Because most philosophies that frown on reproduction don't survive.

Tuesday, March 08, 2011

Inequality, Heritability and the American Dream

Ever since people finished identifying "the American Dream" -- the idea that in the US in particular and the New World in general somehow allowed people to escape the hidebound social structures of the Old World and better themselves via their own efforts -- people have been worried that it is on the point of dying. Americans continue to show an an unusual degree of belief in the ability those who work hard to better themselves by their own efforts. For instance, in the 1999 International Social Survey, 61% of Americans agreed that "people get rewarded for their effort", whereas only 41% of Japanese agreed, 33% of British and 23% of French. This belief has actually increased in recent decades. In 2005 the New York Times reported that while in 1983 only about 60% Americans agreed that "It is possible to start out poor, work hard and become rich" by 2005 nearly 80% of Americans agreed with that statement.

And yet, those who study inter-generational income mobility have been increasingly worried in recent decades that despite American's belief that people can work hard and get ahead, that it is becoming increasingly difficult for people to actually achieve this in the US. In a lengthy report by the liberal think thank Center for American Progress, Tom Hertz of American university brings together a number of the recent studies on intergenerational income mobility in the US as compared to other countries, showing how people who are born into the lower income quartiles in the United States are less likely to reach the top levels of income than in other countries such as Germany, Sweden or Denmark.

To give an idea of what is meant by this intergenerational mobility, it helps to look at a particular study which Hertz quotes in detail. In this study, researches tracked 4000 children originally surveyed in 1968 and compared what the household incomes of their parents were in the 1967 to 1971 period to what those children's incomes were in 1994 to 2000. The intergenerational correlation in family income between parents and children was .42, and the implications of that for the children themselves are shown in the this chart:
Family incomes are inflation adjusted.  On the left column you see quintiles of parental household income in the original 1967 to 1971 window.  In the column headers you see the quintiles of household income for the children.  (The numbers are higher despite inflation adjustment because the group as a whole was better off in the late 90s than in the late 60s.  On average, people within the bottom 20% had higher incomes in the 90s than people in the bottom 20% in the 60s.)

In regards to intergenerational mobility, you can see that of the children of parents in the bottom income quintile in the late 60s, 41% of those children wound up in the bottom income quintile themselves in the late 90s.  24% made it into the second quintile, 15.5% into the third, etc.  Only 6% made it into the top quintile.  Of those born to parents in the top income quintile in the late 60s, 42% were themselves in the top income quintile in the 90s, while only 6% were in the very bottom quintile.

Now, it seems to me that a lot of the question as to whether the American Dream still holds true relies on to what extent we can assume that there is an equal distribution of ability and effort among all children across all income ranges in a study such as this. Yet, when we start to look at this, we (particularly because as Americans we have a great attachment to a variety of ideas relation to the American Dream) run into all sorts of contradictory emotions.

For example, let's take two typically American Dream statements:
1) If you work hard and save, you can work your way up and become rich.
2) If you get your kids a good education and teach them how to work hard, they will do as well as or better than you.

Let's assume for the sake of argument that both of these are true, and look at what happens over two generations. In generation A, people work their way up and become rich to the extent that they work hard and save. They have children: generation B. Now, generation A does a great jobs of getting generation B a quality education and teaching them to work hard, with the result that the children of B who work hard and save all do as well as or better than their parents. A few children of people in A whose parents did not work hard or save also work hard and save, and they become rich too, so we see some movement upwards movement from the lower earning families in generation A -- but given that the middle and upper earning families of A did such a great job of teaching their kids and giving them a solid work ethic, we have the appearance of very little social mobility -- because people are doing a very good job of teaching their children the skills that allowed them to achieve their current space on the income ladder, and so the only room for movement is if some people who themselves did not work hard or save manage to teach their children to do differently.

So, if the kind of abilities and behaviors that result in doing well economically are heritable or teachable, then after the first generation we would probably expect to see less intergenerational income mobility. If your abilities and work ethic are fairly similar to your parents, and if your parents economic success was determined by the extent to which they worked hard and saved, then in all probability your success will be a lot like your parents'.

