurance, it turns out that incomes for the bottom three quintiles grew by at least 25 percent during that period — that’s hardly stagnation.
The notion that a wide dispersion of income makes it harder to move up the ladder is far from definitive. A recent paper by Mr. Winship concludes that the data “reveal little basis for thinking that inequality is at the root of our economic challenges, and therefore for believing that reducing inequality would meaningfully address our lagging growth, enable greater mobility, avert future financial crises, or secure America’s democratic institutions.”
Even if the GG Curve diagnosis of what ails economic mobility is right, are GG enthusiasts prescribing the best medicine? Not at all.
To revive upward mobility for the least fortunate, the White House is peddling the same failed nostrums of the past: universal preschool, universal health care and a $9 minimum wage.
We know these remedies don’t work. Universal preschool? The Department of Health and Human Services’ own evaluation revealed that the $8 billion Head Start program had little to no impact on cognitive attainment or social-emotional development.
Universal health insurance? “Obamacare” is already leading businesses to cut staff or switch full-time workers to part-timers to avoid hitting the mandatory coverage threshold. Indeed, Obamacare even subsidizes layoffs. Eliminating jobs is no way to boost upward mobility.
A higher minimum wage? That means fewer jobs for entry-level employees. It would make it even harder for younger, less-experienced and less-educated “Gatsby’s” to find that first step on the economic ladder.
So what can we do to foster upward mobility? Education is key, but reform should focus on allowing competition to improve all schooling — both in K-12 and in higher education. The best preschool in the world can’t save children trapped in a broken system.
We also need to help young people rediscover a culture of saving. Even small nest eggs can help people weather setbacks as they climb the economic ladder.
Finally, we need to rebuild our social institutions — starting with the family. As Heritage Foundation scholar Stuart Butler observes, government must “remove the obstacles and perverse incentives of its own making — and to foster an environment in which our charitable and social institutions are free to form citizens of the high character a great nation demands.”
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