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This is not your parents’ economy

June 21, 2017
Chetty and Grusky smiling in the lobby of SIEPR building

Raj Chetty and David Grusky worked to study the relationship between inequality and upward mobility.

Photo: Glenn Matsumura

Editor’s Note: This Stanford Magazine story will appear in the July/August print edition of the magazine. It first appeared online June 21.

Melissa Agnew lives in Charlotte, N.C., a city that ranks high on affordability scales. It’s said to be one of the most desirable places to purchase a home, and a top destination for job-seeking college graduates and newlyweds.

But Agnew doesn’t own a home or have a college degree. She went through a painful divorce several years ago, and, even though she was working at the time, the city was anything but affordable for her when she suddenly became the sole breadwinner for her two young children, one of whom has medical problems. After growing up in public housing in New Haven, Conn., she had moved to Charlotte specifically to provide her kids with a better life. But it wasn’t working out the way she had planned.

“I just felt like there was no hope,” she says. “I was already going through a lot of mixed emotions from the marriage, and it really made me feel like less of a mother to my children because I wasn’t able to do things for myself.”

She’s not alone. Americans across the country feel stymied in their ability to improve their lot. A few years ago, a research paper by Stanford economics professor Raj Chetty brought that fact into sharp relief. The analysis, based on millions of anonymous earnings records, ranked U.S. cities by their rates of upward mobility — the likelihood that someone will advance from one income bracket to another. In Charlotte, children born into families in the bottom 20 percent had just a 4.4 percent chance of rising to the top 20 percent — one of the lowest rates in the country, and one that was worse than that of any developed country for which data was available.

A 2013 New York Times article about the findings soon came across the desk of Brian Collier, executive vice president of the Charlotte-based Foundation for the Carolinas, an organization that helps direct hundreds of millions of dollars in grants from corporations and donors to nonprofits each year, mostly in the metropolitan Charlotte area. Chetty, who was then at Harvard, and other scholars had identified factors that affect mobility, such as education quality, level of segregation, family structure and social networks. “All of the things that [Chetty] points out as predictors were things we were spending a great deal of money on. So why were we ranked so low?” Collier wondered.

He presented the Times story to his board of directors. After discussing the matter, they decided to pause a $2 million portion of the foundation’s grant-making while they studied the issues further. Then, in 2015, the foundation teamed up with Charlotte and Mecklenburg County officials to examine the Chetty research, including a subsequent paper that ranked Charlotte last in terms of mobility out of 50 large cities studied.

The Chetty data was motivating because it gave people something to latch on to. “People’s eyes glaze over when you talk about poverty,” Collier says. “[But] everyone is shocked when you think about the American Dream and how the place where you were born dictates so heavily your pathway. No matter what you think about poverty and income redistribution and all of the different things people talk about, every person in the United States agrees that people should have a fair shot at achieving the American Dream.”

The American Dream has always been part reality and part mythology, a source of both aspiration and inspiration. And for decades that dream was authenticated by an economy that, despite the occasional downturn, reliably delivered expanding opportunity and an accompanying expectation that each generation would live better than the one before. But in recent years, globalization, the resulting loss of manufacturing jobs and the Great Recession have made it harder for Americans to move up in the world.

The effects take many forms. Roughly a third of white working-class Americans reported eating less or skipping meals in order to save money, according to a 2016 survey by the nonpartisan Public Religion Research Institute and the Atlantic magazine. A similar proportion of that group said it would be very difficult or nearly impossible for them to cover an emergency expense of $400. A 2014 Pew Research Center analysis showed that among people between the ages of 18 and 34, more were living at home with their parents than in any other type of arrangement (married/cohabitating, living alone, etc.).

Chetty, who realized his own version of the American Dream after moving to the United States from India when he was 9 years old, has spent much of his career trying to find out why the American Dream seems more elusive than ever. The platform for his research is a collaboration called the Equality of Opportunity Project, which he formed several years ago with Brown professor John N. Friedman and Harvard professor Nathaniel Hendren.

“All of our projects build on each other,” Chetty says. “We’re trying to tell a broader story and solve what we see as one of the most important problems of the current era, which is: How do we continue to preserve America as a land of opportunity for all?”

