My Kid Or Your Kid
Greg Mankiw responds to something from Paul Krugman about income equality/mobility.
…the most important factor in whether you can become rich is whether you chose the right parents: Most people are going to end up with socioeconomic status close to where they started.
According to a recent study of mobility (see Figure 1), the correlation between parent's income rank and children's income rank is about 0.3. That means that if you are in the 99th percentile (the much-talked-about 1 percent), your best guess is that your child will be at the 65th percentile.
To me, that seems like a lot of regression toward the mean.
Now I’m not saying that what I’m about to write is correct, but I just want to think about it, and maybe by asking the question, someone will tell me why I’m wrong, and therefore expand my knowledge.
So, my thought experiment is, what if the money and riches that could be going to your kid are really just going to some other rich person’s kid? Maybe this could manifest itself because one set of parents really like yachts, and the yacht company’s owner’s child is in no way going to leave that lucrative business. Or, maybe you spent your riches on your kid already? By giving them a pricy education, maybe that wealth went to the school?
I guess my thought was that the money goes somewhere. Maybe Greg would then say that the wealth was indeed transferred, but instead of it going to the wealthy parent’s child, it went to the government in taxes. Or, maybe the parent had more children.
All that being said, the data is hard to refute. The only cursory thing I could even try to say anything against is that maybe using quintiles is still muddying up numbers. Maybe, there’s a percentage of wealth owners (dare I say 1%) who continue to gain wealth, and indeed their children do see that.