The Great Gatsby Curve Revisited

by Reihan Salam

Last year, Scott Winship engaged in an epic “wonk fight” — I prefer “spirited exchange” – with Miles Corak and Justin Wolfers over the “Great Gatsby curve,” a concept Alan Krueger, who was serving at the time as chair of the president’s Council of Economic Advisors, used to illustrate the relationship between rising inequality and declining mobility:

If the Administration wants to say, “There is a relationship across countries between inequality and mobility, so that would lead us to expect that with rising inequality there will be less mobility,” that’s less objectionable, in a sense, than trying to nail down a point using the Great Gatsby Curve, giving the illusion of precision. However, the claim would still be weak, for a number of the reasons I have laid out. Better yet would be to just say, we have too little mobility and to support it with the comparatively rock-solid evidence on levels of American mobility. That is, one does not have to tie insufficient mobility to inequality, and one does not have to show that mobility is declining to argue that it is insufficiently high.

In a somewhat different vein, Greg Mankiw has offered impressionistic thoughts as to why something like the Great Gatsby curve might obtain:

[I]f we looked at Europe as a whole, rather than each nation separately, we would find that Europe as a whole has more inequality and less mobility than the individual countries. That is, Germans are richer on average than Greeks, and that difference in income tends to persist from generation to generation. When people look at the Great Gatsby curve, they omit this fact, because the nation is the unit of analysis. But it is not obvious that the political divisions that divide people are the right ones for economic analysis. We combine the persistently rich Connecticut with the persistently poor Mississippi, so why not combine Germany with Greece?

The bottom line for me is that the Great Gatsby curve is a bit interesting, but neither particularly surprising nor suggestive of any specific conclusions or policy recommendations.

Though I’m inclined to agree with Mankiw, my takeaway is that the curve is consistent with the view that it is better to be persistently rich than persistently poor, and if the U.S. had the option of annexing Greece or annexing Germany, it would be wiser to annex the latter. (And yes, I have the immigration debate in mind.) 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.