What is the Great Gatsby Curve?

The Great Gatsby Curve was first introduced in 2012 in a speech made by Alan Krueger, chairman of the Council of Economic Advisers during President Obama’s administration.

The Great Gatsby Curve looks at the relationship between the elasticity of income between generations and inequality. Some versions of the curve compare the US and twelve developed nations. Other versions of this curve also include developing countries.

Countries where inequality is low – Finland, Norway, and Denmark – mobility is greatest. Chile and Brazil, by contrast, are the two countries with the greatest levels of inequality along with the lowest mobility.

The Great Gatsby Curve

The curve references The Great Gatsby, F. Scott Fitzgerald’s novel. Jay Gatsby, the debonair lead character, is the embodiment of mobility. He rises from bootlegging to leading the social set of Long Island’s north shore.

According to Robert Lenzner (a journalist) and Nripendra Chakravarthy (a lawyer), the curve is “very frightening” and “requires policy attention.”

Alan Krueger predicted a 25% increase in the persistence of income passed from parents to children as a result of the corresponding increase in inequality in the US over the last 25 years.

Timothy Noah, a journalist, believes this increase in income elasticity is linked to growing inequality. He claims that it’s impossible to experience an ever-rising inequality in income without a decline in upward mobility. He reasons that it’s “harder to climb a ladder when the rungs are farther apart.”

Another journalist claimed that low mobility and income inequality could be due to poorer children lacking access to exclusive schools, or because of differences in healthcare that could limit both education and employment.

Others suggest that the connection could be explained by variance in ability from country to country. These skeptics question any need for intervention. Indeed, it was demonstrated that the very way in which the elasticity of income between generations is defined is steeped in inequality.

Greg Mankiw, Harvard economist, states that the correlation is unsurprising because when comparing diverse and less diverse groups, the phenomenon will be exhibited even without real differences in mobility. His contention is that the curve is a device of diversity.

In a blog post at The Economist, there was a reply to the counter-argument of Mankiw’s. The author says that the argument over the Great Gatsby Curve is actually an argument over the fairness of America’s economy. He contends that whether you are rich or poor is in large part influenced by where you are born. He states that the United States is not a meritocracy. He adds that not only do those born rich tend to stay rich and those born poor stay poor, but your place of birth alone also has a huge impact on your earnings over the course of a lifetime.

Paul Krugman, an economist, has also countered Mankiw’s arguments.

The WCEG’s Carter Price suggested renaming the curve as “the line to serfdom” since he feels it might better convey the correlation’s meaning.