William C Dudley: Economic opportunity and income mobility
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York, at the Association for Neighborhood and Housing Development
Annual Community Development Conference, New York City, 11 April 2016.
* * *
Good morning. I am very pleased to speak at the 6th Annual Community Development
Conference. I would like to give a special thanks to the Association for Neighborhood and
Housing Development for organizing this conference about issues of importance to the
community development industry and to the future of New York City.
At the Federal Reserve Bank of New York, we develop a wide variety of research and data
products to gain a deeper understanding of regional economic conditions. We track the
health of household balance sheets at the state and local level using data from the New York
Fed's Consumer Credit Panel. We also conduct an annual poll of small businesses to
understand their credit needs and credit availability. My meeting with you today is part of our
continuing efforts to understand what is going on at the grassroots level of our economy and
to share insights from the New York Fed.
The Federal Reserve has dual objectives, set by Congress, with respect to monetary policy -
maximum sustainable employment and price stability. I would like to focus my remarks today
on the first of these objectives. As always, what I have to say today reflects my own views
and not necessarily those of the Federal Open Market Committee or the Federal Reserve
System.1
The Federal Reserve's employment objective can be viewed both narrowly and broadly.
Narrowly, we focus on the degree of slack or tightness in the labor market. This leads to
discussion of many measures of the labor market such as the unemployment rate, the
participation rate and the growth of wages. Broadly, the economy's potential growth rate
depends on effectively investing in and taking advantage of all of the resources in the
economy - in particular, we need to achieve the full potential of the human capital of all
Americans. For the United States to reach its maximum economic potential, all Americans
must have the opportunity to reach their potential.
The United States has always prided itself on being "the land of opportunity." Parents hope
that their children can achieve more than they did. Over the course of our history, immigrants
have journeyed to America in search of a better life, a chance to live the "American Dream."
What defines the American Dream? President Reagan thought that one element of the
American dream is "the opportunity to grow, create wealth, and build a better life for those
who follow," while President Obama has described it as follows: "A child's course in life
should be determined not by the zip code she's born in, but by the strength of her work ethic
and the scope of her dreams." One's destination in life should not depend on where the
journey begins.
Equal opportunity does not imply equal outcomes - some people may work harder, be more
fortunate in terms of their disposition and endowments, or just be luckier in how their lives
evolve. But it does require that income mobility - in particular, upward mobility - be widely
evident and remain part of the fabric of the nation.
It is important to keep in mind the distinction between income mobility and income inequality.
Income mobility is a dynamic concept - the degree to which individuals or families can move
up or down in the income distribution over time. Income inequality is a static concept - how
unequal are individual or family incomes at a particular point in time.
Recognizing that rising income inequality in the United States is an important issue, my focus
today will be mainly on income mobility. I don't think the issue of income mobility receives the
attention it deserves. It is a foundational element for a well-functioning democratic society
and provides evidence about the ability of an economy to provide opportunities for its
citizens.
A standard approach to measuring income mobility is to compare where a child is in the
income distribution relative to where the parents were in the income distribution. A striking
result is that intergenerational income mobility in the U.S. - a child's chances of moving up in
the income distribution relative to her parents - has remained stable over the past half
century. However, because of the increase in income inequality, the consequences of being
born to low-versus high-income parents are larger today than in the past. One explanation for
the lack of a correlation between income inequality and income mobility in the U.S. is that
income inequality is strongly influenced by the top one percent of the income distribution, but
there is little correlation between income mobility and this top income percentile.2
While income mobility in the United States has been relatively unchanged, it remains well
below several other nations. According to Stanford economist Raj Chetty, the probability of
moving from the bottom quintile to the top quintile is 7.5 percent in the United States, as
compared to 11.7 percent in Denmark and 13.5 percent in Canada - two countries with
relatively high levels of intergenerational mobility.3 So effectively the chance of achieving the
American Dream is not the highest for children born in America.
Importantly, Chetty finds even more significant variation in intergenerational mobility across
different metro and rural areas within the United States.4 While some regions in the U.S.
match the highest mobility levels among developed countries, others persistently offer less
mobility than in most other developed countries. Relative income mobility is highest in the
Mountain West and the rural Midwest and lowest in the Southeast. Now these differences
could be caused by the experience of living in different neighborhoods, but they may also
simply reflect differences in the people living in these neighborhoods. In an effort to
distinguish between these two possible explanations, Chetty and fellow economists study
children from families who changed their neighborhood during childhood and provide
evidence that much of the variation in upward mobility reflects the experience of living in
particular neighborhoods. Their findings imply that upward mobility depends strongly on
where you grow up as a child.
