Mobility and access to better opportunities

The debate on capitalism and widening inequality is far more complex than appears at first sight. For example, consider this from a review of Caroline Freund's new book,

At the World Economic Forum in Davos this year, Winnie Byanyima, executive director of Oxfam International, referred to the relief charity’s findings that the richest 1 per cent of the world’s population would own more than 50 per cent of the world’s wealth by 2016. In response, Sir Martin Sorrell, chief executive of WPP, the advertising group, said: “I make no apology for having started a company 30 years ago with two people and having 179,000 people in 111 countries and investing in human capital each year to the tune of at least $12bn a year.”

Ms Freund's taxonomy of the super-rich in the emerging world shows that such wealth is largely self-made, and the share of inherited wealth is continuously declining. Obviously, I do not imagine that she is trying to justify widening inequality on this ground, though many others argue vehemently that if anybody can become super-rich, then what is wrong with the dynamics whose one consequence is widening inequality. What gives?

Rationalization of widening inequality on grounds of self-made wealth (as against inherited wealth) overlooks the important point that even access to the opportunity to create self-made wealth is increasingly an ovarian lottery - function of where (country, city/region, locality, and family) you are born. When all is said and done, you are, largely (because of), where are you are born!

Malcolm Gladwell, chronicler par excellence of the less-discussed, has a fascinating essay in New Yorker where he explores the unintended positive consequence of the dislocation caused by Hurricane Katrina on the black population of New Orleans. He argues that by being forced out from the excruciating poverty and blight of pre-Katrina New Orleans black neighborhoods, the nearly 80,000 black population which moved out of the city in its aftermath were presented with an opportunity for social and economic mobility they would otherwise have not had. 

In this context, he writes about the acclaimed work of Raj Chetty, Nathaniel Hendren, and others which documented economic mobility across the US and found the dominant influence of people's immediate socio-economic environment in their life outcomes. He writes,

Moving matters: going to a neighborhood that scores high on those characteristics from one that does not can make a big difference to a family’s prospects... Suppose you look at parents who earn in the first quintile—that is, the bottom fifth of the U.S. income distribution. What are the odds that one of their children will—by the time that child reaches adulthood—make it into the top fifth of the income distribution? Those odds, they found, vary dramatically from one city to the next. In San Jose, for example, the probability is 12.9 per cent... At the other end of the spectrum is Charlotte, North Carolina, where the probability is 4.4 per cent: a poor child is almost three times more likely to reach the top in San Jose than he or she is in Charlotte.

In a second analysis, Chetty and Hendren assigned a value to every major metro area in the country, according to how much more (or less) a child can expect to earn depending on the city where he or she grew up. The No. 1 urban area, by this measure, is Seattle, at 11.6 per cent: by the age of twenty-six, the child of a family in Seattle earning just above the poverty line will make 11.6 per cent more than would otherwise have been expected. The place bonus for Minneapolis is 9.7 per cent; in Salt Lake City, it is 9.2 per cent. Coming in last on the list of the hundred largest commuting zones in the country, by contrast, is Fayetteville, North Carolina, which has a place penalty of negative 17.8 per cent: the child of a poor person in that city will end up earning substantially less than he or she would otherwise have earned, simply by having been raised in Fayetteville.

So how did moving out of New Orleans improve access to opportunities and likelihood of better life outcomes?

In the Chetty-Hendren-Kline-Saez analysis, New Orleans has a bottom-to-the-top probability of 5.1 per cent, which is half a percentage point behind Detroit. And the place bonus / penalty for New Orleans? Minus 14.8 per cent, which puts it ninety-ninth out of the top hundred biggest urban areas in the country, ahead of only Fayetteville.

So is moving poor people out of their existing neighborhoods the best poverty reduction strategy? Unfortunately, as with everything in life, there are no such neat and simple solutions. The problems starts when the partial equilibrium findings of Chetty, Hendren et al intersects with the general equilibrium dynamics that are triggered by such mass movements,

If too many poor African-Americans move into a middle-class neighborhood, then the middle class leaves—robbing the community of many of the things that the movers came in search of.

This is apart from the other major consequences of inequality, on which I have blogged repeatedly - the capture of political decision making and the inhibition of economic growth itself.