Lecture 3

The Limits of Opportunity

Today’s Topics

• Final conclusions about mobility in the U.S.• Is rising inequality in America a problem? • Is there a right amount of inequality? • If so, what is it?• Why does inequality persist?• How does Americans’ belief in meritocracy

influence our approach to inequality and poverty?

Table 2. Income Mobility Transition Matrix, 1968-91

Conclusions about U.S. Income Mobility

• There is broad agreement that income mobility in the U.S. is substantial and that life-time earnings are more evenly distributed than annual earnings.

• About 25 to 40 percent of the American population moves into a new income quintile each year.

• The rate increases with time approaching 60 percent over a ten years

• Most people do not move very far.

• Individuals with at least a college education are more likely to move up than any other group.

Conclusions about U.S. Income Mobility

• The mobility of those with little education has declined.

• Mobility has not changed significantly over the past 25 years.

• Mobility is no higher in the U.S. than in other developed countries

• Source: Daniel McMurrer and Isabel Sawhill, Economic Mobility in the United States, Urban Institute, http://www.urban.org/publications/406722.html

Is rising inequality problematic?

• See slide show at– http://www.inequality.org/facts.cfm

• Do you find the slide show convincing? Why or why not?

Trends in Voter Turnout

Health Insurance Coverage Race, 1987-2001

0

5

10

15

20

25

1987 1989 1991 1993 1995 1997 1999 2001

Whites, NHBlacksAsians & PI

College Enrollment by Income Quartile, Class of 1980/82 vs. Class of 1992

M. Kelly, INEQUALITY AND CRIME : The Review of Economics and Statistics, Volume 82, ﾊ

Number 4, 1 November 2000, pp. 530-539(10)

• This paper considers the relationship between inequality and crime using data from urban counties. The behavior of property and violent crime are quite different. Inequality has no effect on property crime but a strong and robust impact on violent crime, with an elasticity above 0.5. By contrast, poverty and police activity have significant effects on property crime, but little on violent crime. Property crime is well explained by the economic theory of crime, while violent crime is better explained by strain and social disorganization theories.

• Note that this article does not describe trends though time.

Is rising inequality problematic?

• Clearly some trends are correlated, but that doesn’t necessarily imply causation.

• Causation is difficult to prove.

• Logic suggests that increasing inequality without an offsetting increase in mobility means that inequality in the short term is more likely to be come inequality in the long term. More people are likely to find themselves long term members of a specific income quintile.

• Sawhill identifies such a group at the bottom of the income distribution know as the underclass--the persistently poor.

Is there a right amount of inequality?

• Less than we have now– Incentives to work, save, and invest exceed levels required

for growth– We could redistribute more of the current economic pie

without eroding growth

• We should tolerate more– As Sawhill explained, inequality need not imply poverty– A rising tide lifts all boats

• Sawhill argues that the debate should be focused on opportunity, not inequality.

Why does inequality persist? For that matter, why is poverty tolerated in the U.S.? Why

should the debate be focused on Opportunity?

• How would Sawhill answer these questions?– Because Americans believe in that equality of

opportunity rather than results.• The Gallup Social Audit showed that 81% of a

representative sample of Americans believe there is plenty of opportunity.

– Income inequality reflects the results of a fair system because it reflects differences individual talents, efforts and accomplishments.

Can 81% of the population be wrong? Is there “plenty of opportunity” for all Americans?

• It might be useful to rephrase this to ask what factors constrain opportunity?

• Sawhill might answer this by saying:– Unequal education systems– Changing demographic patterns

• Can you add other factors?– Unequal access to health care

How does Americans’ belief in meritocracy influence our approach to inequality and poverty?

How does Americans belief in meritocracy influence our approach to inequality and poverty?

• We are more willing to accept both because they are viewed as the result of a fair system.

• Our believe that those at the bottom of the income distribution must share the responsibility for their situation limits the amount of aid we provide.

• Policies that increase opportunity are preferred to policies that focus on the results and redistribute income from the haves to the have-nots.

• Our focus is directed toward the perceived obstacles to opportunity.