The Gatsby Curve: How Inequality Became a Household Word

For a couple of decades now it's been kind of impolite to talk about economic inequality in the western democracies. 'Class Warfare!' shout those who are doing well in finance, energy and tech. While everyone else understands it's best to keep their mouths shut as the few full-time jobs available and various temp gigs on offer tend not to go to boat-rockers or malcontents.

Even governments have adopted the austerity meme as a sign of their 'seriousness' when it comes to matters economic. Social stimulus has been considered anti-competitive and even morally suspect.

But the sharpened tip of the tipping point has swung of late, driven by both the enduring length of experience and the vast numbers affected by it. Talk has shifted from cycle to secular, from recovery to the new normal.

And, as the following article explains, some of that change in conversational tone is due to the power of data and design. What that has done, more powerfully, perhaps than all of the competing white papers, monographs and essays - though not of the raw experience felt by so many - is to show that increasing inequality leads to a decline in social mobility. Or to put it more bluntly, the concentration of wealth in the hands of a very few undermines the great democratic myth that anyone can accomplish what they wish if they just try hard enough.

The reality appears to be that when economic opportunity is denied to most, the result may be castes as rigid as any in history. The question is whether the citizens of those democracies will stand for that, or not. It will be interesting to track public rhetoric and election results over the next year. Populist pressure, from right and left, is already acute and suggests a profound frustration with the status quo. JL

Brendan Greeley reports in Business Week:

Countries with the highest income inequality, such as the U.K. and the U.S., are also the most likely to pass economic status from one generation to another.
Alan Krueger stuck his head into the office in Washington, D.C., where the Council of Economic Advisers keeps its pool of research assistants and offered a deal. Krueger, then the council’s chairman, needed a name for a graph. He offered a bottle of wine to the researcher who could come up with the best one. The winner: “The Great Gatsby Curve.” That was in 2011. Krueger admits now that he’s not sure he ever delivered the wine.
On Dec. 4, President Obama gave a speech about income inequality in Washington. A family in the richest 1 percent, he said, has more than 288 times the wealth of the median family. The likelihood that a child can escape her parents’ circumstances is lower in America than in “most of our wealthy allies—countries like Canada or Germany or France.” Although the president didn’t pull out any graphs, Obama borrowed two ideas for his speech that make inequality easier to understand: the 1 percent and the Gatsby Curve. In part, the president—and the pope in Evangelii Gaudium, an Apostolic Exhortation released on Nov. 24—are able to talk about income inequality because two groups of economists spent the better part of a decade coming up with easily digestible ways to describe it.
For much of the 20th century, academic economists accepted the ideas of Simon Kuznets, who in 1971 won a Nobel prize for his work on inequality. In the 1950s, Kuznets looked at IRS returns going back to the introduction of the personal income tax in 1913 and discovered that income inequality had been dropping in the U.S. He suggested that for developed economies, economic growth lowered inequality. “It was a nice theory for the golden age of growth,” says Thomas Piketty, a professor at the Paris School of Economics. Out of curiosity in the 1990s, Piketty, then a young Ph.D. at the Massachusetts Institute of Technology, applied Kuznets’s approach to tax data for his native France, eventually running it all the way forward to 1998. Then, with Emmanuel Saez, another French economist, he did the same for the U.S. In 2003 they published their finding that income inequality had started to rise in America in the early 1980s, about a decade after Kuznets accepted his Nobel.

Other economists, relying on household surveys taken by the U.S. Department of Labor, also found growing inequality. But the Frenchmen used IRS data that goes back much further than Labor’s numbers. By 2007, the two were able to show that the income share of the top 1 percent had reached a level not seen since 1928, the Jazz Age of F. Scott Fitzgerald’s Jay Gatsby.
Around the time Piketty began his work on income inequality, economists Gary Solon and David Zimmerman took a new approach to studying a related topic, social mobility. Solon and Zimmerman used data from a University of Michigan study of 5,000 families that started in 1968 and continues today. By the late 1980s, the Michigan study had detailed information on two generations of Americans showing that social mobility was much less prevalent than previously estimated. The poor were staying poor, and the rich were staying rich.
In the late 1990s, Miles Corak at the University of Ottawa applied that approach to Canada. He also began the complicated econometric work necessary to compare social mobility among countries. Corak made it possible to see whether the American Dream measured up to the Danish Dream. (It doesn’t.) In 2004, again inspired by a theoretical paper by Solon, Corak produced the first version of a graph that compared developed economies according to income inequality and social mobility. The graph shows that countries with the highest income inequality, such as the U.K. and the U.S., are also the most likely to pass economic status from one generation to another. “I gave it some technical title,” says Corak, “nothing that sparks the imagination.”

That had to wait for Krueger. For a speech late in 2011 at the Center for American Progress, a Washington think tank, Krueger publicly gave Corak’s graph the name that has stuck. “The Gatsby Curve has been around for a decade,” Corak says. “Only when it got that label did it become something that people could hook on to.” Krueger owes someone a bottle of wine. Perhaps Obama does, too.