How Can We Improve Social Mobility?

(gentle piano music)

Hal Weitzman: Economic and social mobility is critical for creating a meritocratic society and a dynamic economy. But in the US, there has been a sharp decline in economic mobility in recent decades. Why has that happened, and what are the best policies to address the situation?

Welcome to The Big Question, the monthly video series from Chicago Booth Review. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.

Amir Sufi is the Bruce Lindsay Professor of Economics and Public Policy at Chicago Booth. Ariel Kalil is a professor and director of the Center for Human Potential in Public Policy at the University of Chicago Harris School of Public Policy. And Ufuk Akcigit is an assistant professor of economics at the University of Chicago.

OK, panel, welcome to The Big Question.

Ariel Kalil, let me start with you, because of your research about what happens in the home. Tell me what drives your research, and how does it relate to the issue of social mobility?

Ariel Kalil: Well, I’m interested in the home environment as a setting for children’s skill development. Children need both cognitive and what we call noncognitive skills to succeed in life, to perform well in school, to perform well in the labor market, to get along with other people. And these skills are critically important, both for social mobility as well as equality. And in my research, I study the things that parents do to help children either learn or not learn those skills, as the case may be. In particular, I focus on the early years as a primary setting for those kinds of skill development.

Hal Weitzman: So does that mean that your ability to climb a social and economic ladder depends on these very few early years to a large extent?

Ariel Kalil: I would say to a large extent. I wouldn’t say to an extreme extent. Clearly there is opportunity for skill development throughout the life course. But the early years are critically important. It’s a period of rapid brain development. It’s a period when I would say the path to skill development is laid down. And so it’s a formative period, and parents and the home environment play an important role.

Hal Weitzman: And specifically you look at things like reading and spending time playing games. So tell us a little bit about the important factors within those years.

Ariel Kalil: Sure, I mean, the important factors are children’s ability to think, to solve problems. Preliteracy skills, premath skills. Understanding the world, understanding how to get along with others. And there are many different ways that people in my field of developmental psychology study these phenomena, and they have to do with the quantity and the quality of time that caregivers spend with children on particular activities: as you say, book reading, puzzle playing, simply talking to children, helping them solve problems, etc.

Hal Weitzman: And this is caregivers. Does that mean parents, or could it be anyone?

Ariel Kalil: It’s typically parents, but it could be anyone. It’s the important people in a child’s social orbit with whom they spend time and from whom they learn. It need not be only the mother; it need not be only the father. A range of important caregivers typically in a child’s life.

Hal Weitzman: OK, so would it be over simplifying it to say that the more time a preschool child spends with a caregiver playing games, reading books, the more likely they are to advance socially and economically through their life?

Ariel Kalil: That would be a simple way of putting it, but I wouldn’t call it an oversimplification.

Hal Weitzman: OK, alright. Ufuk, actually, let me turn to you. You’re looking at the macroeconomy, and specifically innovation. Tell me about what drove you to that question and how that relates to social mobility.

Ufuk Akcigit: Sure. I’m studying macroeconomy and the importance of innovation for the macroeconomy. And the overarching research question is, why do we care about innovation, from a macroeconomic standpoint? And in our research, we found three answers to this question.

First, innovation is the sole driver of long-term economic growth. So in the long run, economies are growing only due to technological progress and innovation.

The second answer we found is that, when we look at the relationship between well-being and happiness and innovation, we see this very strong association between innovation at the regional level and the happiness of the individuals. And clearly this is due to innovation, but at the same time, there are some caveats. Maybe we can come back to this later.

The third aspect of it is that, OK, innovation is leading to the growth in the average income of individuals in the society, but how does that income evolve across generations, and how does it get spread? And what we see in the data, very starkly, is that innovation or turnover in the economy is very strongly associated with social mobility. Meaning that, looking at the condition of having low-skilled parents, what’s the likelihood that the child will end up being high skilled. And we see that, in regions where there’s a lot of turnover, there’s also very high social mobility. And this is particularly true if innovations are coming from new entrants, young entrepreneurs.