This research indicates that it is the places themselves, rather than the families who live
there, that affect the outcomes for children. An important question is what specific features of
neighborhoods are associated with greater upward mobility. Chetty and co-authors find that
higher upward mobility is associated with areas that are less residentially segregated by race
or income, have lower income inequality (i.e. a bigger middle class), higher quality schools,5
stronger social networks, higher community involvement and stable family structures.
The finding that intergenerational mobility is primarily a local problem has two broad policy
implications. The first is the need for place-based policies to invest more in at-risk
communities to improve their childhood environments. The second is to facilitate families to
be able to move into areas with better childhood environments.
With respect to the first, I would initially like to talk about the importance of schools―and in
particular, strong public education. Consistent with the findings by Chetty, there exists a large
literature that has established the importance of high-quality education as a key determinant
of economic mobility. While there are differences of opinions on the most relevant measures
of school quality, there is ample evidence that children who attend better schools on average
end up with better outcomes later in life - such as higher levels of educational attainment
and higher earnings. It is also well known that there exist large disparities in the quality of
education by geography and socioeconomic background. Compared to children born to
lowincome parents, those born to higher-income families can better afford to move and live in
areas with high-quality schools.
The sorting of families by income and their desire for better educational opportunities leads
to enclaves of higher-quality and higher-spending schools that are separated from areas of
economically less-advantaged populations and lower-quality schools. To a degree, this
residential segregation has been perpetuated by our system of school financing that relies
heavily on local property tax funding. Local financing of public schools leads to a bundling of
two distinct choices - residential choice and school choice - and increases the degree of
socioeconomic segregation across school districts.
We can promote greater income mobility by unbundling the residential and school choices.
This can be done in one of two ways. The first is to work to equalize school quality across
location, while the second is to allow parents more choice of schools from a given location.
Along the lines of the first approach, New York Fed research has shown that school finance
reforms that seek to equalize funding across school districts by reducing the role of local
property taxes can go a long way in decreasing residential segregation and equalizing quality
of education.6 The key mechanism is that such reforms make underperforming
neighborhoods more attractive, thus reducing socioeconomic segregation and leading to
consequent gains in peer quality in previously-challenged enclaves. This in turn reduces
disparities in school quality stemming from reduced socioeconomic segregation.
On the second approach, there exists research indicating that school vouchers that enable
students to move to private schools or better-quality public schools can lead to improvements
in public school quality and student performance by increasing competition among schools.7
It is important to note, though, that not all voucher programs are created equally, and the
design of the program matters in how vouchers impact school quality. Charter schools have
provided another source of school choice in education. More research into evaluating the
effectiveness of voucher programs and charter schools at raising student achievement would
be desirable in terms of informing public policy choices.8
The importance of education is not limited to elementary and secondary levels. In fact, there
exists convincing evidence from the child development literature that suggests that
educational investments early in childhood have especially large rates of returns in terms of
lifetime earnings and other outcomes. Take, for example, the Perry Preschool program for
low-income African-American children, a two-year preschool program experiment in the
mid1960s. Recent research shows that this program had very large beneficial long-term effects,
with participants experiencing higher rates of high school graduation, higher salaries, higher
homeownership, more stable family structures, fewer arrests and lower welfare dependence.
The large positive economic externalities from these investments in children imply that such
programs more than pay for themselves over the long term. Estimates indicate that the
aggregate benefits over the life of a child exceeded by eightfold the program's per-pupil
cost.9 Almost equally-large gains were reported for children who enrolled in Head Start, a
federally-funded nationwide preschool program for low-income children.10
Related literature on neighborhood effects has found that labor market outcomes for adults
are also significantly affected by the type of neighborhoods where people reside. The role of
labor market networks and referrals has been amply-demonstrated as affecting the likelihood
of finding a job, the quality of matches between employers and workers, and the earnings
associated with these jobs. Several studies show that many of these networks have a
significant local neighborhood component. Further, workers who live in neighborhoods with
higher-quality networks are more likely to move to jobs with higher wages.11
Let me now turn to policies aimed at improving upward income mobility through increased
residential mobility. There is some striking evidence that shows providing more opportunities
for families to move to wealthier areas may improve upward mobility while also being
costeffective.12 In the mid-1990s, as part of a lottery-based housing mobility experiment
sponsored by HUD - called the Moving to Opportunity (MTO) experiment - families in
highpoverty housing projects were given housing vouchers to move to lower-poverty
mixedincome neighborhoods. While this project appears to have had little impact on the economic
outcomes of the adults and older children, the program appears to have had remarkable
long-term impacts on children who moved to such neighborhoods at a young age, with the
impacts increasing by the number of childhood years they ended up living in the better
environment.
