Chicago Follies (XII)

13 May, 2015 at 17:33 | Posted in Economics | Leave a comment

At the University of Chicago, where I went to graduate school, they sell a t-shirt that says “that’s all well and good in practice, but how does it work in theory?” That ode to nerdiness in the ivory tower captures the state of knowledge about rising wealth inequality, both its causes and its consequences. Economic models of the distribution of wealth tend to assume that it is “stationary.” In other words, some people become wealthier and others become poorer, but as a whole it stays pretty much the same. Yet both of those ideas are empirically wrong: Individual mobility within the wealth distribution is low, and the distribution has become much more unequal over the past several decades …

Economists typically highlight individual or inter-generational mobility within the wealth distribution as both a reason not to care that the distribution itself is unequal and as an argument that having wealthy parents (or not) doesn’t matter that much for children’s outcomes. 2011-10-26-dumb_and_dumber-533x299-2In fact, an influential model by the late Gary Becker and Nigel Tomes, both of the University of Chicago , predicts that accumulated wealth reduces income inequality because parents who love all their children equally allocate their bequests to compensate for their stupid children’s likely lower earnings potential in the labor market. According to those two authors, families redistribute from the smart to the dumb, and therefore, by implication, governments don’t have to redistribute from the rich to the poor.

But as Thomas Piketty and numerous other scholars point out, those reasons not to care about wealth inequality are not empirically valid. There’s scant evidence that parents leave larger inheritances to stupid children. Nor is there much evidence that native ability is the major determinant of earnings in the labor market or other life outcomes. The weakness of these explanations gets to a much larger question, one of the most important (and unanswered) ones in economics: Why are some people rich while others are poor? What economists are just finding out (while others have known for awhile now) is, essentially, “because their parents were.”

Marshall Steinbaum

Leave a Comment »

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.
Entries and comments feeds.