Central to that question is whether rising inequality makes it harder to advance in life — a major point of contention among policymakers, economists and voters across the country. This year, Chetty and his team made a breakthrough. After analyzing vast amounts of administrative data (the information that we provide to our governments through things like the census and our taxes), they believe they have determined that it does. They summarized those findings in the April 28 issue of Science, in “The Fading American Dream: Trends in Absolute Income Mobility Since 1940.”

The paper helps explain with data the forces that spawned widespread discontent with the wage gap, culminating in the 2011 Occupy Wall Street movement, and which inspired policy proposals during the 2016 presidential election such as free public college tuition and a $15 minimum wage. Chetty says he hopes their findings motivate policymakers and others to act, just as his prior research on cities like Charlotte has.

The “Fading American Dream” collaboration began in January 2014, when Chetty, Hendren and three other scholars released research showing that the chances someone will move up the income ladder have not changed significantly over time. The paper came at an awkward time. The findings didn’t sync with how many Americans felt. And just one month prior, President Obama had delivered a speech in which he lamented “diminished levels of upward mobility.”

Chetty collaborator Friedman was at the White House working as a special assistant for economic policy at the time. Because he had seen an earlier draft of the paper, he tried to warn his White House colleagues about the president’s remarks on that particular point. But he struck out. After the speech, at least one commentator pounced on the Chetty and Hendren research to call Obama “flatly wrong” and to criticize his “populism.”

But then Chetty received a challenge from New York Times columnist David Leonhardt to take his inquiry into mobility a step further. Leonhardt, with whom Chetty often exchanged ideas, wondered: If movement up the income ladder remained steady, what about the chances that someone was actually doing better than his or her parents?

After Chetty moved to Stanford in 2015, he began to consider how to respond to Leonhardt’s question. Fortunately for him, Stanford has one of the leading sociologists working in the field of social mobility: David B. Grusky, director of the Stanford Center on Poverty and Inequality.

Chetty pulled Grusky into the project and together with Hendren they assembled a team of economics and sociology doctoral students, including one, Robert Manduca at Harvard, who had been exploring the same idea (by using data Chetty and Hendren had made available publicly), and two others with coding experience, Maximilian Hell at Stanford and Jimmy Narang, a former Stanford research assistant now at UC-Berkeley.

“It took quite a while to figure out exactly how” to answer Leonhardt’s question, Chetty says. “There are a bunch of statistical issues you have to solve.”

That’s putting it mildly. Long-term data that linked parents to their children didn’t exist. To get around that, the team combined data from the U.S. Census Bureau with information from de-identified federal income tax returns, to which the IRS had given them restricted access as part of an earlier study.

“I think a lot of people, me included, thought it probably wasn’t possible to figure out how much mobility there had been in the U.S. over a long period of time,” says Sean Reardon, professor of poverty and inequality in education at Stanford, who provided feedback to Grusky and Chetty. “So, in the first order, [the team’s work is] very smart and creative.”

If Chetty and Hendren had proved Obama wrong, Chetty and Grusky proved him right again. According to the “Fading American Dream” paper, 92 percent of people born in 1940 earned more in income at age 30 than their parents did at age 30. Only 50 percent of those born in 1984 did.

The declines were startling. But even more startling was what would be required to reverse them.

In trying to explain why mobility has fallen so precipitously, Chetty, Grusky and their team considered two “counterfactual” scenarios for those born in the 1980s. The first assumes higher GDP growth, equivalent to that experienced by those born in 1940 but distributed as it has been recently. The second uses the real GDP growth for the 1980s cohort but assumes a “more broadly shared” distribution. As the paper explains, “the first scenario expands the size of the economic pie, dividing it in the proportions by which it is divided today. The second keeps the size of the pie fixed, but divides it more evenly as in the past.”

The higher GDP growth scenario did increase mobility — to 62 percent from 50 percent. But the more broadly shared growth scenario did even better, increasing mobility to 80 percent. To achieve that higher level of mobility using GDP alone would require growth of 6.4 percent per year, Chetty and his team found. (Recent years have seen growth under 3 percent in the United States.)

