April 28, 2015
Great Gatsby Economics
Posted on Jun 16, 2013
WASHINGTON—You don’t need me to tell you, but it’s a whole lot tougher leading a garage band than being a superstar. What you might not have known is just how much harder.
If you want an example of growing inequality, try the rock ‘n’ roll industry. Between 1982 and 2003, the share of concert income taken home by the top 1 percent of performers more than doubled, rising from 26 percent to 56 percent. The top 5 percent collected almost 90 percent of all concert revenues.
The rock world is simply a more extreme version of the larger American experience. The top 1 percent of families doubled their share of national income between 1979 and 2011: their take went from 10 percent to 20 percent of the whole. We live in a superstar economy.
That phrase and the examples come from Alan Krueger, the outgoing chairman of the White House Council of Economic Advisers, in a speech last week at Cleveland’s Rock and Roll Hall of Fame that drove home the danger of growing economic inequality. To paraphrase Bruce Springsteen, we are not taking care of our own as we should.
Now you might say that all rockers start in a garage or some other humble venue with the hope of becoming Springsteen, Beyonce or Ke$ha. (I cite the last because of her name’s thematically convenient dollar sign.) The metaphor is that America may be unequal but we still offer exceptional opportunity.
Square, Site wide
Well, yes, but not as exceptionally as we think. Krueger, who has a gift for popularizing economic concepts, has invented “the Great Gatsby Curve,” which measures income mobility across generations. It turns out that the United States has far less “intergenerational earnings elasticity,” to use the technical term, than do many other countries, including Denmark, Norway, Finland, Sweden, Germany, or New Zealand. Economically speaking, “Born in the USA” doesn’t mean what it once did.
Those who defend our economic status quo have other alibis. We don’t need to make any structural changes in our economy, the argument goes. People who want to advance just need to understand that our new economic circumstances place a very high premium on education. Get a good education, and you will do OK.
There’s a lot to this, and broadening access to good schools and higher education is part of Krueger’s program. But we also need to realize that education is not the only factor in getting ahead. He explains this by invoking a study he conducted of identical twins.
On the one hand, he found that “on average, twins with higher education tend to earn more than their other half with less education.” So schooling really matters. But he also found that among identical twins with the same level of education, “earnings differed by 25 percent or more ... in half our sample” and by “more than 50 percent in a quarter of identical twins with identical school levels.”
“These discrepancies for such similar workers,” he concludes, “suggest that luck is an important factor in the labor market, as well as in the music industry.”
I confess: I love any economist willing to say straight out that luck plays a large part in how well we do. The prosperous are especially disinclined to acknowledge that however hard they worked or how ingenious they were, they were also lucky. The role of good fortune in determining success provides a powerful moral underpinning for more egalitarian policies.
As the song goes, it’s a long way to the top if you want to rock ‘n’ roll, and Krueger points out that the three decades or so years after World War II—when the United States firmly established itself as the global economic leader—were a time of greater economic equality than we enjoy today.
He argues that we need to grow again “from the middle out,” not from the top down. This is the theme of a symposium in Democracy, a journal I’m involved with, and the “middle-out” idea needs to be our era’s answer to inequalities rationalized since the 1980s by supply-side economics.
“We have reached the point where inequality is hurting the economy,” Krueger insists. “Today, a reduction in inequality would be good for efficiency, economic growth and stability.”
Those two sentences should affect everything President Obama does in the economic sphere for the rest of his term. He should stand up for the garage bands. The superstars will take care of themselves.
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