On the other hand, if there is a great deal of chance involved in how one's ability to work hard and save translates into household income, then one would actually expect more intergenerational variability in income. If your parents worked very hard, saved, etc. but through bad luck or lack of opportunity made very little, and yet they taught you to also work hard and save, then if you experienced better luck in translating your hard work and saving into higher income, you would do significantly better than your parents.

Similarly, if until recently people's economic success in a given country did not reflect their efforts, but then something changed so that in future greater effort resulted in greater success, one would expect to see a period with a lot of intergenerational income mobility, and then a settling out.

Of course, all this is working off the assumption that the traits which might result in higher earnings are heritable. Some characteristics such as measured IQ appear to be quite heritable. One's adult IQ has a .75 correlation to the average of one's mother's and father's IQs -- a significantly stronger correlation than the one between one's income and one's parents' in the US. But other determining factors in how much one makes (willingness to work hard, the amount one is interested in making more, the type of career one is interested in, etc.) are much harder to quantify and may quite possibly be less heritable.

All of which is to say: It seems to me that discussing whether or not Americans are right in believing that "anyone can succeed in America" with hard work and ability is much more difficult than simply looking to see how often people whose parents were in the bottom income quintile end up in the top income quintile. Moreover, the fact that one country has higher intergenerational income mobility in recent years does not necessarily mean that it is more of an opportunity society than the United States (though that's one of the possible meanings of that statistic), especially if the two countries have significantly different histories in recent decades.


Andy said...

Interesting commentary.

One point jumped out of its parentheses at me: "The numbers are higher despite inflation adjustment because the group as a whole was better off in the late 90s than in the late 60s."

If most people at most economic levels achieved absolute gains in wealth compared to previous generations, we would see this kind of chart.

This doesn't disprove that by working hard you can get ahead in America; "getting ahead" doesn't mean "ahead of other people" (i.e. a shift from one quartile to another) but "ahead of where I was." One's success doesn't require another's failure.

Anonymous said...

If one begins with the assumption that the poor are poor because they deserve it, and that the rich are rich because they deserve it, then social mobility is an obvious detriment.


Darwin said...


While pithy, I'm not sure what you're getting at with that.

"the poor are poor because they deserve it, and that the rich are rich because they deserve it" seems like it's a highly judgmental version of saying "one's income is to a great extent determined by one's efforts and abilities". The key word would seem to be "deserve". The word "deserve" suggests that one it talking about some sort of judgment which ought to be the case, rather than something which is simply a result of a given condition.

To be concrete -- I have a brother who is, I am quite sure, by any straight up measure of intelligence at least as smart as I am if not significantly smarter. He is also, due to various personality and mental issues, unable to function well in a job environment. (His problems don't relate to intelligence -- rather, he has some psychiatric issues which make him very, very bad at following deadlines and instructions, working with others, dealing with the unexpected, etc.) As a result, he's never had a full time job and relies heavily on family for support.

Now, I certainly wouldn't say that he "deserves" to not make much money -- but it's pretty clearly a result of characteristics that he has. There's no big conspiracy out there to deny him a high income.

On a side note, maybe this is part of why I find the claim that we have a pretty fluid and effort/ability-based economy pretty persuasive: In my direct and extended family there's a fairly wide range of incomes, all the way from bottom quartile to top quartile, and generally speaking those outcomes seem to line up pretty well with abilities (typically something one has no choice in) and effort/personal choices. It doesn't look to me like this is all the result of impersonal societal forces that allow some people or classes to succeed while excluding others.

That doesn't mean people "deserve" to be low income in the sense of "oh well, it's his fault, he could do differently if he wanted to, so we might as well leave him to it and not worry about it" but it does seem to me that there do tend to be reasons for where a lot of people end up on the income ladder other than "it was random chance" or "society did it to him".

Anonymous said...

Warren Buffet believes that it would be detrimental to his children if he left them a huge amount of money. This is his primary motivation for giving 99% of his wealth* to charity. The fact that this charity will do socially beneficial work is good but is only secondarily important to him. He mainly just doesn't want to ruin his kids. Bill Gates has said similar things. And of course Andrew Carnegie was the one who said "the man who dies rich is a disgrace."

