Nostalgic for the Gatsby era? (Surprise! You’re living in it.)
It’s fitting that director Baz Luhrmann chose contemporary artists like Jay-Z to provide the soundtrack in his new take on The Great Gatsby, because in many ways, the Gatsby story could easily be set in current times. (No, we don’t mean hipsters bringing back vests or flapper hairstyles.) Unfortunately, today’s economy shares many of the same sad qualities of the 1920s highlighted in the Gatsby story: increasing financialization, low socioeconomic mobility, and gross wealth and income inequality such that a privileged few live astonishingly well while a large portion of Americans are struggling just to get by.
EPI has been describing these trends for years. In fact, you might consider our flagship publication, The State of Working America, as a sort of modern-day Gatsby, in charts. The prose may not be as artful as Fitzgerald’s, but the economic descriptions are equally alarming.
The Great Gatsby’s protagonist, Nick Carroway, is drawn to New York by the promise of riches to be made on Wall Street. Indeed, the premium to working in the financial sector at that time was better than ever… until recently. As Figure A shows, at the beginning of the Great Depression, earnings per worker in the financial industry peaked at nearly 1.8 times the earnings per worker of all other private sector workers. After the Depression and the regulation that followed, earnings per worker in finance fell back roughly into line with the rest of the private sector. Beginning in the late 1970s, however, earnings per worker in finance again began to take off. By the onset of the Great Recession, they exceeded 1.8 times the earnings per worker of all other private sector workers. With such striking disparities in compensation, who wouldn’t be attracted to the green light of finance?
The depictions of economic inequality in Gatsby are stark. We catch a glimpse of two worlds, one filled with emerald green lawns and another where coal dust has choked out any sign of color. In 1922, when Gatsby was set, the richest 5.0 percent—the Tom and Daisy Buchannan class—captured a whopping 31.9 percent of all U.S. income (Figure B). That explains the front yard polo and the endless strings of pearls. The picture today is no less bleak, however. The top 5.0 percent of earners in 2010 took home 35.7 percent of all income.
While this share has increased slightly since 1922, it hasn’t simply ticked upwards slowly. There was a period of more equitable growth, stretching from the end of WWII to 1979, during which time overall inequality went down. Unfortunately, since then, either through deliberate policies that favor the top or a lack of policy action to protect the middle class, we’ve created a second Gatsby era.
At one point in the story, Tom Buchanan, the archetypal, old-money blue-blood from “East Egg,” expresses his disdain for the newly-rich residents of “West Egg” where Gatsby resides. Implicit in Buchanan’s contempt is the recognition that income can be fleeting and, thus, is not nearly as important as wealth. Wealth, i.e., the sum of one’s assets (houses, stocks, bonds, marble statues) minus one’s debts, is more enduring; it can be passed on to heirs, creating the dynastic family wealth that his character typifies. In 2010, the top 5.0 percent owned an astonishing 63.1 percent share of all wealth in America. Meanwhile, the entire bottom 90 percent held only 23.3 percent of all wealth. In fact, more than 1 in 5 households (22.5%) actually have zero or negative wealth, meaning their debt matches or exceeds their assets.
The picture gets even more disturbing when you examine wealth by racial group. In 2010, the median white household had wealth valued at $97,000. That is over 20 times the average wealth of black households, which stood at $4,900 in 2010.
The danger with such high concentrations of wealth is that it likely reduces a society’s economic mobility (pdf). When a shrinking portion of the population can afford access to good schools, to decent health care, and to homes in good neighborhoods, then the opportunity to better one’s lot in life begins to become concentrated as well. Jay Gatsby made it (as a bootlegger, mind you), but the reality for most Americans is that they will never venture far from the socio-economic status into which they were born. Studies have shown that a child born into a family in the bottom fifth of the wealth distribution has only a 7 percent chance of reaching to top fifth of the wealth distribution. Conversely, 36 percent of children born into the top fifth of the wealth distribution will remain there as adults, and 60 percent will remain at least in the top two fifths of the wealth distribution.
Economists quantify mobility with a metric called the intergenerational elasticity (IGE), which essentially describes how much of a child’s long-run earnings can be explained by the long-run earnings of their parents—the higher the IGE, the less mobile the society. Figure C shows what CEA Chairman Alan Krueger appropriately called “the Great Gatsby curve” (pdf). On the vertical axis is the IGE and on the horizontal axis, the Gini coefficient (a frequently-used measure of inequality). As the figure shows, countries that have higher levels of income inequality also exhibit a larger IGE, meaning lower mobility. (For more, read the mobility chapter in the State of Working America.)
It is easy to romanticize the exuberance of the Jazz Age. (Luhrmann’s Gatsby throws quite the party.) But we should remember that the excesses and disparities of the 1920s precipitated the greatest economic catastrophe in modern history, a disaster alleviated only by the massive stimulus of WWII. Let this latest incarnation of Gatsby be a wake-up call to the economic reality of 2013. We, as a country, must decide whether we will build an economy where growth is shared by all, or let policies of austerity, tax cuts for the wealthy, and inadequate regulation of Wall Street continue to feed growing inequality. We know too well how that story ends.
(Animation taken from The Great Gatsby trailer)
Bivens, Josh. 2011. Failure by Design: The Story behind America’s Broken Economy. An Economic Policy Institute book. Ithaca, N.Y.: Cornell, University Press.
Corak, Miles. 2012. “Inequality from generation to generation: the United States in Comparison”. University of Ottawa. http://milescorak.files.wordpress.com/2012/01/inequality-from-generation-to-generation-the-united-states-in-comparison-v3.pdf
Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012. The State of Working America, 12th Edition. An Economic Policy Institute book. Ithaca, N.Y.: Cornell, University Press.