And one more interesting result we found was that this strong association between entrant innovation and social mobility gets much weaker in regions where the incumbents are spending more money on lobbying activities. Because, as you can imagine, innovation is a process of creative destruction, where new entrants are coming and replacing the incumbents. And this, of course, creates the chance for the child of an assembly-line worker to become the business owner. And if incumbents are slowing down this process, of course this is going to also have a negative impact on social mobility.

Hal Weitzman: So where you have more lobbying, you have less social mobility?

Ufuk Akcigit: That’s what we observe in the data. Indeed, we are also studying political connections of the firms as well, in a parallel study. And we try to also understand how politically connected firms, if they are getting any preferential treatment, and what we observe, for instance, very starkly in the data is that, where incumbents are politically connected, where they are hiring moonlighting politicians, we also observe much slower entry rate into those regions or into those industries, in the data. And of course this is going to have negative consequences on social mobility as well.

Hal Weitzman: Who are the innovators? What did you find out about them?

Ufuk Akcigit: That’s an excellent question. To answer this question, we have done a number of studies, both with modern US data, then we went back historically and looked at the past. We looked at different countries, for instance a more-equal society like Finland. And what we find in all these studies is that, first, education is an extremely important ingredient for becoming an inventor.

The second important ingredient is: having rich parents does help a lot. And when we put the two together, indeed we see this very strong association of having rich parents on becoming an inventor, but this positive association disappears completely once you control for a child’s education. Which suggests that, indeed, it is the child’s education that matters. But parental income matters because they are able to afford better education for their children. So of course, an immediate conclusion from here highlights the importance of education for innovation, which later on also leads to social mobility in the society, of course.

Hal Weitzman: How does that relate to your research, Ariel? Does it suggest that a good education could kind of overturn the bad effects you might get in the preschool years? If you didn’t get enough of that reading and playtime in the preschool years, could a really good education in school, in formal education, kind of overturn that bad effect?

Ariel Kalil: Yeah, that’s an interesting link you make. I don’t think so, because the child’s skills, first of all, are jointly produced. And I think we can’t imagine that a lack of opportunity for learning in the home environment can be made up for by a schooling environment.

First of all, one problem is that children who arrive at school with fewer skills will get less out of the learning environment that is provided to them in the school environment. So it’s a sort of vicious cycle in that respect.

Secondly, as it turns out, if you look at the number of hours, the sheer level or amount of time that children spend in school environments versus home environments or in the company of caregivers, the home environment trumps the school environment in terms of time in any horse race. And so, we simply can’t imagine, from a policy perspective . . . I mean, of course there certainly can be cases where there’s a fabulous school environment, but in general we should not think that that’s a solution for improving social mobility on its own. We can certainly think about a joint effort, but it’s really not one versus the other. It’s those two environments combined.

Hal Weitzman: Great, OK, Amir Sufi, let me bring you in. Your research about, kind of in the middle somewhere, about households and their debt. How does that relate to the question of social mobility?

Amir Sufi: Yeah, so we’ve been doing a lot of research thinking about not so much social mobility as just general inequality and how growing inequality then impacts the financial system, and how the financial system may then exacerbate inequality.

So I think the starting point is just the observation that the financial sector really is charged with transforming the savings of high, wealthy people. Usually most of the savings that goes into the financial sector is by, let’s say, the top 10 percent of the wealth distribution, just because they have so much wealth. And how do those savings get transformed into borrowing by firms and borrowing by households. So that’s where the link basically starts in our research, to think about, how is the financial sector handling the growing inequality that we’re seeing among the US population in particular?

Hal Weitzman: How does, basic question: inequality and social mobility are not the same thing?

Amir Sufi: Yeah.

Hal Weitzman: What are your thoughts on how those two are related?

Amir Sufi: So it’s a complicated question, and then perhaps these two have a better expertise on social mobility.

Hal Weitzman: Well, we’ll come to them. We’ll give you a chance to think about it.

Amir Sufi: But I think the question, of course, is that social mobility is the idea of a dynamic relation, how people and their education will then lead to them rising, perhaps, in either the income or wealth distribution, whereas inequality is kind of more of a static statement about just currently how does the top 10 percent of the wealth distribution compare to the bottom 10 percent.

So they’re related in that we might think high inequality may exacerbate the decline in social mobility, but I think the evidence is a bit mixed on that, and I think it’s not such a clear-cut relation on that front.

