The rise of the 1 per cent and the Great Gatsby Curve

Most chief executives I know are quick to admit the role that luck has played in their success. They also typically say that they welcome criticism. I doubt their sincerity on both counts.

In the debate over the inexorable rise in measures of inequality, the various factors that have led to the rise of the ‘1 per cent’ include chance and circumstance; most analysts would also mention globalisation, technological change, the demise of trade unions and the polarisation of educational opportunities.

Any discussion of inequality quickly descends into a morass of statistics, jargon and philosophical musings about whether or not it matters. Students of economic history (a surprisingly small number) know that inequality has troubled scholars for a long time. And luck has also been long acknowledged - the grandfather of modern economics, Alfred Marshall, was intrigued by the role that chance plays in how much anybody earns.

When economists engage with their public, the very different ways in which they think about all of this is often revealed. Economists typically think about efficiency: how we can produce more with less. Non-economists, let’s call them normal people, are often obsessed by the need to redistribute what we do make. (Noah Smith, one of the best economics bloggers out there, has an excellent recent post that both introduces and explores this distinction.)

For the most part, economists shy away from redistribution because they think that it often reduces growth: the cake that is being shared more equally often shrinks because of the dopey things that politicians do. Redistribution can be efficient but usually is not. The obvious politicisation of the debate rarely leads to any consensus. Economists in their search for efficiency usually believe that the associated rising tide lifts most boats - if some rise more than others it doesn’t really matter as all other possible outcomes are worse.

Current data on inequality is stark and has led some to conclude that the conventional ways of thinking need to be revised. In the US, where the data is particularly extreme, inequality fell from the late 1920s to the early 1980s but has since spectacularly reversed. It is now back to where it was nearly a century ago. Alan Krueger, President Obama's outgoing chief economist, has introduced a new piece of jargon called the Great Gatsby Curve, to make the point that the distribution of US income has regressed a long way. He also argues that the traditional way of viewing growth, efficiency and inequality needs to be turned on its head. Inequality, he suggests, is now so extreme it is reducing the growth rate of the US economy.

We live in a “winner takes all” economy. Trends long established in sport and music, where a smaller and smaller number of elite players take most of the spoils, have spread into many other industries. When this so obviously is a result of luck - and therefore in a sense pre-determined - the 99 per cent have an obvious grievance about fairness, as well as simple lack of opportunity. Why is CEO pay in the oil industry so highly correlated with the oil price? What possible law of finance justifies bumper payouts to executives because of something completely outside of their control? And, of course, there are the banks. And so on.

Krueger, and one or two others, think that manifest unfairness is feeding back negatively into productivity and, therefore, overall growth. One of his most recent talks on all of this was given in the Rock and Roll Hall of Fame, which is probably testament to just how far from mainstream thinking he lies. But the numbers are uncontroversial: for example, children of rich parents are more and more likely to enjoy higher incomes themselves. Children from poorer homes are much less likely than before to move up into the middle class. It may have always been like this, but it is getting increasingly difficult to move up from whatever rung of the ladder you are on. If your parents can afford music lessons your life chances are better than ever.

If the US could reform its tax and education systems, inequality could start to fall again. But that seems as likely as action to fix the European banking system.