Under Reagan, Income Mobility Trumped Income Inequality

(Ron Knecht & Geoffrey Lawrence) – Recently, we analyzed the records of the last seven presidential administrations on economic growth and income inequality.  The Reagan, Clinton and Nixon/Ford administrations did best, with Bush43, Bush41, and especially Obama the worst.

But income inequality is trumped by income mobility – the ability of people to improve their lot and of one generation to do better than its parents’ generation.

Income inequality has increased in the U.S. for decades, and it accelerated most during the Obama years.  Worse, the Obama economic period has seen slow growth even though it should have exhibited fast growth because it began at the end of the Great Recession.

As sons of working-class families with children of our own, we know firsthand the value of every child sharing the hope that comes from growth and opportunity.  The Obama combination of slow growth and galloping inequality has destroyed hope, growth and opportunity.

Several years ago, before the dreadful Obama inequality record became apparent, Princeton economist Alan Krueger, then chairman of Obama’s Council of Economic Advisors, sought to demonstrate that rising inequality was correlated with declining income mobility.  He cited the work of Canadian economist Miles Corak, who purported to show that countries with more income inequality also had lower rates of people moving up and down the income spectrum.

Krueger coined the relationship the “Great Gatsby Curve” and it has provided the intellectual foundation for much of the Left’s agenda in recent years.

In real human terms, the living standards of all income classes have risen over time – a good thing for all.  But we believe it’s also both morally and economically beneficial that people’s incomes greatly depend on the value they deliver to others and not on the social station to which they were born.  And the American Dream is that folks born into even the lowest income class can rise to the top.

Fortunately, the Great Gatsby Curve is an erroneous factoid.  Almost every author who has cited it references the singular work of Corak.  But his work confuses the widening of the income spectrum due to economic growth with income mobility, which entirely explains the supposed direct correlation between them.

That is, Corak compared earnings of parents decades ago to those of their children.  He calculated childrens’ earnings as a percentage of their parents’ earnings and found that, in absolute dollar (not percentage) terms, the income of children from high-earning parents rose faster than the income of children from low-earning parents.  He interpreted this to mean that income mobility was declining when, in fact, it simply indicated a widening of the income spectrum.

Our experience illustrates the point.  When Ron worked in food service as a college student in the 1960s, he made very little.  When Geoff did comparable work running the drive-through window at a fast-food restaurant a generation later, he made more than Ron had, even allowing for inflation.  Eventually, though, both of us moved past those entry-level jobs into middle-class professional jobs – the important point.

Some good Harvard and Berkeley economists have corrected Corak’s approach and straightened the record.  Led by Raj Chetty, they calculated the percentile rank of parents along the income spectrum and compared that to the percentile rank of their children.  Thereby, they determined that income mobility has actually increased slightly over time.

As they note: “A useful visual analogy is to envision the income distribution as a ladder, with each percentile representing a different rung.  The rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed.”

In fact, they determined that 9.0 percent of children born in the bottom income quintile in the 1980s eventually made it to the top income quintile, while only 8.4 percent of children born in the 1970s did so.  Both probabilities would have been unimaginable under the legacies during most of human history.  Throughout most history, your lot in life was your parents’ lot.

During the Reagan years, the U.S. experienced rising income inequality with growing social mobility while living standards rose rapidly for all income classes.  As a song says, two out of three ain’t bad.  In fact, it’s better than the others did.

Ron Knecht is Nevada State Controller.  Geoffrey Lawrence is Assistant Controller.