Gatsby on the Farm: Social Immobility Threatens Economy

Tuesday, 08 Oct 2013 06:49 PM

 

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The ascent to dazzling affluence achieved by fictional farm boy Jay Gatsby is becoming increasingly less plausible, posing risks for U.S. economic prospects, studies show.

The widening gap between rich and poor — exacerbated by wage stagnation, rising tuition costs and $6 trillion in wealth wiped out by the housing collapse — is making it more difficult for today’s young people to have success climbing the income ladder than previous generations. Former White House economist Alan Krueger dubbed the income inequality-immobility link “The Great Gatsby Curve,” named after novelist F. Scott Fitzgerald’s protagonist.

The mobility of workers versus their peers has also declined, threatening productivity, business profitability and economic growth, according to Wells Fargo Securities LLC’s chief economist John Silvia. While the ability to ascend income brackets still exists, the likelihood of a household jumping from poverty into wealth declined in the decade ended 2009.

“It really flies in the face of what we believe to be true as a nation, that we have equality of opportunity,” said Diana Elliott, research officer for economic mobility at non-profit Pew Charitable Trusts in Washington. “For this current generation of adults, if you’re raised in the bottom it’s much harder to climb up the economic ladder.”

Stocks declined, giving the Standard & Poor’s 500 Index its biggest two-day loss since June, as concern grew that a deadlock among lawmakers over the debt limit could lead to a government default. The S&P 500 fell 1.2 percent to 1,655.45 at the close in New York.

Humble Beginnings

Children from humble beginnings are less likely to make great gains in wealth and social status and 70 percent won’t ever reach the middle class, according to a Pew study.

The reverse also is true. Those at the top of the income scale are less likely to slip down, a phenomenon economists call “stickiness at the ends.”

The highest earnings have gone to the same households every year for the past decade, while globalization has made it harder for Americans to compete with laborers abroad, according the study co-authored by Silvia and economists Tim Quinlan and Joseph Seydl.

The ensuing wealth gap makes workers less optimistic about their prospects, fueling declines in labor force participation, productivity and the pace of economic recovery, said Silvia, a former chief economist for the Senate Banking Committee. Labor participation fell to a 35-year low of 63.2 percent in August.

Little Opportunity

“It’s very discouraging if people perceive that there isn’t a lot of opportunity to move forward,” Silvia said. He prescribes improved access to education, better childhood nutrition and financial literacy, as well as “individual initiative.”

“You have to get yourself ready for a new career, new opportunities, which means you either move or you get some education or some training,” Silvia said. “It’s not easy, but if you really want to succeed and participate in the economic recovery, that’s what you need to do.”

Krueger, former chairman of the White House Council of Economic Advisors, plotted economic inequality in 10 developed nations against the ability of the children in each country to climb the income ladder. Where wealth was concentrated in the hands of a few, daughters and sons of the less fortunate were less likely to advance, the Gatsby Curve showed.

In a June speech, Krueger projected the U.S. will have the highest levels of inequality and immobility of those developed nations.

Income Inequality

Income inequality in the U.S. has been rising since the 1980s, suggesting that the fortunes of today’s youth may be more heavily dependent on their parents. Between 1979 and 2007, $1.1 trillion in annual income shifted to the top 1 percent of households, said Krueger. Not since Gatsby’s Roaring Twenties has so much income been collected by so few, the Princeton University economics professor said.

“The rise in inequality has gotten to the point where we have to worry about it being unhealthy,” Krueger said in an interview. “It’s bad for growth.”

Some say the portrayals of inequality and mobility aren’t so clear cut. Heritage Foundation’s Donald Schneider notes that the size and homogeneity of countries skews the results.

Comparing the U.S., the third-most populous country in the world at about 317 million, with Denmark and its population of 5.6 million as Krueger does with his Gatsby Curve “may generate results that are not as useful in drawing conclusions about the mobility conditions in each country,” Schneider wrote in a July paper.

International Comparisons

“Dealing with the data itself is difficult, but there’s entirely different reasons across countries that make it hard to give you an apples-to-apples comparison,” Schneider said in an interview. “When you get into international comparisons, not only do you have those local economic factors but also things you wouldn’t really consider, like demographic heterogeneity.”

Within the U.S., elements of economic mobility are more obvious to some. In its attempt to rescue the economy from the worst recession since World War II, the Federal Reserve may have exacerbated income disparity, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Unprecedented monetary stimulus has led to rising home and stock prices, sources of wealth that are out of reach for some Americans, he said.

The record bond buying, known as quantitative easing, has caused the Fed balance sheet to balloon to $3.75 trillion in total assets from $877 billion in August 2007.

Stocks, Homes

Higher home values and investment portfolios helped boost household net worth by $1.3 trillion to $74.8 trillion in the second quarter, the Fed reported Sept. 25. Net worth is $6.7 trillion above its pre-recession peak reached in the third quarter of 2007.

“The rise in wealth masks a lot of disparity,” LaVorgna said. “Not everybody has partaken in this recovery. That’s one of the reasons the economy has not performed as well as everyone would have liked.”

Median household income has fallen every year for the past five after adjusting for inflation, according to data from the Census Bureau, with Americans earning no more than they did in 1996. The share of people making between $35,000 and $100,000 a year has declined over the same period, while those earning more than $200,000 has grown to 4.5 percent from 3.3 percent.

Economists say one great aid to mobility -- college and jobs training -- is becoming out of reach for more Americans as costs skyrocket. Seventy-four percent of students at the most selective U.S. institutions were from high-status families as measured by income and education, according to a 2004 report from Anthony Carnevale and Stephen Rose of the Georgetown University Center on Education and the Workforce.

Socioeconomic Diversity

About 10 percent came from the bottom half of the status scale. The lack of socioeconomic diversity trumped even the lack of racial and ethnic diversity, the study found.

Making education more accessible is one rare point of agreement for policy makers. Last year, Senators Ron Wyden, a Democrat from Oregon, and Jerry Moran, a Kansas Republican, formed the Economic Mobility Caucus to explore bipartisan policies to promote opportunity and, as Moran put it, the American Dream. The caucus has only three members.

Lawmakers can’t agree on basic safety-net programs such as funding for food stamps let alone bridge ideological divisions to promote mobility, said Elisabeth Jacobs, a fellow at the Brookings Institution and a former policy advisor to the Joint Economic Committee in Congress.

Health Care

The 2010 Affordable Care Act is the latest example of that fundamental divide. During a 21-hour Senate filibuster last month, Texas Republican Ted Cruz blamed President Barack Obama’s signature health-care law for killing jobs and hurting workers’ chances to get ahead.

“Anyone in this country can achieve anything based on hard work, perseverance, and based on the content of your character,” Cruz said on the Senate floor. “The reason this Obamacare fight matters so much is that is imperiled right now.”

Others, including Krueger and Jacobs, say making health care more affordable will improve living standards for many people, boosting mobility.

“The story of American opportunity and the triumph of the American dream is part of what almost every politician uses when they’re running” for public office, Jacobs said. “Whether that framework has been applied and how people think of the day-to- day legislative decisions that are being made -- there’s still a gap there.”

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