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Gregory Mankiw Discusses Equality of Opportunity

Gregory Mankiw discusses an argument I hear most often when considering the issue of income inequality – lower income kids are born into an adversarial circumstance.  I can agree with this assessment to a degree.  Money helps, but at the same time, our parents bank account on day one does not determine who we will be on day 16,756.  I would contend other factors more highly associated with lower income households are larger obstacles to overcome, of which many do – the most salient obstacle being education.  Dr. Mankiw discusses research from Raj Chetty’s “Recent Trends in Inter-generational Mobility“:

When people think about inequality of incomes, a key issue is inequality of opportunity. Some people are born to rich parents who can afford private schools, summer camp, SAT tutors, etc., while others have poorer parents who cannot easily afford such things. One might wonder how much of the income inequality we observe can be explained by differences in the resources that people get because of varying parental incomes.

Let me suggest a rough calculation that gives an approximate answer.

The recent paper by Chetty et al. finds that the regression of kids’ income rank on parents’ income rank has a coefficient of 0.3. (See Figure 1.) That implies an R2 for the regression of 0.09. In other words, 91 percent of the variance is unexplained by parents’ income.

I would be willing venture a guess, based on adoption studies, that a lot of that 9 percent is genetics rather than environment. That is, talented parents have talented kids partly because of good genes. Conservatively, let’s say half is genetics. That leaves only 4.5 percent of the variance attributed directly to parents’ income.

Now, if you let me play a bit fast and loose with the difference between income and income rank, these numbers suggest the following: If we had some perfect policy invention (such as universal super-duper pre-school) that completely neutralized the effect of parent’s income, we would reduce the variance of kids’ income to .955 of what it now is. This implies that the standard deviation of income would fall to 0.977 of what it now is.

The bottom line: Even a highly successful policy intervention that neutralized the effects of differing parental incomes would reduce the gap between rich and poor by only about 2 percent.

This conclusion does not mean such a policy intervention is not worth doing. Evaluating the policy would require a cost-benefit analysis. But the calculations above do suggest that all the money the affluent spend on private schools, etc., explains only a tiny fraction of the income inequality that we observe.
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Addendum: A few readers seem confused about how to infer an R2 from a coefficient.  The key is that the left and right hand side variables in the regression have the same variance.  In this case, the R2 is the square of the coefficient.  This conclusion is a standard result for AR(1) models, which is what we have here, as applied to generational data.  (Also, a few readers are confused when they look at the paper’s Figure 1. The points plotted are not the raw data but binned averages, so you cannot see the R2 in the plot.)

{ 30 comments… add one }

  • Gayle McDanal Norton July 3, 2014, 11:39 am
  • Gayle McDanal Norton July 3, 2014, 11:44 am
  • Josh Crutcher July 3, 2014, 11:47 am

    That is taking it a bit far for me, Gayle. Stress = brain shrinkage. I think that is taking a major leap. By that logic, CEOs brains are shrinking at a greater rate. You could just as easily argue stress and wealth go hand in hand.

  • Gayle McDanal Norton July 3, 2014, 11:49 am

    Are CEO’s brains developing? I think your article lacks understanding in human development.

  • Gayle McDanal Norton July 3, 2014, 11:55 am

    Have you ever read about the effects of cortisol on the body? Cortisol is released under the fight/flight syndrome due to stress. Chronic stress profoundly affects the body, including CEOs. I wrote a paper on it years ago. Ever wonder why presidents age so quickly? Look at photos of Lincoln prior to the war and during.

  • Josh Crutcher July 3, 2014, 12:03 pm

    First, I believe it is abhorrently irresponsible to compare brain sizes and pocket books. I do not think Sierra Leone’s citizens are dumber. For that matter, my brain is not smaller than someone’s from Wisconsin. In the same spirit, China is managing to build quite the empire out of a poverty state.

    Second, the article is about economic mobility. Poverty is usually only a temporary state. As many churn out of poverty as churn out of the elite.

  • Gayle McDanal Norton July 3, 2014, 12:10 pm

    I think you better do some further research on the effects of poverty on the brain, and on poverty. It seems you understand neither. There are many places, even in the US where poverty is not temporary. The second article I posted is much more indepth. Poverty and upward mobility are interrelated.

  • Gayle McDanal Norton July 3, 2014, 12:12 pm

    This is simplistic, but it gives you a degree of understanding of the affect of stress on adults. http://www.mayoclinic.org/healthy-living/stress-management/in-depth/stress/art-20046037

  • Gayle McDanal Norton July 3, 2014, 12:23 pm
  • Gayle McDanal Norton July 3, 2014, 1:05 pm

    Here is a great article about the biological aspects. I took a neuropsychology course which taught the physiological aspects of brain function. I came away with adhering to the biological approach to psychology. Even a fake smile can alter brain chemistry and improve one’s mood. http://physrev.physiology.org/content/87/3/873

  • Josh Crutcher July 3, 2014, 1:58 pm

    Gayle, this is absolutely ridiculous! I agree and I believe a person can choose to have a good attitude! This has nothing to do with brain sizes. In addition, there is no scientific conclusion that a bigger brain leads to greater intelligence nor is there evidence suggesting stress leads to smaller brains. There is actually more evidence suggesting the opposite – from more complicated and stressful routes of taxi drivers having larger brains.

    Regardless, this has absolutely nothing to do with what I am discussing in the article nor does it have anything to do with what any point you are trying to make.

    The entire premise is just ridiculous. Why don’t we just put $1 million dollars in the middle of every classroom? Will that make us smarter?

    You are associating a societal classification (poverty) with physical characteristics! Do you not see the absurdity of this? Does labeling a kid as athletic at an early age help him grow taller?