“There’s much talk about how inequality might be nefarious or pernicious, but really the evidence hasn’t been very clear,” says Hell, one of the sociology doctoral students on the team. “We were able to say, if you care about upward mobility, aggregate growth wouldn’t be enough to restore it; instead, growth needs to be more equitably distributed.”

Kim Weeden, MA ’93, PhD ’99, chair of Cornell University’s sociology department and director of its Center for the Study of Inequality, which Grusky founded, says the paper makes an important contribution on a timely topic.

“In theory, you could have inequality without having immobility, but we don’t live in that world,” she says. “We live in a world where . . . kids who are born into income have a lot of advantages.”

After Charlotte formed its task force, a representative from the local nonprofit Crisis Assistance Ministry led the city’s 20-member working group in a poverty simulation designed to make them aware of the realities of some of their fellow residents’ lives. The nonprofit agency served more than 22,000 families in the county in fiscal year 2016. Its average client had a gross monthly income of $1,295, compared with the county’s median of $4,738. Its CEO, Carol Hardison, also arranged for the task force to meet with clients who had to deal with the same problems task force members did but under much more difficult circumstances. Melissa Agnew, the single mother of two, was one of them.

Agnew shared how, after her landlord served her with eviction papers and her utility company threatened to cut off her power, she had gone to the Crisis Assistance Ministry for help. The agency paid portions of her rent and electricity bills, and that cushion — plus a better-paying job Agnew found — enabled her to get back on her feet.

“I actually broke down and cried before those people because it felt like I was reliving my situation,” recalls Agnew, who now serves on the board of the organization that helped her. “I felt embarrassed that I got emotional, but I’m glad that it happened because I’m hoping it will resonate with people.”

According to Hardison, the task force members were just as moved. After forming in 2015, the group met with thousands of community members in Charlotte over an 18-month period to examine the issue of mobility. Along the way, interest in its work grew, especially as the U.S. presidential election neared and following the September 2016 killing of Keith Lamont Scott by a Charlotte-Mecklenburg police officer, which led to massive protests in the city’s streets.

When the task force scheduled a presentation about its findings for March 27 of this year, free tickets to the event distributed online were gone in 72 hours, Collier says. An overflow room had to be set up to accommodate the hundreds of donors and leaders from business and faith-based communities who wanted to attend. The resulting report and recommendations call for systemic, structural changes as ambitious as dismantling segregation and strengthening family structures. Specific proposals range from expanding access to early childhood education to improving living-wage job opportunities. Next, the city plans to assemble a team to figure out how to implement the recommendations, a process it knows could take many years.

It isn’t just Charlotte making use of Chetty’s work. The Equality of Opportunity Project’s data has been used by universities and housing authorities looking to improve outcomes for low-income students and residents (see below) and by public schools trying to keep higher-quality teachers in the classroom.

Although the “Fading American Dream” paper doesn’t provide prescriptions for how to reduce inequality, it does shine light on the problem so that others may do so. “We should know if we’re not living up to the American Dream,” Grusky says. “Maybe people are fine with that, maybe they’re not, but they ought to know. And now that we know, it’s up to the people. That’s how democracies work.”

In Charlotte, according to Collier and Hardison, much has already been accomplished, including the start of a conversation that might never have taken place otherwise. “I can’t overemphasize how important the research was,” Collier says. “I don’t know if we do ticker-tape parades anymore, but [Chetty] would probably get one if he came here. He’s a celebrity, a household name.”

Still, as well received — and well publicized — as the “Fading American Dream” paper has been, it did draw criticism. In March, Scott Winship, a former Brookings Institution fellow, published a paper through the Archbridge Institute pointing out that if you were to adjust the “Fading American Dream” data in certain ways, including for family size, the mobility rate would rise. The Archbridge Institute states on its website that “there is an excessive focus on income inequality as the main cause of immobility.”

But, as a Brookings Institution blog post about Winship’s paper noted, Chetty and Grusky considered alternative calculations, not just with family size but also with inflation, ratio of children’s income to parent’s income, post-tax instead of pretax measures, and income at age 40 instead of at age 30, among other factors. They ultimately went with the analysis they felt best reflected the data, Grusky says.

