Addressing the U.S. Financial/Housing Crisis: Pareto, Schelling and Social Mobility

Two important principles governing upward social mobility are Pareto’s 80/20 rule and Schelling’s segregation threshold. Pareto shows that wealth follows a power law, where a few have the most. Schelling shows that neighborhood preference (beyond a certain threshold) leads to spatial segregation. The link between these two principles, however, remains undeveloped—particularly in relation to the current U.S. financial crisis. To explore this link, we created an agent-based, Pareto universe of rich, middle and poor agents. The rules for this universe follow Schelling, with a slight modification: while rich agents seek their own, middle and poor agents do not; instead (pursuing upward mobility), middle agents seek rich agents and poor agents seek middle agents. Congruent with the current U.S. financial crisis, our model finds that, in a log-normal wealth distribution with a power-tail, moderate upward social mobility produces spatial segregation, instability and, in particular, unhappiness on the part of middle-class and poor agents. We call this insight the upward social mobility rule (MR). Unexpectedly, the MR also provides a corrective: it appears that, at threshold, upward social mobility leads to integrated, stable neighborhoods with very high rates of happiness. The MR therefore suggests that the U.S. financial/housing crisis might be effectively addressed for the greater good of all if upward social mobility is controlled and regulated, even on the part of poor households.