Hal Weitzman: OK, Ufuk, actually, what thoughts do you have on this? There’s been so much concentration on inequality in the past couple of years in economics.

Ufuk Akcigit: Sure.

Hal Weitzman: And we know that inequality has been getting worse and is likely to get worse. How does that relate to this question of social mobility?

Ufuk Akcigit: So the relationship is two ways. If we have a lot of social mobility, clearly this is also allowing new entrants to catch up with the incumbents, so that incumbents cannot open up the gap. So as a result, if there’s a lot of turnover in an economy, this is going to have a negative impact on the inequality because it’s going to shrink the income distribution.

On the other hand, as I highlighted earlier, there’s also a link from inequality to social mobility because the question is, are we giving equal chance to everybody in the society, or is it mainly a rich man’s business? And as result, just a special group in the society just keeps producing and earning.

So as a result from our studies, we found that, indeed, having this connection to rich families definitely helps in becoming an inventor, and as a result, this is also going to have an impact on social mobility as well because it looks like we are not giving equal chances to everybody. And this is also highlighting the importance of equal opportunity, especially on the education front.

Hal Weitzman: And let’s talk about some of the historical perspective here, because your broad sweep of history that you looked at indicates some differences in how innovation is done today to how it was done at the turn of the 19th century. Well, turn of the 20th century, I should say.

Ufuk Akcigit: These days there’s a lot of concern that there’s a productivity slowdown overall and we are running out of ideas, that we hit our golden age in the early 20th century. I thought this was an excellent period to study to shed some light on today’s discussion, so that’s why we have done an interesting study, I would say. In order to create a historical data set, we went back and digitized all the patent records since 1836. That way we uncovered the inventors on each of those patent files. And then we also merged them with the decennial census records between 1880 and 1940. That way you could see all these historical inventors of the golden age to whom we owe bicycles, refrigerators, the safety pin, you name it. A lot of the technologies we are using we owe to them, and it’s an interesting question: Who are they? So the interesting fact emerges that there are some facts that are very similar to today.

For instance, back then also, innovation was very strongly associated with social mobility as well. But when it comes to inequality, the dynamics have changed. For instance, historically, when we look at the relationship between innovation and inequality— again, when we say inequality, we have to be a little bit careful in terms of how we are defining inequality. For instance, one measure could be a 90/10 ratio, or the Gini coefficient in the income distribution. Those measures were negatively associated with inequality, as I highlighted. If there’s a lot of innovation, probably the distribution was shrinking.

But when you look at the relationship between top income inequality and innovation, the relationship is not linear. If anything, there’s a U relationship between the two, because at the same time innovation, especially patenting, is creating some monopoly rents. And if those monopoly rents are getting bigger and bigger, of course innovation in that case can also lead to top income inequality.

And I think this is also what we are observing today. Because that U-shaped relationship today became completely a positive relationship, so you don’t see any U-shaped relationship anymore. So in regions in the US today where there’s more innovation, you also see much bigger top income inequality, top income share.

Hal Weitzman: Your historical research also indicated the kind of people who are coming up with patents, with new inventions, right? In the 20th century, beginning of the 20th century, it was much more individuals . . .

Ufuk Akcigit: Oh, that’s right.

Hal Weitzman: . . . who came up with these inventions. And more recently it’s incumbents, going back to your point about lobbying and incumbents’ behavior.

Ufuk Akcigit: I think historically innovation was a little bit more of a democratic activity, in the sense that most of the inventions in the beginning of the century were done in garages. So when we look at the patent records, around 70 percent of the patents were assigned to individuals, whereas today more than 90–95 percent are assigned to nonindividuals, to corporations or universities.

So you see this massive shift of innovative activity from individuals to corporations. And, of course, this definitely relates to business strategies, and the competition environment among firms has a direct impact on this entire inequality discussion I think.

Hal Weitzman: OK, Ariel Kalil, what’s been happening in the home, what’s the historical perspective there?

