How much do your financial prospects in life depend on how well-off your parents are? If the answer is “a lot,” is that necessarily a bad thing?
In a free society, people’s incomes correlate with the marketable value they create for others. The traits that help you create marketable value include your work ethic, honesty, conscientiousness, and intelligence. Parents often pass down these traits to their children, whether through their genetic contributions or through training and socialization. So if two parents have traits that correlate with creating value for others, their kids are more likely to have those traits, too. And in a free society, that means parents with high incomes will tend to have kids who go on to earn high incomes, too.
Intergenerational mobility is the frequency with which children find themselves in a different income bracket than their parents. If children of rich parents frequently find themselves out of the “rich” income bracket, while children of poor parents frequently find themselves out of the “poor” income bracket, then there is a high level of intergenerational mobility (sometimes called “circulation mobility”). Many journalists and academics seem to assume that more intergenerational mobility is a good thing because it means a society has more equality of opportunity, but this view is clearly wrong.
Complete intergenerational mobility — in which one generation’s incomes do not correlate with those of the next generation at all — would indicate something seriously wrong with an economy. It would probably mean that incomes in that economy do not correspond at all to creating marketable value.
What’s the right level of intergenerational mobility, then?
If country A has more (or less) intergenerational mobility than country B, or time period A has more (or less) than time period B within the same country, how should we interpret those numbers? It’s unclear.
The media coverage of intergenerational mobility research often ignores these fundamental questions. In an otherwise accurately reported article for the New Yorker, John Cassidy says that the lack of a decline in intergenerational mobility in the United States is “good news,” while the United States “remains a highly stratified society” compared to Scandinavia. Even economist Raj Chetty, one of the field’s top researchers, claims that “improving the rate of upward income mobility is an important issue for policy makers.”
But do we really know that increasing the amount of intergenerational mobility would constitute an “improvement”? Clearly, a free society will have more intergenerational mobility than a feudal society in which parental status determines everyone’s economic prospects. But when comparing partly free societies like the advanced industrial economies, how should we interpret the intergenerational mobility numbers?
What could cause an economy to have too much intergenerational mobility?
One way a society could have too much intergenerational mobility is that the market does not determine incomes. If backing the right political leader is the path to individual prosperity instead, then high income might come from brown-nosing and good luck rather than marketable skills, while those with marketable skills might actually earn little money.
Immigrants still flock to the United States to earn far more than they could at home, suggesting that the US economy is doing something right: it’s providing opportunities for immigrants whose marketable skills do not earn them high incomes in the dysfunctional economies they came from.
Another way a society could have too much intergenerational mobility is that its economy is volatile. War and political instability can create a lot of intergenerational mobility. Furthermore, small economies that are highly dependent on the global markets for a small set of goods are more volatile. Now, you could think of a province or a city or a neighborhood as having a small economy, so by “small economies” here I mean places where it is difficult to emigrate during hard times — your income is volatile because you’re trapped in a particular place. The US economy might not have that much intergenerational mobility because it has a fair degree of political mobility and spatial mobility (you can move to places where the economy is doing better), and incomes are therefore not that volatile over a long period.
Certainly, the US economy has its share of problems, and some of those problems do reduce intergenerational mobility. It has become harder for people to move to economic opportunity because of land-use regulations that raise the cost of housing: more people are actually moving out of San Francisco than moving in, despite the tech boom, because housing is so expensive there. Racial disparities caused by legacies of severe discrimination, disparities in public school quality, and dysfunctional social patterns limit intergenerational mobility, too.
How should we interpret the intergenerational mobility numbers?
So, when comparing societies with different levels of economic freedom, how should we interpret the intergenerational mobility numbers? We can’t just assume that higher intergenerational mobility in the small economies of northern Europe is a blessing to the people living there. The optimal level of intergenerational mobility is likely close to whatever level would prevail in a free society, where people are rewarded for bringing their talents into the service of others’ wants and needs.
I myself grew up in a household with an income at various times below or just above the poverty line. I want economic opportunity for the poor, just like everyone else. But the intergenerational mobility statistics might not tell us much about economic opportunity. Instead, we need to look directly at government policies and social practices that may hold people back from bettering their lot.