Alan Krueger, Chairman of Obama’s Council of Economic Advisors, gave a major policy speech two years ago in which he claimed rising income inequality is reducing economic mobility, i.e. reducing the likelihood of climbing the economic ladder. He called this the Great Gatsby Curve, and it became a major justification for the administration’s efforts to raise taxes on high-income earners, which came to fruition in last year’s fiscal cliff deal. Top taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates on ordinary income were raised to Clinton-era levels, while top tax rates on investment income were raised higher than Clinton-era levels, to rates not seen since the early 1980s.
But new research indicates there is no Great Gatsby Curve, at least not in the U.S. over the last several decades (see coverage by WSJ and Washington Post). Raj Chetty of Harvard and other economists associated with the NBER use previously unavailable data from tax returns and elsewhere to show that economic mobility has remained remarkably constant since 1971, while income inequality appears to have increased during the 1980s. For example, they find children born to parents in the lowest quintile of income earners (the bottom 20 percent) have about a 9 percent chance of eventually making it into the top quintile of income earners (the top 20 percent), and that has essentially not changed since 1971.
Does that mean we can roll back the tax increases? Doubtful President Obama will come to that conclusion in next week’s State of the Union address, but instead he may zero in on the other results of these studies. Namely, that economic mobility varies across the U.S.: the West is more economically mobile than the Southeast. As the researchers state, “high mobility areas have (1) less residential segregation, (2) less income inequality, (3) better primary schools, (4) greater social capital, and (5) greater family stability.” All of this makes sense, except income inequality stands out as a function of the other factors, indicating the way to address economic mobility at its core is to fix the underlying problems, i.e. the failures of primary schooling, the breakdown of family structures, and prejudice.
This is not complicated stuff, it has been well known for decades by experts and non-experts alike. We appear to have simply gone off the rails of late in attributing all sorts of ills to tax policy. Now we have solid research that points us back to sensible policy solutions. Let’s hope the President is listening.
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