In January, Alan Krueger, chairman of President Barack Obama’s Council of Economic Advisers, gave an important policy address in Washington in which he addressed the growing problem of inequality in America, an issue that has come to define the president’s re-election campaign.
From Occupy Wall Street to the general loathing of the “1 percent” who’ve captured the lion’s share of economic growth in the past few decades, Americans today increasingly question whether true equality of opportunity – the “American dream’’ – is still possible in a land in which social and economic mobility is now more of a pipe dream for those at the bottom.
Mr. Krueger, an economics professor at Princeton University, marshaled a striking piece of evidence that, not just in America but around the world, there’s a strong correlation between income inequality and the likelihood of increased socioeconomic stratification in the future, which perpetuates inequality over the generations.
Drawing on work by the Canadian economist Miles Corak, Mr. Krueger has
dubbed this finding the “Great Gatsby curve,” taking a leaf from the great American Jazz Age novel by F. Scott Fitzgerald. On the horizontal axis is the country’s Gini coefficient, the most commonly used measure of inequality (zero represents perfect equality among a country’s citizens, and 1 means, roughly, that one person gets all the money in a society). On the vertical is what labor economists call inter-generational earnings elasticity, or IGE — roughly a measure of how likely it is that if you’re rich (or poor), your kids will be, too. In a society with perfect equality of opportunity, the child of rich parents would have neither a higher nor a lower income than the average, yielding an IGE of zero.)
Each labelled dot represents a country, and the straight line that runs through the figure is the line of best fit: clearly upward-sloping, which tells us that countries which are more unequal in outcome are also more unequal in opportunity. As you would expect, egalitarian Scandinavian countries such as Denmark and Norway are in the lower left corner of the figure, with both low inequality and a low IGE, and some very stratified Latin American countries such as Brazil and Peru are at the upper right corner, with high inequality and a high IGE. The United States falls just about in the middle.
Mr. Corak, whose work on the IGE is an input into Mr. Krueger’s Great Gatsby curve, explained to me via email that he couldn’t compute comparable data for India on IGE, which is why we don’t appear on the curve. But recent research by the World Bank suggests that India’s Gini has been rising steadily, even as extreme poverty drops, and was measured at 0.33 in 2005.
As inequality continues to rise in India, I would conjecture that India today would be close to where the United States appears, around 0.40, although we’ll only know for sure when the latest numbers have been crunched.
If India conforms to the “Great Gatsby” curve — and there’s no reason to believe it would be an outlier — that would mean the country would have an IGE of around 0.4, corresponding to a Gini coefficient of 0.40. This IGE implies that if Indian citizens are earning 50 percent more than the average income today, their children will earn 20 percent more than average in their generation.
Whether we want to admit or not, the Great Gatsby has, in my judgement, come to India.
It’s unlikely that Mr. Krueger was aware of the delicious irony, in an Indian context, of the name he gave the figure. Writers about India are increasingly reaching for America’s Jazz Age, or its even earlier Gilded Age, as tropes to help explain India’s dizzying mixture of rampant inequality and corruption, marked by the rise of a new class of super-rich entrepreneurs whose wealth – much like that of Fitzgerald’s title character – often seems to derive at least as much from proximity to power and shady dealings as it does to hard work and productivity.
So where can the culprits be found for rising inequality, whether in America or in India? Here the tales diverge.