What is the most valuable inheritance in a knowledge economy?

Inheriting money is certainly nice, but intellectual capital may be the most valuable bequest in today’s knowledge economy.

… today’s rich increasingly pass on to their children an asset that cannot be frittered away in a few nights at a casino. It is far more useful than wealth, and invulnerable to inheritance tax. It is brains.

Intellectual capital drives the knowledge economy, so those who have lots of it get a fat slice of the pie. And it is increasingly heritable. Far more than in previous generations, clever, successful men marry clever, successful women. Such “assortative mating” increases inequality by 25%, by one estimate, since two-degree households typically enjoy two large incomes. Power couples conceive bright children and bring them up in stable homes—only 9% of college-educated mothers who give birth each year are unmarried, compared with 61% of high-school dropouts. They stimulate them relentlessly: children of professionals hear 32m more words by the age of four than those of parents on welfare. They move to pricey neighbourhoods with good schools, spend a packet on flute lessons and pull strings to get junior into a top-notch college.

Yes, all this is true.  But how to address the issue of income inequality?  Thankfully, the author agrees the “solution is not to discourage rich people from investing in their children”.  But he does have other ideas.

• Improve early childcare for poor children.
• Move primary control of public school funding from local to state level, and tilt it to favor poor students.  Expand school choice.
• Change college admission so it is based “solely on academic merit”, and force schools to be more transparent about the financial “return that graduates earn on their degrees”.

Even if these recommended reforms could be magically imposed, I question whether much would change.  Head Start doesn’t work in improving long-term outcomes, and I’m skeptical about the chance for reforming such a massive government program.  State funding of public education would be an improvement, but wealthy parents would always find ways to make sure their own children got a better deal.  School choice would at least offer motivated low-income families better options.  I like the idea of academic merit becoming the primary determinant for college admission, but that in itself would do little to mitigate the effects of inadequate K-12 education.

How much impact would increased income redistribution have?  So far, it appears our attempts to address poverty have ‘been a “success at strengthening the social safety net” but a “failure as an engine of self-improvement”’.

There are important reasons to help all Americans develop the ability to create their own financial success.

Loosening the link between birth and success would make America richer—far too much talent is currently wasted. It might also make the nation more cohesive….

Related:

 “87 percent of poor smart kids escape poverty”

Changes in marriage patterns have affected poverty and income inequality

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“America’s new aristocracy”, The Economist, January 24, 2015.

Economic ‘mobility has not changed appreciably since the 1970s’

Children growing up in America today are just as likely — no more, no less — to climb the economic ladder as children born more than a half-century ago ….

That’s the conclusion of The Equality of Opportunity Project, led by Harvard’s Raj Chetty.

Even though social movements have delivered better career opportunities for women and minorities and government grants have made college more accessible, one thing has stayed constant: If you are growing up poor today, you appear to have the same odds of staying poor in adulthood that your grandparents did….

Incorporating results from a previous study dating back to the 1950s, the authors concluded that “measures of social mobility have remained remarkably stable over the second half of the twentieth century in the United States.”…

INCOME MOBILITY OVER TIME

This figure plots the difference in average income percentiles for children born to low vs. high-income parents in each year from 1971-1993. On average, children from the poorest families grow up to be 30 percentiles lower in the income distribution than children from the richest families, a gap that has been stable over time. For children born after 1986, estimates are predictions based on college attendance rates.

The effects of government intervention remain a subject for debate.

David Autor, an MIT economist who writes frequently about issues related to inequality, called the findings “a sort of Rorschach” test that will support many economists’ preconceived notions about the effectiveness of government programs in providing opportunity.

Some could view the results as a failure of programs such as Pell grants, Head Start and nutritional supplements for children that are intended to promote mobility. Or, he said, “you can view this as: Social policies have fought market forces to a draw.”

Fathers seem to matter.

 “The fraction of children living in single-parent households is the strongest correlate of upward income mobility” among all the variables the research team explored.

Cognitive skills also seem very important.

87 percent of poor smart kids escape poverty

… 87% of children with the highest level of cognitive skills who grow up in the lowest income quintile move out of that quintile by adulthood.

Although income mobility has not changed much, in many ways living standards for poor people have improved.

Bill Gates:  ‘Poor people far better off today than they were in the past.’

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Jim Tankersley, “Economic mobility hasn’t changed in a half-century in America”, Washington Post, January 22, 2014.

Should we restrict ‘opportunity hoarding’ by high-income families?

In a previous post I wrote that “cognitive skills are very important in escaping poverty”.

87 percent of poor smart kids escape poverty 

Looking at the other end of the wealth spectrum, it’s clear that family income is also very important in avoiding poverty.

74% of rich, low-skills kids escape poverty.

Here’s the same chart used in my previous post, but this time I’m looking at the orange bar on the far right.  It shows that 74% of children with the lowest cognitive skills who grew up in the highest income quintile manage to avoid a life of poverty in adulthood.  But most of these children do slip into a lower income level, with only 4% managing to stay in the highest income group when they become adults.

