Krueger: Income Inequality is a Generational Issue

Want to know how much you, as a young American, are likely to earn over your lifetime? Look to your parents, says White House Council of Economic Advisers Chairman Alan Krueger.

In a discussion at the Center for American Progress, our parent organization, on Thursday, Krueger explained how income inequality in America is bad for the both the economy and intergenerational income mobility, or how likely young Americans are to change the socioeconomic status into which they were born.

Krueger noted that the statistical correlation between parents’ and children’s income is about the same as the link between parents’ and children’s height:

The chance of a person who was born to a family in the bottom 10 percent of the income distribution rising to the top 10 percent as an adult is about the same as the chance of a dad who is 5’6” tall having a son who grows up to be over 6’1” tall. It happens, but not often.

Countries with higher income inequality tend to have lower intergenerational economy mobility—and, as Krueger noted, the growth of inequality in the U.S. is staggering.

The data show a clear picture of a shrinking middle class. After World War II, real income for each quintile (or one-fifth) of the population grew at about the same rate. Between 1979 and 2010, however, real income grew much more for the top fifth than the middle—and for the lowest fifth, incomes actually decreased. What’s more, the percentage of families who have incomes close to the national median—that is, the middle class—has fallen from 50 percent in 1970 to 42 percent in 2010, creating an even wider gap.

The Clinton years provided some relief from this trend, with all five quintiles growing at the same rate from 1992-2000. But changes in tax policy in the early 2000s that favored the very wealthy compounded the rising inequality in that decade, Krueger said, along with changes in technology, increased globalization, and decreased union membership.

A shrinking middle class means poorer long-term economic growth overall, said Krueger, who noted that the middle class has historically supported new markets and that the rich tend to save more than spend.

For young people, these current patterns will likely mean a lesser chance at future economic mobility.

“The fortunes of one’s parents seem to matter increasingly in American society,” Krueger said.

How to solve the problem? According to Krueger, battling inequality means ensuring that the current recovery continues—helped, he said, by President Obama’s policies of extending the payroll tax cut and unemployment insurance, passing the American Jobs Act, and continuing to implement the Affordable Care Act.

Already, the Affordable Care Act has given a leg up to 2.5 million young people who can now stay on their parents’ insurance—many from lower- or middle-class families and not enrolled in school.

“Restoring more fairness to the economy would be good for all parts of American society,” Krueger said. “This is not a zero-sum game.”

Emily Crockett is a reporter with Campus Progress. Follow her on Twitter @emilycrockett.

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