  • Gayle McDanal Norton July 3, 2014, 3:34 pm

    Did you actually read any of this. It does not mean I have a bigger brain, so I am smarter. What it means, if you actually read it, is we are genetically given a certain amount of intelligence. The way the environment, including in the womb, affects the brain, thru diet, stress, stimuli and other factors positively or negatively impacts the brain and its capabilities. You are using the taxi driver incorrectly. Learning something new, taking a new route, increases brain function, positively. Chronic stress, the taxi driver being lost at every turn day in and day out, reduces brain function. Poverty does the same. It has everything to do with what you are describing.

  • Gayle McDanal Norton July 3, 2014, 3:57 pm

    “Prenatally
    Maternal undernutrition during pregnancy increases the risk of negative birth outcomes, including premature birth, low birth weight, smaller head size and lower brain weight. Babies born prematurely are vulnerable to health problems and are at increased risk for developing learning problems when they reach school-age.”

    This would skew his adoption theory.

  • Josh Crutcher July 3, 2014, 4:07 pm

    Ok. So:

    undernutrition –> increased risk of health issues –> increased risk of learning problems… Your connection is lower income can potentially begin this cycle. Correct?

  • Gayle McDanal Norton July 3, 2014, 4:09 pm

    It can and does, but does not preclude others from having poor nutrition.

  • Gayle McDanal Norton July 3, 2014, 4:16 pm

    “Poverty and academic achievement
    Poverty has a particularly adverse effect on the academic outcomes of children, especially during early childhood. Chronic stress associated with living in poverty has been shown to adversely affect children’s concentration and memory which may impact their ability to learn. The National Center for Education Statistics reports that in 2008, the dropout rate of students living in low-income families was about four and one-half times greater than the rate of children from higher-income families (8.7 percent versus 2.0 percent). The academic achievement gap for poorer youth is particularly pronounced for low-income African American and Hispanic children compared with their more affluent White peers. Underresourced schools in poorer communities struggle to meet the learning needs of their students and aid them in fulfilling their potential. Inadequate education contributes to the cycle of poverty by making it more difficult for low-income children to lift themselves and future generations out of poverty.”

  • Gayle McDanal Norton July 3, 2014, 4:16 pm

    The brain is the organ of the body that interprets experiences as threatening or nonthreatening and which determines the behavioral and physiological responses to each situation. Besides the hypothalamus and brain stem, which are essential for autonomic and neuroendocrine responses to stressors, higher cognitive areas of the brain play a key role in memory, anxiety, and decision making. These brain areas are targets of stress and stress hormones, and the acute and chronic effects of stressful experiences influence how they respond.

  • Gayle McDanal Norton July 3, 2014, 4:20 pm

    Also, doesn’t poverty influence, not only the schools, but the stimuli or lack of stimuli in the home, starting at birth? Does it affect the nurturing ability of the mother, which is also a learning experience?

  • Gayle McDanal Norton July 3, 2014, 4:24 pm

    Once you finish with your nutrition, then we can add prenatal toxins and impacts. 😉

  • Josh Crutcher July 3, 2014, 4:26 pm

    So the primary reason kids drop out of high school is prenatal malnutrition?

  • Josh Crutcher July 3, 2014, 4:27 pm

    and prenatal toxins…

  • Gayle McDanal Norton July 3, 2014, 4:27 pm

    Why do you believe you can make everything so simplistic?

  • Gayle McDanal Norton July 3, 2014, 4:33 pm

    What if a child is genetically predisposed to a lower IQ. Add to that, malnutrition, stress in the womb, the IQ will be lower. Adopt the child to wealthier family with increased stimuli, which will raise the child’s I Q, but at most around 30 points. The child might still come out behind because of nature/nurture in the womb.

  • Andres Alejandro July 3, 2014, 6:15 pm

    Gayle, we can all agree that poverty makes it more difficult to achieve academic and economic excellence.

  • Andres Alejandro July 3, 2014, 6:26 pm

    What are your solutions Gayle? How do we implement this?

  • Josh Crutcher July 3, 2014, 6:32 pm

    The solution is a gene pool testing/memory sweeping program. Once implemented, everyone will have equal opportunity for economic mobility.

  • Gayle McDanal Norton July 3, 2014, 9:32 pm

    I would agree, Andres. People will not like this, but it is the truth. If you want a very short and to the point answer, the way to alleviate poverty is money. It could be done by restructuring taxes and by rethinking the social construct of wages. Why we are wedded to our current system? We spend a lot of money on Homeland Security and the military. Restructuring is needed there anyway. I believe some inequality is good for the country because it increases motivation, but we are in extremes now. It is hurting the economy.

  • Gayle McDanal Norton July 3, 2014, 9:34 pm

    Josh, didn’t Nazi Germany try that or was it the Soviets? 😉 You all have a safe and Happy Fourth!

  • Andres Alejandro July 3, 2014, 9:46 pm

    Our income gap is important, The more important gap is the wealth gap. There are people that have little stress with very little income because they are very careful about what they spend. Others make enough income but make choices that lead them to the stresses you are talking about. My solution is primarily a much larger emphasis on personal finance education very early in school. If the parents are in poverty, its very likely that they will teach a lifestyle of poverty to their kids along with the way. Personal finance education is as important as reading for the kids that are in poverty. If they have a glimpse of hope early, it can make a huge difference.

  • Josh Crutcher July 4, 2014, 3:15 pm

    Gayle, your point is taken. I suppose in terms of policy, addressing genetics is difficult. I also believe everyone has both genetic advantages and disadvantages, so allocation of this is nearly impossible as well… In addition, there are materiality levels in this analysis where you must focus poverty initiatives in areas they will have the most impact.

    Andres , I think I like your idea of implementing financial education in schools…

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