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What is The Great Gatsby Curve?

Summary: 
The Great Gatsby Curve illustrates the connection between concentration of wealth in one generation and the ability of those in the next generation to move up the economic ladder compared to their parents.

Today, The White House released the Great Gatsby Curve on its Tumblr.

"The Great Gatsby." You’ve probably heard of it -- a novel by F. Scott Fitzgerald and now a movie (again) that highlights the inequality and class distinctions in America during the Roaring 20s.

But, unless you’re an economist, you’ve likely never heard of The Great Gatsby Curve, introduced in a speech last year by Alan Krueger, Chairman of the Council of Economic Advisors.

So what is it, then? As Chairman Krueger explained in his speech, The Great Gatsby Curve illustrates the connection between concentration of wealth in one generation and the ability of those in the next generation to move up the economic ladder compared to their parents.

The curve shows that children from poor families are less likely to improve their economic status as adults in countries where income inequality was higher – meaning wealth was concentrated in fewer hands – around the time those children were growing up.

So why does this matter for the United States? The U.S. has had a sharp rise in inequality since the 1980s. In fact, on the eve of the Great Recession, income inequality in the U.S. was as sharp as it had been at any period since the time of "The Great Gatsby."

“While we will not know for sure whether, and how much, income mobility across generations has been exacerbated by the rise in inequality in the U.S. until today’s children have grown up and completed their careers,” he said, “we can use the Great Gatsby Curve to make a rough forecast.”

According to projections, “the advantages and disadvantages of income passed from parents to the children is predicted to rise by about a quarter for the next generation as a result of the rise in inequality that the U.S. has seen in the last 25 years,” he said.

It is hard to look at these figures and not be concerned that rising inequality is jeopardizing our tradition of equality of opportunity. The fortunes of one’s parents seem to matter increasingly in American society.

Children of wealthy parents already have much more access to opportunities to succeed than children of poor families, and this is likely to be increasingly the case in the future unless we take steps to ensure that all children have access to quality education, health care, a safe environment and other opportunities that are necessary to have a fair shot at economic success.

President Obama has advanced a number of policies to give greater opportunity for the middle class and those striving to join the middle class.

Education is critical to economic mobility, and the President’s proposal for universal, high-quality pre-school would make sure that every child – regardless of their family background – can start school ready to learn. The President has also proposed to raise the minimum wage to $9.00 per hour and index it to inflation thereafter, which would help make it a little easier for working families to make ends meet. The Affordable Care Act will help create more economic opportunity by giving families the chance to purchase quality, affordable health insurance, ensuring that families cannot go bankrupt because of an unforeseen illness.

And the President continues to fight for more investment in infrastructure construction and manufacturing, two industries that were particularly hard-hit by the recession but have historically offered American workers a path to the middle class.

Update: On Wednesday, June 12, Chairman Krueger gave a speech at the Rock and Roll Hall of Fame about the economics of popular music, and how lessons from that industry can be applied to the larger economy. You can read his remarks from that speech here.


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