By Arnold Kling
Yes, there is some correlation in wealth across the generations. But most of that correlation (almost seventy percent) comes from continued hard work and savings. The authors do not examine Krugman’s claim that mobility once was greater, but it seems premature to suggest that the American dream is gone.
Cowen cites a paper by Kerwin Kofi Charles and Erik Hurst on the correlation of lifetime earnings across generations.
Age adjusted parental wealth, by itself, explains less than ten percent of the variation in age adjusted child wealth. Furthermore, twenty percent of parents in the lowest quintile of the parent’s wealth distribution have children who are able to break away from their parents low wealth status and end up in the top two quintiles of the child’s wealth distribution. Similarly, one quarter of the parents in the highest wealth quintile have children whose wealth places them in the lowest two quintiles of the child’s wealth distribution. We conclude that while parents do pass on human capital and saving propensities to their children, there is still a sizeable amount of churning in economic position from generation to generation.
My intuition is that as the economy becomes more dynamic, the correlation of wealth across generations is likely to fall. If my generation has an average income of $50,000 and the next generation is going to have an average income of $100,000, then it is going to be very difficult to use my income to influence my children’s position in the income distribution. That is because 20 percent of my average income is only 10 percent of my children’s average income.
Also, in a more dynamic economy, human capital depreciates more quickly. I might give my children an excellent education, which will give them a head start, but in ten or fifteen years chances are that they will need to re-educate themselves.
Two hundred years ago, land was a significant asset, and your place in the wealth distribution was affected by how much land you inherited. In 1950, ownership of physical capital determined one’s place in the wealth distribution, and there were a lot of heirs and heiresses in the list of richest people. Today, where you wind up in the wealth distribution depends a lot on talent and what you do with it. Entrepreneurial propensity is a major factor. This does not strike me as an economic environment that is conducive to a static wealth distribution.
For Discussion. What other features of today’s economy promote or discourage intergenerational income mobility?