Mankiw on income inequality and parental resources

January 27th, 2014 at 12:00 pm by David Farrar

is the Chairman and Professor of Economics at Harvard. His blog is ranked No 1 in the US by economic professors. He blogs:

When people think about inequality of incomes, a key issue is inequality of opportunity. Some people are born to rich parents who can afford private schools, summer camp, SAT tutors, etc., while others have poorer parents who cannot easily afford such things. One might wonder how much of the we observe can be explained by differences in the resources that people get because of varying parental incomes.

Let me suggest a rough calculation that gives an approximate answer.

The recent paper by Chetty et al. finds that the regression of kids’ income rank on parents’ income rank has a coefficient of 0.3. (See Figure 1.) That implies an R2 for the regression of 0.09. In other words, 91 percent of the variance is unexplained by parents’ income.

I would be willing venture a guess, based on adoption studies, that a lot of that 9 percent is genetics rather than environment. That is, talented parents have talented kids partly because of good genes. Conservatively, let’s say half is genetics. That leaves only 4.5 percent of the variance attributed directly to parents’ income.

Now, if you let me play a bit fast and loose with the difference between income and income rank, these numbers suggest the following: If we had some perfect policy invention (such as universal super-duper pre-school) that completely neutralized the effect of parent’s income, we would reduce the variance of kids’ income to .955 of what it now is. This implies that the standard deviation of income would fall to 0.977 of what it now is.

The bottom line: Even a highly successful policy intervention that neutralized the effects of differing parental incomes would reduce the gap between rich and poor by only about 2 percent.

This conclusion does not mean such a policy intervention is not worth doing. Evaluating the policy would require a cost-benefit analysis. But the calculations above do suggest that all the money the affluent spend on private schools, etc., explains only a tiny fraction of the income inequality that we observe.

The best way to reduce the gap between rich and poor is education, in my opinion.

Tags: ,

14 Responses to “Mankiw on income inequality and parental resources”

  1. NK (1,211 comments) says:

    The best way to reduce the gap between rich and poor is education, in my opinion.

    The best way to improve the plight of the poor is education. Inequality doesn’t matter.

    Vote: Thumb up 2 Thumb down 0 You need to be logged in to vote
  2. Pete George (23,422 comments) says:

    There’s been a discussion running on a DPF Facebook post where it was suggested to me that because I don’t agree with the Green nanny school approach I would “just let them rot”. More of the “totally with us or cretinous enemy” that’s common from the activist left.

    Robin Stephen also said:

    Yet we have “poor bashers” here practically blaming children for being hungry. There is a child poverty problem in NZ which just wasn’t there while John Key was growing up.

    When I disputed that referring to my own experience he asked the necessities where I “disputed” with Rev. Waldegrave?

    I’ve listed all the things detailed in Waldegrave’s Living Wage report as necessities that I didn’t have in part or in full when I was a child (which was the same time as Key). I’m sure I’m far from alone on this. Too many for here so Failing the Waldegrave necessities of life.

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  3. wat dabney (3,755 comments) says:

    The best way to reduce the gap between rich and poor is education

    And by ‘poor’ we mean fabulously rich in global and historical terms, but not quite as rich as some others.

    Vote: Thumb up 4 Thumb down 0 You need to be logged in to vote
  4. kowtow (8,138 comments) says:

    The new paradigm is absolute equality.

    Gender,marriage,sexuality ……so why oppose income equality?

    Vote: Thumb up 2 Thumb down 1 You need to be logged in to vote
  5. BeaB (2,104 comments) says:

    I am sure there is poverty but that is not a cop out for schools. When they come through the school gate it’s up to us to make sure they get the best education possible. For some it will be of no use at all but the more literate and numerate kids are the more likely they will get a job, stay away from crime, delay having babies etc etc.
    I have no problem with feeding them as long as that doesn’t mean expensive kitchens, dining rooms etc. A wholemeal sandwich with a protein filling, an piece of fruit and drink of milk is enough for any kid and can be delivered easily and cheaply to schools and easily eaten.
    Being poor does not mean you cannot learn to read and schools are paid to do this job.

    Vote: Thumb up 2 Thumb down 0 You need to be logged in to vote
  6. Harriet (4,758 comments) says:

    “…The best way to reduce the gap between rich and poor is education, in my opinion….”

    Education for educations sake is a waste of time.

    Far too many people are ‘becoming educated’ by doing arts degrees and then remaining poor because they don’t command much in income.

    Secondry school has to divide it’s pupils into those who will go onto university and study hard degrees and those who will go onto learning trades and polytec type industry courses.

    That is a reasonable way to allow all students to gain meaningful employment that will suit them, and not give them unnessecery costs such as repaying art degree loans.