The thoroughness of the “Fading American Dream” paper — its consideration of so many variables — is a hallmark of the Equality of Opportunity Project, says Friedman, one of the team members. “We’re all just really committed to understanding the questions we’re studying as deeply as we can,” he says. “We don’t want to write a paper that answers 65 percent of the question even if that alone would be a successful paper.”

Something else the Equality of Opportunity Project collaborators have in common? They all believe the American Dream is worth fighting for, however faded. And the Stanford outpost of the project may soon become even more active. Chetty, Grusky and Reardon are all senior fellows at the Stanford Institute for Economic Policy Research (SIEPR), where Chetty leads the interdisciplinary Opportunity Lab.

“There’s a lot of excitement about trying to leverage the great resources that are here in Silicon Valley with the kinds of questions [Chetty and Grusky] are tackling, to really move the needle,” says Mark Duggan, SIEPR’s director. “That’s very core to what we’re trying to do at SIEPR.”

There are plans for a future Equality of Opportunity Project with Reardon on education. Chetty is preparing to use Facebook data to study how networks affect poverty. And, in their quest to improve people’s lives with the use of administrative data, Chetty, Grusky and others are exploring new ways to leverage Census Bureau data to better examine questions of mobility.

“When I was a kid — for many kids in India — coming to America was literally the dream,” Chetty says in explaining his almost singular focus. The American Dream was “very motivating to me and to my family. America is a beacon of opportunity for so many people around the world. I think preserving that and expanding it to other countries as well is extremely important.”

The “Fading American Dream” paper isn’t the first time economics professor Raj Chetty and his team have used data to upend previous research.

Nearly 25 years ago, the U.S. Department of Housing and Urban Development (HUD) began a monumental social experiment to test whether moving low-income families to lower-poverty neighborhoods would improve the lives of the parents and children involved.

More than 4,600 families were enrolled and assigned to one of three randomized groups: a group that received vouchers to move to areas with poverty rates below 10 percent, as well as counseling on the potential relocation and help in leasing a new unit; a group that received vouchers that could be used anywhere; and a group that was eligible only for preexisting programs.

The results of the experiment were largely disappointing. Although the recipients of the lower-poverty vouchers became healthier, the adults did not experience better outcomes in employment or income.

Then, Chetty and Harvard professor Nathaniel Hendren came along. In 2015, the pair combined forces with Harvard professor Lawrence Katz to reanalyze the data. Because the children in the experiment were older than they had been in previous evaluations, Chetty and Hendren were able to test their employment outcomes.

The updated results? The experimental vouchers increased the future annual earnings of young children who moved to lower-poverty neighborhoods by 31 percent, an amount the researchers estimated would increase total lifetime earnings by about $302,000.

When Gregory P. Russ, then the executive director of the Cambridge Housing Authority, first started reading reports about the new research, he sent Chetty an email, and the pair made a commitment to study the issue further. More than a dozen public housing authorities around the country agreed to participate, including the Seattle Public Housing Authority, where Andria Lazaga is director of policy.

Lazaga said the new analysis of the HUD experiment was a “game changer.”

“We had all written it off,” she says of the experiment. “When the revised data came out, it was like, in the long run, there really is a payoff if we do this right.”

The United States spends approximately $20 billion each year on vouchers, but 80 percent of them are used in moderate- or high-poverty areas. Chetty and Hendren estimate that the eventual additional tax revenue from children who move to lower-poverty neighborhoods would offset the cost of the vouchers used to move them there.

Today, public housing agencies around the country have partnered with government officials, housing advocates, Chetty and other scholars in an effort to maximize low-income families’ chances for success.

“Here’s a case where the data has shaped thinking and now the data is about to shape practice,” says Russ, who became executive director of the Minneapolis Public Housing Authority in February and promptly signed it up to participate in Chetty’s research. “The real power is not just changing your mind that a method could work; the real power is in designing a program based on what really amounts to a scientific assessment of its impact. That’s rarely done.”

Rebecca Beyer is a freelance writer in New York City.