It wasn’t until coming across the term “Great Gatsby Curve” in a news article that I remembered why I knew of the economist Alan Krueger, who died last weekend.
Krueger had landed on the term Great Gatsby Curve preparing for a high-profile speech when he was part of the Obama administration. He wanted people to see how greater income inequality really increases the odds that kids from low-income families won’t do any better than their parents did.
That it’s nothing but a long shot to make it into the upper class is something young Jay Gatsby from the F. Scott Fitzgerald novel “The Great Gatsby” would have known all about. Of course, it didn’t stop him from trying.
It does not seem fair to associate Krueger just with this Gatsby reference, by the way. He was clearly an all-star known for lots of work in economics, including helping to show, from on-the-ground research, that an increase in the minimum wage didn’t necessarily mean jobs would be lost.
Giving talks was part of the job chairing the White House’s Council of Economic Advisers, and in his 2012 speech that introduced the Great Gatsby Curve, he described just how much income inequality had grown.
From World War II through the end of the 1970s, on average, the incomes of American families up and down the income ladder grew at roughly the same rate. Then growth rates sharply diverged.
From 1979 through the eve of the Great Recession, the after-tax, inflation-adjusted incomes of families in the top 1 percent grew nearly 280 percent, while the middle 60 percent of American families saw income gains of less than 40 percent and the segment at the bottom didn’t even do that well. The share of income going to the very top hadn’t been that high since the 1920s.
In his talk, Krueger highlighted some work by labor economist Miles Corak, who had created a scatter diagram of dots representing different developed countries. Corak later gave credit to others, too, and in this version, the likelihood of inheriting the same income level as parents was put on the vertical line of the chart, while along the bottom there was a measure of income inequality for a country roughly when the people had been kids growing up.
It turned out to be a good way to show how the two seemed so closely correlated, as the result was a bunch of dots roughly lying along a line that sloped up and to the right. Countries like Denmark and Finland fell at the lower left end of the curve, with relatively little income inequality and where kids born into a low-income family had a good chance to move up.
The United States lay on the other end of the curve, with the worst level of income inequality among countries in this analysis and about the longest odds that any kids would have a different economic life than their parents.
That’s an important thing to understand. Not only are kids born into low-income families unlikely to do better, but children who grew up in a household at the top of the income ladder will almost certainly do just as well as their parents.
As Krueger explained, he couldn’t yet say how the lives of today’s kids would turn out, yet he knew enough to predict kids from low-income American families would be unlikely to do any better than their parents. Corak, in later describing his role in the origins of the Great Gatsby Curve, pointed out that income inequality really becomes a problem when it starts to limit the opportunity of kids.
Krueger apparently wanted to tag the curve with a memorable name, hoping more of the public would hear about how income inequality really can limit the opportunity for many American kids. And he chose well.
Jay Gatsby is one of those characters people have heard of even if they have never read Fitzgerald’s literary classic. Here in the Upper Midwest we should all know something about Gatsby. He was one of us.
Readers don’t get into the back story right away, but it turns out he was James Gatz from an unsuccessful farming family in North Dakota.
The fictional character lasted just two weeks at St. Olaf College before quitting, and a later chance encounter with a yachtsman along Lake Superior first brought Gatsby into the world of well-off people. He never had much money of his own until he began bootlegging after World War I.
It’s not clear if Gatsby wanted to be rich as much as he wanted to win back Daisy Buchanan, a wealthy heiress he had courted while in the Army. She had instead married Tom Buchanan, a fabulously rich and unlikable man from Chicago. They now lived in an enclave on Long Island.
Gatsby’s plan wasn’t very practical, but the most fundamental thing Gatsby didn’t quite get was how he could never hope to really belong among the Buchanans of the world.
If Fitzgerald ever explained how the Buchanan family acquired its wealth I missed it, but Tom Buchanan didn’t seem to do much besides play polo and carry on with girlfriends. Fitzgerald’s point is that the Buchanan wealth was dynastic wealth. Tom and Daisy’s children were going to be wealthy adults if they never passed a single class in school.
Fitzgerald’s narrator had enough of people like that by the end of the book and came home to Minnesota. The only person who seemed to have earned his respect was Gatsby, the bootlegger. Gatsby may have been naive in 1922 to think his hard work and practiced charm gave him much of a shot at lifting himself into the class of the Buchanans, but he didn’t quit hoping.
One thing that seems different now from Gatsby’s era is how it’s possible to amass a fortune just by doing a job. Median big company CEO compensation last year increased again, to $12.4 million, the Wall Street Journal just reported. On average, S&P 500 company CEOs do the job for five years, so that’s $60 million before taxes as an employee.
It’s hard to imagine the kids and grandkids of the CEOs ever being anything other than well off.
Thanks to Alan Krueger we have a better understanding of what that means, and the kind of long odds kids might face of lifting themselves into the upper classes.