I would like to see a society in which people are encouraged to make money and live well - indeed, to live irresponsibly and hedonistically if they so choose - but in which it is impossible to leave much wealth to one's own kids. Dynasties are bad for society, in every conceivable way. They are bad for the people in the dynasty (see ref: Hilton, Paris); they are bad for people outside the dynasty, who see useless twits enjoying wealth and luxury that they didn't earn while the rest of us work hard for the basics; and they are bad for social stability, since persistent inequality, if it becomes stark enough, leads to social upheaval.

The children of the rich don't need to start out in life with trust funds. They already have enough advantages over the rest of us: elite education, and a rolodex full of names of people in high places. If that kind of head start is not enough for them to make it to the top then they don't belong there anyway.


* Of course, getting only 1% of Dad's wealth means that the Buffet children will somehow have to make ends meet on only $400 million.

Darwin said...

The study linked to, and the post, are talking about the "heritability" of income -- that is, the degree to which parental household incomes correlate to child household incomes 30 years down the road -- not the question of whether or not people should be allowed to leave money they have left over to their children when they die.

They're separate and unrelated issues.

Anonymous said...

The study does not separate earned income from investment income.


Darwin said...

Not explicitly, no, but it's unlikely that much at all of the effect the study is looking at is the result of "trust fund kids". To make it into the top quintile of household income based on investment income, one would need to be earning 5% on investments of $2mil or more, and there aren't a whole lot of people whose parents leave them that kind of money.

Only 0.5% of estates are valued over $2mil -- so it's unlikely that a significant amount of the income heritability effect that's being looked at here is the result of large estates. Given that the highest income group the study talks about is households with total income (usually from two incomes) over $166k (the top 5%) and that the vast majority of households making $166k/yr are working professionals, it's probably safe to assume that any amount of inheritance going on here is coming out in the wash.

The levels of heritable income that might well be making a difference are probably more along the lines of people in the top 20% being better able to afford to go to top colleges as a result of parents or grandparents helping to foot the bills. That's certainly going to be one fact leading to 50% of those born in the top quintile ending up in the top quintile themselves, but it's not something that a stricter approach to large fortune estates would make a difference on. (I mean, we don't really want to ban people from helping to pay for their kids' college, do we?)

Anonymous said...

"Only 0.5% of estates are valued over $2mil" - because money placed in a trust fund for Junior is no longer part of the estate. There are many, many ways to structure financial instruments to leave wealth to the next generation without, technically, leaving an inheritance. A smart millionaire will distribute his assets in various funds and trusts long before he dies.

Anyway, the main reason that, say, Sweden has greater social mobility than the US isn't because Sweden does a better job of preventing their rich from keeping it in the family forever, though that may be part of it. The main reason is more likely the fact that Sweden's poor get better services than America's poor, particularly education and health care, things that make a big difference in future job prospects for the children of the poor.


Darwin said...

Anyway, the main reason that, say, Sweden has greater social mobility than the US isn't because Sweden does a better job of preventing their rich from keeping it in the family forever, though that may be part of it.

Okay, agreed then. We may assign different eights to this factor (with you putting it at "small" and me at "practically nil") but it sounds like we're on the same page.

As for the actual sources of greater social mobility in the countries that did much better than the US, I'd suggest it probably has multiple sources:

- Most of those countries were moderately socialist (though certainly never communist) until a couple decades ago, and now have many more free market high tech and finance jobs than before. Given that they're still on their first generation or two of that kind of economy, it's probably reasonable to expect more "sorting" to be going on now, while the US may already be more sorted, having had a fast moving free market economy for a long time.

- All of those countries have much better public educations systems (in the primary and high school levels) than the US and an overall more educated citizenry. Finland is listed as one of the most economically mobile countries, and it is reputed to have one of the best education systems in the world.

- The US has had a racial underclass ever since it was founded, while those countries generally do not. African Americans in the study showed significantly less inter-generational mobility than other minorities or whites. That is probably the result of some sort of mix of culture, lack of opportunity, and discrimination -- but it's clearly a contributing factor the to national data.