Ariel Kalil: Right. We’ve taken a similar historical perspective to look at change in inequality, in learning opportunities between rich and poor kids, for example. We do that in the spirit of wanting to understand social mobility, I would say. So one thing we’ve noticed is that over time, there has been an increase for both rich and poor families alike in the amount of time that they spend with kids, and to such a great extent that, at present, the home environments of low-income kids look a lot like the home environments of rich kids 30 years ago. So you could say, well, that’s a good thing, that’s good for shrinking inequality, and that’s good because we could imagine that poor kids now have opportunities to—

Hal Weitzman: And that’s specifically in terms of how much time the caregivers spend with kids?

Ariel Kalil: Right, it’s both the quantity and qualitative dimensions: both how much time is spent and in these particularly important activities. But the second part of this phenomenon, this historical perspective, that is possibly more troubling is the fact that, just as low-income caregivers have increased their time, so too have high-income caregivers. And so, in fact, the gap has shrunk very little, because high-income parents are doing orders-of-magnitude more than they did 30 years ago.

And so, a puzzle that we have to solve is how much, in absolute terms, cognitive and emotional stimulation is necessary. Is there some absolute level that will say, this child is ready to succeed? We don’t know that as a field. But most people look at the continued gaps and say, that’s a problem we still need to solve. If you think there’s some set of spoils out there, and rich parents will keep having access to them, or taking them, or whatever, that’s something we care about.

Hal Weitzman: In your research, though, what’s kind of the baseline? Is there not a certain number of minutes that, kind of, was the baseline that you wanted to get people to?

Ariel Kalil: Exactly. So, as it turns out, even college-educated parents, or rich parents, are not spending five hours a day reading to their kids. They’re not spending hours a day playing puzzles with their kids. But what they’re doing is spending, let’s say, 20 to 30 minutes a day on a particular kind of learning activity that’s relevant for children’s development, but they’re doing it every day.

And what we see in lower-income households is that these activities happen much less frequently. When low-income parents do spend time with their kids, the actual number of minutes does not differ so much from their high-income peers, it’s just that it happens, as I said, less frequently. And the problem is, if you accumulate all those days over the first five years of a child’s life, the fact that one parent did something every day and another parent did something only once or twice a week, that’s what gives rise to the big gap in investment in children’s skill development that we see.

Hal Weitzman: Why do you think it doesn’t become a habit for the lower-income parents?

Ariel Kalil: Why does it not become a habit? That’s a great question and the focus of a lot of the research we do. Uh, because life is complicated (laughs) when you’re a low-income, often single parent.

Hal Weitzman: You mean the act of being, or being low income makes it harder, is that it?

Ariel Kalil: Yes, there’s demands on, many different demands, many fewer resources, much less social support, many fewer peers around you who are kind of reinforcing these particular kinds of activities. It doesn’t have to do with anything like less-educated parents have lower aspirations for their kids, or are any less good parents, or not even that they understand any less some of these key ways of interacting with their children.

Our research suggests that they know it, and they aspire to interact with their children, but somehow, for many people, life gets in the way of the things we want to do. This is actually a universal phenomenon. (laughs) And for low-income parents, the constraints of life often get in the way of following through on good intentions.

Hal Weitzman: Amir Sufi, tell us about the historical perspective on debts, then, the focus of your research.

Amir Sufi: Yeah, so I mean, we’ve seen a sharp rise, as all of us have noted, in measures of inequality over, say, the last 40 years. And I think the question in our research is: How does that ultimately impact the financial system?

And a lot of people have focused on this kind of “keeping up with the Joneses” story, because simultaneously with that rise in wealth inequality we’ve seen a sharp rise in household-debt levels, measured just about any way you want to measure them. And a lot of people say, oh, that’s because lower-income households, people in the median of the income distribution, they need to borrow more to get an education, to buy a car, to buy a home, in order to catch up, in some sense, with more-wealthy people. And that is one narrative that’s out there.

The narrative that we actually believe is more relevant is more of a push factor coming from the financial sector rather than a pull factor, and that is, as you get a rise in wealth inequality, because people who are extremely wealthy consume or spend so little out of their wealth, more and more money comes into the financial system. For the financial system, of course, it’s charge is to go out and try to find good investment opportunities, good ways of making use of those funds.

And our view, and this is related a little bit to Ufuk’s research, is just that perhaps there aren’t enough good opportunities in, say, the private-firm sector for investment, so a lot of that savings gets transformed into basically borrowing by lower-income people, subprime mortgages, subprime auto loans, more education loans. So that’s the connection that we really focus on in our research.

