Garett Jones  

The More Parents Pass on Earning Power to Offspring, the Weaker the Argument for...

Pinpointing Gun Households: A ... Bahrain Travelogue: Friendlies...
...the welfare state as social insurance.  

After all, if you know how your kids are going to turn out, what's there to insure against?  Sure, you'd like to grab resources from other people--the raiding party has a long history--but it's only when you're not sure how your kids will turn out that you start fretting over whether insurance markets face major market failures and whether government-mandated redistribution can fix those market failures.  

Further, if insurance companies can tell a person's productivity potential just by looking at the parental units, then it's easy to write a private insurance policy that pays the person what they are worth.  If high (or low) productivity persists across generations there's a weaker argument for insurance market failure. 

These twin facts--that when parental income is a better predictor of a child's income, both:

demand for genuine insurance against life risk will be lower, and 

market supply of such insurance will involve little redistribution,

--should play a big role in the debate over rising income inequality in the rich countries

The Great Gatsby Curve has made the rounds recently, showing that in countries with higher income inequality, your parent's income does a better job predicting your income.  One version from Chrystia Freeland, author of the new book Plutocrats (source: WonkBlog):


[Wonkish: Yes, it's elasticies not correlations. Maybe that matters, I doubt it.]

Testable hypothesis: One reason welfare states are smaller in high inequality countries is because moderate to high income voters demand less government-mandated insurance in these countries.  Most voters in these countries don't see much point in a wide-reaching welfare state since most voters face little genuine likelihood of falling to the bottom.  

If the Gatsby Curve is right, and if inequality continues to rise, the political support for redistribution will probably fall among the top third to two thirds of the income distribution.  When low income people become The Other in the minds of the median voter, the redistributive welfare state faces a tough political climb.  

Coda: I'm trying to get in the habit of often using "productivity" instead of "income" or "earnings."  I use the term neutrally, referring to private productivity not overall productivity, so a successful raiding party is just as productive as a McDonald's.  

Subcoda: I saw Freeland speak about her book earlier this year, and she places substantial weight on productivity-side explanations for the rise of the new plutocracy.  

Comments and Sharing

COMMENTS (6 to date)
Brett writes:

How did you get from "moderate to high-income voters demand less government-mandated insurance" to "most voters face little genuine likelihood of falling to the bottom"? Most of them are at or near the bottom, and you see a stronger appetite for social insurance policies in many highly unequal countries (such as Brazil and India).

Doug writes:

Un PC observation:

If the X axis replaced Gini coefficient with a measure of population genetic diversity the graph would look very similar.

We know that earning power has a strong genetic component, both through intelligence and concionsness. Societies that are highly genetically homogenous, like Scandinavia or Japan will have small variance in income related genes.

This will translate into both lower inequality as well as higher mobility, since a higher proportion of earnings variability will be noise instead of signal.

Countries with high genetic diversity, like the US and South America should have higher R-squares when using genetic heritage to predict income. The US has a preponderance of both high and low earning minorities compared to Northern Europe.

Brandon Berg writes:

I get the impression that they mean social insurance in a Rawlsian, veil-of-ignorance sense. That is, there's a presumption that if we were given the option to buy social insurance before being born, and without knowing who our parents would be, a rational (pre-)person would choose to take it.

That's the charitable interpretation. I think that more often "social insurance" is just a euphemism for, "No skin off my nose if those crooked fat cats have to pay higher taxes."

Brandon Berg writes:

Lower income inequality may also reduce intergenerational income correlations by affecting the career choices of the children of the upper and professional classes. If the difference in standard of living between the first and fourth quintiles is very large, then it becomes unthinkable for a child of the first quintile to choose a career path that will drop him into the fourth quintile. But if the difference is not so large, he may be willing to choose a career path that sacrifices income for intangibles.

Also, due to the large size of the US, there is significant regional variation in nominal income which would likely be moderated somewhat by local PPP adjustment. Since people tend to live near where they were born, this impacts intergenerational income correlations.

Bostonian writes:

If parents pass on their productivity to their children, taxing the more-productive to subsidize the childbearing of the less-productive has dysgenic effects. This is an old idea that has been labeled "Social Darwinism". That does not mean it is untrue.

Tom West writes:

That does not mean it is untrue.

Odd how this obsession with those of the lower classes, wrong race, or criminal tendencies outbreeding the the virtuous has been around for centuries (if not millenia), yet we keep failing to see the apocalypse of mentally retarded criminals overwhelming and enslaving the virtuous, hard-working, productive (and probably white) upper classes.

I have to admit, if one ever wants proof that a narrative that feels right ("Oh poor us, surrounded by the hordes") can survive a thousand years of proof otherwise, the obsession with dysgenics is it.

(And yes, Bostonian, I am (I hope) exaggerating your belief for effect, but the underlying sentiment really hasn't changed since time immemorial.)

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