Wealth

The Gatsby Curve: How Inequality Became a Household Word


(An earlier version of this story ran online.)

Alan Krueger stuck his head into the office in Washington, D.C., where the Council of Economic Advisers keeps its pool of research assistants and offered a deal. Krueger, then the council’s chairman, needed a name for a graph. He offered a bottle of wine to the researcher who could come up with the best one. The winner: “The Great Gatsby Curve.” That was in 2011. Krueger admits now that he’s not sure he ever delivered the wine.

On Dec. 4, President Obama gave a speech about income inequality in Washington. A family in the richest 1 percent, he said, has more than 288 times the wealth of the median family. The likelihood that a child can escape her parents’ circumstances is lower in America than in “most of our wealthy allies—countries like Canada or Germany or France.” Although the president didn’t pull out any graphs, Obama borrowed two ideas for his speech that make inequality easier to understand: the 1 percent and the Gatsby Curve. In part, the president—and the pope in Evangelii Gaudium, an Apostolic Exhortation released on Nov. 24—are able to talk about income inequality because two groups of economists spent the better part of a decade coming up with easily digestible ways to describe it.

For much of the 20th century, academic economists accepted the ideas of Simon Kuznets, who in 1971 won a Nobel prize for his work on inequality. In the 1950s, Kuznets looked at IRS returns going back to the introduction of the personal income tax in 1913 and discovered that income inequality had been dropping in the U.S. He suggested that for developed economies, economic growth lowered inequality. “It was a nice theory for the golden age of growth,” says Thomas Piketty, a professor at the Paris School of Economics. Out of curiosity in the 1990s, Piketty, then a young Ph.D. at the Massachusetts Institute of Technology, applied Kuznets’s approach to tax data for his native France, eventually running it all the way forward to 1998. Then, with Emmanuel Saez, another French economist, he did the same for the U.S. In 2003 they published their finding that income inequality had started to rise in America in the early 1980s, about a decade after Kuznets accepted his Nobel.

Other economists, relying on household surveys taken by the U.S. Department of Labor, also found growing inequality. But the Frenchmen used IRS data that goes back much further than Labor’s numbers. By 2007, the two were able to show that the income share of the top 1 percent had reached a level not seen since 1928, the Jazz Age of F. Scott Fitzgerald’s Jay Gatsby.

Around the time Piketty began his work on income inequality, economists Gary Solon and David Zimmerman took a new approach to studying a related topic, social mobility. Solon and Zimmerman used data from a University of Michigan study of 5,000 families that started in 1968 and continues today. By the late 1980s, the Michigan study had detailed information on two generations of Americans showing that social mobility was much less prevalent than previously estimated. The poor were staying poor, and the rich were staying rich.

In the late 1990s, Miles Corak at the University of Ottawa applied that approach to Canada. He also began the complicated econometric work necessary to compare social mobility among countries. Corak made it possible to see whether the American Dream measured up to the Danish Dream. (It doesn’t.) In 2004, again inspired by a theoretical paper by Solon, Corak produced the first version of a graph that compared developed economies according to income inequality and social mobility. The graph shows that countries with the highest income inequality, such as the U.K. and the U.S., are also the most likely to pass economic status from one generation to another. “I gave it some technical title,” says Corak, “nothing that sparks the imagination.”

That had to wait for Krueger. For a speech late in 2011 at the Center for American Progress, a Washington think tank, Krueger publicly gave Corak’s graph the name that has stuck. “The Gatsby Curve has been around for a decade,” Corak says. “Only when it got that label did it become something that people could hook on to.” Krueger owes someone a bottle of wine. Perhaps Obama does, too.

The bottom line: New measures of income inequality helped the concept become an issue for U.S. politicians.

Greeley-brendan-190
Greeley is a staff writer for Bloomberg Businessweek in New York.

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