 …

A college degree helps create a “glass floor” for high-income children.

The authors of the study described this resistance to falling very steeply down the income scale as a “glass floor”.  There is at least one factor that seems to be quite significant in helping these high-income adolescents of “modest skills” stay in the higher income groups.

Getting a college degree is associated with a 23% greater chance of an adolescent of modest skills—i.e., predicted to fall—remaining in a higher-income household as an adult.

Of course wealthier families are more able to afford for their children to complete college.  Their outlays typically include not only tuition and other direct costs, but also expenses like tutors, high quality K-12 schools, freedom from having to work part-time, and extra-curricular activities that pave the way to a college degree.  Non-monetary support in the form of encouragement and connections are also important.

Is there a problem of “opportunity hoarding” at the top?  And if so, should it be addressed?

Committed parents work very hard to make sure their own kids do as well as possible. They invest time, love, money, and energy into their well-being and prospects. This is a natural, commendable instinct, one of the deepest instincts of any of us. Indeed, we want more parents to feel like this. Why shouldn’t they do everything they can to help their children do well, even if—perhaps especially if—they are somewhat dim? What’s the problem here, exactly?

Of course advantage is passed down from one generation to the next in many ways that are benign, fair, and legitimate. Nobody is going to suggest affluent parents stop reading bedtime stories to their children in the interests of equal opportunity. But there may be some transmission mechanisms that are less legitimate. The use of social networks to close off certain areas of the labor market (e.g., the informal allocation of internships) could be seen as unfair hoarding of opportunities. Gaining preferential access to valuable education opportunities—for example, through legacy admissions—is another potential opportunity-hoarding mechanism. At the same time, the accumulation and transmission of financial wealth may also contribute to immobility at the top. Greater capital may, for example, ease transitions to higher education, or help with getting a foothold on the housing ladder in an area with good jobs.

Here, then, is the problem: the laudable desire of parents to do the best for their own children translates into systematic opportunity hoarding at the top of the income distribution. There is a strong meritocratic argument that lower-skill rich children should not triumph over the highly-skilled poor, and take up disproportionate space at the top.

It’s hard to find agreement on whether “hoarding” should be curtailed.  One idea would be to focus greater resources in providing support for the “poor smart kids” to attend colleges commensurate with their achievement levels.

‘How to get more high-achieving, poor students to attend selective colleges’

An important caveat from the study, which used the Armed Forces Qualifying Test (AFQT) to measure cognitive skills :

… Needless to say, adolescent AFQT and coding speed scores are far from a pure test of merit, or market ability. They simply measure certain skills that have developed up to the time of test taking. A whole host of factors—family background, formal education, and social environment—will have influenced this development. It is important to stress that our measures do not—cannot—capture innate levels of skill or ability.

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Dylan Matthews, “87 percent of poor smart kids escape poverty”, Washington Post, November 20, 2013.

Richard V. Reeves and Kimberly Howard, “The Glass Floor:  Education, Mobility, and Opportunity Hoarding”, Center on Children and Families at Brookings, November 2013.

How important are cognitive skills in escaping poverty?

A Brookings Institution study tells us that cognitive skills are very important in escaping poverty.

87 percent of poor smart kids escape poverty 

The green bar on the far left of this graph shows that 87% of children with the highest level of cognitive skills who grow up in the lowest income quintile move out of that quintile by adulthood.  The orange bar for that same lowest quintile shows that only 46% of low-income children with the lowest cognitive skills escape poverty.

 …
Furthermore, the chances for these top-scoring poor children to become rich are the same as those of comparable middle-class children.

… High-skill adolescents in the bottom quintile have a 24% chance of making it to the top quintile similar to the rate seen among high-skill students in the middle-income quintiles.

Cognitive skills were measured using the Armed Forces Qualifying Test (AFQT).  The study also found that conscientiousness, measured by the coding speed section of the Armed Services Vocational Aptitude Battery (ASVAB), is similarly associated with the ability of poor children to escape poverty.

A college degree improves the chances “of upward mobility for smart, poorer kids”.

… those with a degree had a 42% higher chance of making it from a lower-income household as a child into the higher-income bracket as an adult….

This data suggests ideas for policy changes, including one that would improve the opportunities for high-achieving children from low-income families to attend college.

An important caveat from the study:

… Needless to say, adolescent AFQT and coding speed scores are far from a pure test of merit, or market ability. They simply measure certain skills that have developed up to the time of test taking. A whole host of factors—family background, formal education, and social environment—will have influenced this development. It is important to stress that our measures do not—cannot—capture innate levels of skill or ability.

Related:  How do public schools treat below-average students? (Cost of College)

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Dylan Matthews, “87 percent of poor smart kids escape poverty”, Washington Post, November 20, 2013.

Richard V. Reeves and Kimberly Howard, “The Glass Floor:  Education, Mobility, and Opportunity Hoarding”, Center on Children and Families at Brookings, November 2013.