Thursday, April 27, 2006

Rich Dad, Poor Dad

Yesterday's Washington Post contained a story about the intergenerational transmission of inequality. It began as follows:

Rags-to-riches dream an illusion: study
By Alister Bull

WASHINGTON (Reuters) - America may still think of itself as the land of opportunity, but the chances of living a rags-to-riches life are a lot lower than elsewhere in the world, according to a new study published on Wednesday.

The likelihood that a child born into a poor family will make it into the top five percent is just one percent, according to "Understanding Mobility in America," a study by economist Tom Hertz from American University. By contrast, a child born rich had a 22 percent chance of being rich as an adult, he said.

"In other words, the chances of getting rich are about 20 times higher if you are born rich than if you are born in a low-income family," he told an audience at the Center for American Progress, a liberal think-tank sponsoring the work.

He also found the United States had one of the lowest levels of inter-generational mobility in the wealthy world, on a par with Britain but way behind most of Europe.

"Consider a rich and poor family in the United States and a similar pair of families in Denmark, and ask how much of the difference in the parents' incomes would be transmitted, on average, to their grandchildren," Hertz said.

"In the United States this would be 22 percent; in Denmark it would be two percent," he said

I am struck by how much "spin" there is here. The last number on the U.S. economy (22 percent) is consistent with other things I have seen, but one can just as easily put the point in a different light:
How much does income inequality persist from generation to generation? After two generations, 78 percent of the benefit of being born into a wealthy family has dissipated.
I think many people would find this to be a surprisingly small degree of persistence.

(I don't know much about Denmark, other than that it is a society with a lot less inequality than the United States. Here is a conjecture: Persistence of inequality is lower in nations where there is less inequality. I am guessing that it is easier to make it from the bottom to the top of the income distribution when it is a smaller jump.)

One might ask why being born into a high-income family means you will likely have higher income. Is it the good genes that you inherited from your successful parents or the nice neighborhood and expensive private schools that their high income could purchase for you? Is it nature or nurture?

The evidence suggests that nature trumps nurture. In a fascinating paper, Dartmouth economist Bruce Sacerdote asks "What happens when we randomly assign children to families?" He examines a data set in which adopted children were, literally, assigned randomly--a great natural experiment for studying these issues. He reports:
Having a college educated mother increases an adoptee's probability of graduating from college by 7 percentage points, but raises a biological child's probability of graduating from college by 26 percentage points. In contrast, transmission of drinking and smoking behavior from parents to children is as strong for adoptees as for non-adoptees. For height, obesity, and income, transmission coefficients are significantly higher for non-adoptees than for adoptees.
Sacerdote suggests that income is like height. Having a tall father means you are likely to be tall, but it is because he has given you the tall gene, not because he has created an environment that fosters height. The same appears to be true for income. Sacerdote's Table 3 shows that although there is a positive correlation between the incomes of parents and their biological children, the positive correlation disappears when we examine the incomes of parents and their randomly-assigned adopted children.