Tuesday, 21 October 2014

What Is Equality of Opportunity?

I have asked before what reasons there are to be worried about economic inequality, highlighting some plausible candidates and rejecting them all. Now Fed Chair Janet Yellen disappoints by lamenting growing inequality while apparently offering no shred of argument for why it would be a deplorable thing. Consider in which society you would rather live if societies consisted of five groups with income levels as follows:
Group 1: £1,000 in Society A; £1,000 in Society B;
Group 2: £1,100 in Society A; £2,000 in Society B;
Group 3: £1,250 in Society A; £3,000 in Society B;
Group 4: £1,350 in Society A; £4,500 in Society B;
Group 5: £1,400 in Society A; £8,000 in Society B.
Purchasing power is the same for every pound across societies. Inequality is palpably greater in society B, but who would not want to live there? I believe this sufficiently proves that inequality is a non-issue to sensible individuals (except to Yellen, Stiglitz, Krugman, Piketty, and other sensible individuals, whose repeated 'warnings' that it is a scourge of our times I cannot fathom). If high incomes were earned by crooks, that would be a problem with crime, not inequality; if low incomes were "too" low, that would be a problem with poverty, not inequality. I am bound to record my impression that a great deal of the concern with inequality is really a begrudging of high incomes going to top talent.

Professor Yellen says:
"It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."
If those at the top are not getting richer at the expense of those not at the top, I fail to see the problem. To her credit, Professor Yellen continues by discussing the issue of change at "the top"; the fact that members of, say, the "one per cent"  come and go and are apt not to be the same every year. She is dissatisfied with the rate of change between generations, however, and highlights the now famous 'Great Gatsby Curve', the finding that:
"...among advanced economies, greater income inequality is associated with diminished intergenerational mobility. In such circumstances, society faces difficult questions of how best to fairly and justly promote equal opportunity."
Forget for the moment the fact that "society" cannot "face" any questions, easy or difficult (only individuals can do that), and ask what intergenerational turnover would be compatible with equality of opportunity.

If one in ten (or a hundred, or whatever) children from the bottom percentile of families climbed to the top percentile over the course of a lifetime, would that be evidence in favour of, or against, equality of opportunity? Suppose turnover were complete, so that every child would be in every percentile at some stage of his life. Would that, on the other hand, be evidence in favour of, or against, equality of opportunity?

As far as I know, the common measure of equality of opportunity is the intergenerational elasticity of income, obtained, for instance, by looking at covariation between the natural logarithm of an individual's permanent income and that of his parent(s). If the correlation is zero, there is no statistically consistent relationship between incomes at different generations of the same family. Negative values mean higher (lower) family earnings depress (increase) those of offspring, and positive values mean that family and offspring earnings move in the same direction.

I submit the proposition that this is a pretty bad measure of intergenerational mobility. Why? Because it looks at average outcomes rather than choice sets. Who cares if rich (poor) families remain rich (poor) generation after generation as long as everyone has the opportunity to do things differently than did mum and dad? The fact that some fraction of family income influences adult income says something about the choices made by individuals as the grow up, but we cannot really say anything about what choices were available during that selfsame time.

Everything intergenerational is also a two-way street. There is what the children do and then there is what the parents do. If wealthy parents buy annuities for their children, that will influence the intergenerational elasticity of income in a positive direction. If parents run a business that is passed on to their children, that does the same thing. A zero elasticity of income between generations would indicate to me that something is blocking parents from doing what they want. A high intergenerational elasticity of income would suggest to me that mobility is possible but does not happen as often as it would if the measure were lower. It is, of course, possible that even an elasticity of one is "just" in the sense that it violates nobody's rights. I find it very difficult to say at which point between zero and "high" one might find the "ideal".

Alan B. Krueger, who coined the term 'the Great Gatsby Curve' (incidentally an odd name, given that Jay Gatsby was initially but a poor bootlegger in F. Scott Fitzgerald's great novel, though I suppose Professor Krueger's term is not too bad if one thinks of some of the novel's other characters), said in a concomitant talk that "equality of opportunity should be a nonpartisan issue", but if one gets to define equality of opportunity as always rising with intergenerational mobility, one has in fact made rather a partisan definition. There is probably too much focus on intergenerational mobility. Perhaps it would be better if one simply noted that the progress at the top has not come at the expense of those at the bottom and contented oneself with the justice of a procedure that violates nobody's rights.

PS. This was my 100th blog post. As Groucho Marx Said, "Time flies like an arrow. Fruit flies like a banana".

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