    Vote: Thumb up 3 Thumb down 4 You need to be logged in to vote
  7. dime (9,793 comments) says:

    when i was in 3rd form we all had to do a term of “consumer economics”. they basically tried to teach you the basics of money etc

    do schools still do this? i suspect more than one term is needed.

    i have a lot of buddies who left school after 5th form (half failed) and are doing really well. they even manage to feed their kids with the big green turds help

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  8. RRM (9,769 comments) says:

    But the calculations above do suggest that all the money the affluent spend on private schools, etc., explains only a tiny fraction of the income inequality that we observe.

    Sounds right… Mrs RRM flatted with a real dropkick once. This was during the Clark govt years. The dropkick was always whining about how much tax her rich successful dad living in Whitby had to pay.

    The dropkick didn’t really work much… filled the flat up with expensive new furniture on HP… Then abruptly had to move out… “it’s not bankruptcy, it’s a no-asset procedure…”

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  9. greenjacket (451 comments) says:

    And one of the best policies that the State has for ensuring that the parents of rich kids receive all the advantages of education (while keeping the poor kids out) is school zoning.
    Remember that next time Labour Party people go on about inequality.

    Vote: Thumb up 2 Thumb down 0 You need to be logged in to vote
  10. Fletch (6,234 comments) says:

    As the Investors website points out – income equality has actually widened under Obama. And Obama is supposed to be making income inequality a big thing this year and focussing upon it in his State Of the Union speech.

    But what Obama is unlikely to say in his lengthy address is that income inequality — as measured by the Census Bureau’s Gini index — has increased faster on his watch than it did under any of the three previous presidents.

    Nor is he likely to mention that, on his watch, inequality has reached its highest level since the Census started recording it back in 1947.

    And Obama is almost certain to avoid mentioning that the policies he’s pushing now have either had little impact on inequality or have provided few benefits to those they’re supposed to help. Or that one of his policy priorities is likely to increase inequality, not reduce it.

    http://news.investors.com/012414-687632-obamas-state-of-the-union-inequality-ideas-have-failed.htm

    There’s a graph on the linked website that shows that the income gap under Obama has widened to a 2% increase, whereas it was stable under Bush (0%), and had widened 1.8% under Clinton. So, while Obama may bitch and moan about inequality, it’s his measures that have caused the most.

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  11. HB (301 comments) says:

    dime says:
    “when i was in 3rd form we all had to do a term of “consumer economics”. they basically tried to teach you the basics of money etc

    do schools still do this? i suspect more than one term is needed”

    The following are achievement objectives from the NZ Curriculum(Social Science) at Levels 4 and 5 which students who are years 9 and 10 would be at.
    *Understand how producers and consumers exercise their rights and meet their responsibilities
    *Understand how economic decisions impact on people, communities, and nations.
    *Understand how people’s management of resources impacts on environmental and social sustainability
    *Understand how people seek and have sought economic growth through business, enterprise, and innovation

    These should all be covered (along with the other ones listed in the Curriculum).

    http://nzcurriculum.tki.org.nz/The-New-Zealand-Curriculum/Learning-areas/Social-sciences/Social-sciences-curriculum-achievement-objectives

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  12. HB (301 comments) says:

    What does that mean in the classroom? (quick summary)

    My Year 9 class last year did the following with me:
    * History of money and bartering systems
    * NZ Consumer laws, our rights and responsibilities
    * Budgeting, why and how
    * Dangers of credit, poor lifestyle choices
    * Goal setting, how to use budgets to help achieve them, how at different ages we will have different goals and needs
    * Understanding the different types of income and different taxes
    * Participated in an online simulation (where they competed against each other in class) where they had money to invest in property, shares, cash bonds, etc. They could choose the city in which they bought their property (which entailed different prices, ROI etc) and then choose which bank they borrowed the remainder from at which fixed terms/rates. They then rented out property and either pay off the mortgage or use excess (if any) to reinvest elsewhere in their portfolio. They chose their shares etc also (one day = one month in the simulation to get enough movement as we only did the simulation for about 4 months). It was a great simulation it was based loosely on current actual market events. It got them reading lots of news stories and chatting to their families at home about their strategies. Some of them did very well!

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  13. Kea (11,878 comments) says:

    In my view the problem is not inequality nor is it that some people are too rich. The problem is better described as too many not having enough.

    Fixing “inequality” does not mean the poorer folk will be better off. It just means more people will be poor, so they are “equal”. The politics of envy is what made the USSR the economic success it was.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  14. JClarkson (3 comments) says:

    Far be it from me to disagree with Prof Mankiw, but it seems to me that it is difficult to equate social mobility with income inequality. The authors that Mankiw cite are very clear that income inequality has increase significantly, thereby increasing the ‘birth lottery’. They are also clear that a lot of the inequality has occurred because the top 1% have grown so much richer and that there is not a heck of a lot of mobility into or out of that social group. Seems to me that education by itself probably isn’t enough.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote

Leave a Reply

You must be logged in to post a comment.