Hal Weitzman: So it’s about cheap money floating around that needs to find . . .

Amir Sufi: That’s right, I mean, if you look at the ease with which households anywhere below the 70th percentile of the wealth distribution, the ease it is for them to get credit: it’s a lot easier over the last 30 years than it was before that. One prominent example is the ease with which people can borrow against the value of their homes. Thirty, forty years ago it was almost impossible to take out what’s called a home-equity loan or cash-out refinancing, where you literally go to the bank and say, I want to take out more money because my home value’s gone up. Now, well especially in 2004, ’05, and ’06, it was incredibly easy to do that.

Subprime auto loans are another innovation. People so far down in the credit-score distribution can now borrow almost the entire value of the car when they buy a car. And so that’s one way in which I think inequality is affecting the financial system and thereby affecting borrowing patterns.

Hal Weitzman: What about the rising cost of college?

Amir Sufi: The rising cost of college is something that a lot of people have pointed to that potentially— because tuitions are going up, and because there’s so much support for education coming from the government especially—that that may be leading to a rise in tuition levels, and also then leading households to have to borrow more.

The story with education is more complicated because the government is such a huge player in the student-loan market. So that phenomenon gives a whole different dynamic than, I would say, mortgages and auto loans and credit-card lending, which is really more where our research focuses. But a lot of people are interested in student loans—

Hal Weitzman: Although the government is now a huge player in the mortgage markets.

Amir Sufi: Well, they’ve always been a huge player, but still mortgages are originated in the private sector. They’re oftentimes sold to the government. So the private sector still plays a very important role there, whereas I think over 90 percent of student lending is done directly by the government, so I think that market is really a government market, which has a bit of a different dynamic because of that.

Hal Weitzman: So would it be too crude to say that, if there were less easy money, there’d be less inequality?

Amir Sufi: Oh, that’s a tricky question because, of course, sometimes people need to borrow in order to catch up in the distribution, to do good investment in both their human capital, and potentially entrepreneurs need to be able to borrow.

Hal Weitzman: Sounds like a somewhat Victorian solution.

Amir Sufi: Right, right. S I mean, I think that the issue is a bit more complicated. I think that the fundamental problem is the decline in median-household-income growth. And once you have that decline, which can be for a variety of reasons, the financial system can end up exacerbating this problem. If people get too far into debt, you hear about debt traps, poverty traps. And so I think that’s an issue that we need to explore more.

Hal Weitzman: OK, I mean, in your book, you propose this new type of debt contract, shared responsibility. Tell us a little bit about that.

Amir Sufi: Well, I mean the broad perspective we’re trying to make, which I think is pretty intuitive once you think about it, is that debt, as a financial contract, really is a pretty terrible contract if you’re a middle- or low-income person, because it essentially forces all the risk on you.

So the example we always give is, if you have a $200,000 house and a $100,000 mortgage, and house prices drop by, let’s say, 50 percent, well then you end up eating the loss, not the bank; your mortgage is still gonna be worth $100,000. And so, the way debt contracts work is that it concentrates those losses on the debtor, who tend to be lower-income people. So the idea in our book is to just try to put more equity-like financing into markets so that that risk is shared more equally by the rich and the middle- and the poor-income households.

Hal Weitzman: OK. But it wouldn’t necessarily stop people from borrowing so much?

Amir Sufi: Well, that’s the question.

Hal Weitzman: They might borrow more.

Amir Sufi: Well, I mean, our point is that one of the ways debt facilitates or exacerbates these kind of bubbles, if you will, is precisely because lenders may not be bearing any of the downside risks, so they end up falling into some traps of kind of logic in thinking, oh, well it’s OK to lend because we’re not gonna experience the losses if house prices crash. And I think there’s a lot of research, both theoretical and empirical, that argues that if you had more equity-like financing, you may reduce the effects of these optimism, speculative bubbles, and so that’s one of the ideas we push in our book.

Hal Weitzman: OK, Ufuk Akcigit, let’s talk about solutions or policy prescriptions. How could we improve innovation in a way that would make it more accessible to everyone, not just the wealthy?