Analysis of the data from the experiment shows that those who moved to lower-poverty
areas when they were 12 or younger were found to earn about 30 percent more, on average,
in their early- to mid-twenties compared to those who did not move, were 27 percent more
likely to have entered college, and 30 percent less likely to be a single parent. The MTO
experiment again illustrates the importance of neighborhood effects on child development
early in childhood. It also demonstrates that grants to move families to lower-poverty
neighborhoods may reduce the intergenerational persistence of poverty.
Of course, mobility of the sort that Chetty and other researchers have emphasized interacts
in a very important way with the availability of affordable housing. Making high quality
neighborhoods accessible to families from all socioeconomic backgrounds is a major
challenge for public policy. Of course, illegal racial and other discrimination has played a role
in preventing access to high-quality neighborhoods. However, part of the challenge arises
from the fact that in a free-market economy, the quality of the environment is reflected in the
price of land - and thus housing - in that place. This means that the neighborhoods with the
best schools, the best access to jobs, shopping, recreation and other amenities will be the
most desirable and will have the highest cost of land and housing. Simply put, families
seeking the upward mobility that better neighborhoods can promote may well find that
housing in these neighborhoods is unaffordable.
Some kinds of public policies may exacerbate, rather than lessen, the tendency of the
housing market to price some families out of good neighborhoods. Zoning and other land use
regulations are sometimes enacted to artificially reduce the supply of housing, thus driving its
price up even further. Take, for example, minimum lot size zoning which specifies a minimum
amount of land per housing unit. When this regulation is binding, it reduces the number of
housing units that can be built in a given area, and thus introduces artificial scarcity into the
housing market, thereby raising prices.
Zoning can also be used to promote affordable housing - to include, rather than exclude
lowand moderate-income families by setting aside space for those families in exchange for the
right to develop market-rate units. This is a strategy that New York and other large cities
have pursued for many years, and in these cities it is easy to point to units that were
developed under the program. Nonetheless, these programs are often controversial - some
economists and others argue by increasing the cost of development they restrict supply.
Thus, while some percentage of new units developed will be affordable, fewer new units will
be developed with uncertain effects on affordability overall.
It's perhaps informative to contrast this kind of program with one that has historically been
the main mechanism by which the supply of affordable housing has increased. The program I
have in mind here isn't a housing program, but, in my view, it has extremely important effects
on the housing market. I'm talking about intra-urban transportation, which can serve to
dramatically increase the locations available for development, and thus promote the
availability of affordable housing.13 I believe that safe, reliable, affordable and efficient
transportation to job locations should be a crucial element in an effective housing policy.
Such a program indisputably increases the supply of sites available for development, which
is a key way to get the benefits of lower prices to a broader set of families. Indeed, it is clear
that cities' ability to grow and attract new residents requires them to either increase density -
essentially meaning taller buildings - or to expand outwards by increasing transportation
access.
Access to affordable credit is yet another pillar of a policy program that promotes housing
affordability. We at the Federal Reserve have long worked to ensure that credit flows
equitably and that financial services are available to all U.S. citizens. The Fed's research on
these subjects ranges from the pioneering study of redlining by a team of Boston Fed
economists, to a very recent New York Fed study on "banking deserts" that appeared in our
Liberty Street Economics blog just last month, as well as ongoing community credit work. We
understand the importance of credit in allowing communities to grow, and the importance of
the Community Reinvestment Act in requiring financial institutions to make investments in
their communities. But, as my remarks here have indicated, credit is only one factor - and
perhaps not the most important one - that affects the affordability of housing in our cities.
I've addressed the importance of geographic mobility in supporting income mobility from the
perspective of providing parents options for better neighborhoods in which to raise their
children. Geographic mobility is also important in terms of individuals receiving the highest
return to their human capital. Local economic shocks can depress employment and wages in
some labor markets. This creates a strong incentive for individuals to move to an alternative
labor market in order to more fully utilize their skills. Financial frictions to geographic mobility
can reduce this movement of individuals across labor markets leading to less-efficient
outcomes for the economy. Income mobility can be enhanced through policies that attempt to
limit these financial frictions. This argues for avoiding, where possible, policies that create
"in-place" subsidies where the household can access the benefits only while remaining in a
specific location.
The Federal Reserve has the twin objectives of maximum sustainable employment and price
stability. Achieving the first of our objectives requires that every individual has the opportunity
to achieve her full potential in life. Where you happen to be born should not determine your
chance of living the American Dream. Research is highlighting possible key determinants of
economic opportunity and income mobility. More research is necessary to inform future
policy choices in this critical area.
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