Thursday, November 14, 2002

Becker and social capital

MR writes in pointing to this article in the New York Times (reg. required) arguing that parental success is (much) more important to a child's success than previously thought. Combine this with the Krugman's recent "the rich are too rich" op-ed, and it seems that the fabled "American dream"is a hoax.

In particular, MR writes
What I don't understand is why their is no mention of social privilege as a major factor (see excerpt below). In my experience, children of the rich have much greater access to capital as well as a greater chance to interact with influential business people because of their "connections," ie. because their family is part of the social elite.

Children of poor people trying to get a bank loan are like "nobodys" trying to get into a fashionable Hollywood party.
While children of the privileged have many advantages over children of the poor, access to capital is not one of them. If anything, capital markets are *much* more democratic now than they ever have been in the past. Innovations like junk bonds, angel investing, warrants, and venture capital means that money cares less about privilege than it ever did. In home ownership, a more prosaic form of capital, low interest loans and zero-downpayment mortgages mean that more low income individuals have access to home ownership than ever before.

If you look at return to capital over the past 30 years, it's stayed pretty constant at around 8%. This is what one expects of capital markets are competitive -- investors seeking higher returns drive down the value of high-return investments. The returns to human capital however have skyrocketed, particularly to education, which is also reasonable as productivity improvements made by investment in capital ends up going to labor through higher wages (returns to capital are constant).

But the article argues that education only explains 60% of the data. This means they've done a regression, and the coefficient infront of the "education" variable was 60%. This type of analysis is pretty inaccurate, so I'd be wary of trusting it. I don't know why intergenerational correlation in income seems so high, but it's not because only the rich have access to capital. Capital has, without a doubt, become more democratic than it ever was before.

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