Ufuk Akcigit: So, um, clearly one policy conclusion coming from our analysis is: access to education is a very, very important tool. The second important aspect—which, in the very beginning of my part, I mentioned that innovation has an unusual relationship with happiness: the reason is that we observe that with true innovation, you’re also replacing some firms, and when some of those firms are leaving the economy, there are many, many workers working for them who are joining the unemployment pool. And it takes a really long time until they find a new job. And especially during these days when technology’s evolving very fast, skills, and especially software literacy’s extremely important. And we observe that typically older workers are not able to find a new job quickly.

And when we look at, for instance, in the data, the relationship between innovation and happiness, we see that the relationship gets much tighter in regions where the unemployment benefits are higher, which suggests that, indeed, if you take also into account the losers—not only the winners in this process but the losers into account—potentially we can also create a bigger gain from this entire process. Which, of course, suggests it doesn’t mean that we have to necessarily increase unemployment benefits, but it means that probably introducing some training programs for these people who are losing their jobs could be an important policy tool.

Another important policy conclusion coming from these studies is that we need to adopt procompetitive policies, which will make it easier for new entrants to come in and create this turnover that we want, and as a result, we can generate social mobility out of this.

Hal Weitzman: So more, kind of, antimonopoly or procompetitive—you call it procompetitive.

Ufuk Akcigit: More procompetitive.

Hal Weitzman: Antitrust, kind of.

Ufuk Akcigit: More entry friendly, more procompetitive policies.

Hal Weitzman: Ariel Kalil, let’s go back to this idea of what happens in the early years of life and how important it is. You’ve said that there’s this big gap between low-income parents, who have the same aspirations for their children. They still have books in the home and want to help them play games and everything else. You’ve identified some simple but very effective measures that would help them kind of bridge that gap. Tell us about them.

Ariel Kalil: Yeah, so in our work we’ve been very inspired by the work here at Booth and the Center for Decision Research, in thinking about parenting as a decision like any other decision you’d make. We think of parenting—a decision to read a book to your kid—as no different from going out for your daily exercise or saving for your retirement. And what do we do when you have an aspiration to do something, some health-promoting behavior, and yet you don’t do it? So if we take that framework—

Hal Weitzman: You get a Fitbit.

Ariel Kalil: You get a Fitbit. And we think metaphorically about a Fitbit for parenting, and we think metaphorically about, how do we design an intervention that helps parents set goals, reminds them of the goals they’ve set, gives them some sort of social reward or feel-good feedback for meeting their goals?

Hal Weitzman: What do you give them?

Ariel Kalil: Well, we send text messages, we send—

Hal Weitzman: Saying, well done.

Ariel Kalil: Saying, well done!—it’s really as simple as that. It’s a very different approach to behavior change in the sphere of parent-child interaction than has historically been true. We do these very simple, light-touch, low-cost kinds of interactions. And we find dramatic increases in the behavior of interest. And this is, we believe, because we simply help close that gap between wanting and doing. We’re helping people follow through on the good intentions they already have. We’re not trying to say: You should be doing this. You should want something different. You’re doing it wrong. You don’t know what to do. And in this way, I think we are breaking new ground in understanding the science of behavior change as it relates to parent-child interaction. The tools we use are cheap, they’re scalable, anybody could implement them, and they’re showing a lot of promise for different kinds of parent-child engagement.

Hal Weitzman: And so, do you then track those children and see how they get on in school and thereafter?

Ariel Kalil: Yes, our ideal research study would do just that. At the moment, we’re focused on sort of the first stage, which is, can we use things like goal setting, text-message reminding, inexpensive feedback simply to change the parent behavior? And then in studies we’re doing now, which are longer run, we then see does that translate into differences in kids’ outcomes. And then the big study tracks those children through to age 50 and looks at how their life turns out.

Hal Weitzman: OK, well, we look forward to having you come back.

Ariel Kalil: In 50 years, I’ll be back.

Hal Weitzman: In 50 years time. Please, God, we’ll all be here having this conversation again. We’ll look forward to the results of that. But unfortunately, on that note, our time is up. My thanks to our panel, Amir Sufi, Ariel Kalil, and Ufuk Akcigit.

For more research, analysis, and commentary, visit us online at review.chicagobooth.edu. And join us again next time for another The Big Question.

Goodbye.

(gentle piano music)