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Thursday, November 15, 2007

Income Mobility and Inequality

A recent treasury report of some interest is blogged about by Mark Perry here and here.
(additional good links in the comments)

Bizzyblog also deals here:

(The study shows) beyond doubt that the U.S. remains a dynamic society marked by rapid and mostly upward income mobility. Much as they always have, Americans on the bottom rungs of the economic ladder continue to climb into the middle and sometimes upper classes in remarkably short periods of time.

The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s.

….. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn’t remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.

The impressive mobility and income statistics in the report collectively remind us of three points that Old Media and too many politicians want us to forget:

  • First, that those on the bottom rungs of the economic ladder typically don’t stay there very long, i.e., being irretrievably “stuck in poverty” is largely a myth.
  • Second, since the poor are not the same people from year to year, and since the poor who replace the ones who just moved up are either new workforce entrants or people who have fallen from greater heights, it’s likely that they too will make or remake their way up the economic ladder in a relatively short period of time.
  • Third, the rich are also not the same people from year to year. To the extent that they still exist, high punitive tax rates single out different people each year, “rewarding” their newfound success with confiscatory tax bills.
Did I mention this?
The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s.

Will Franklin's take was also worthwhile:

When people talk about "inequality" today in the context of American politics, it often seems like people are using the same words but meaning vastly different things. As high school debate judges like to say, "it's like ships passing in the night."

We hear people talk about "the rich" and "the middle class" and "the poor" all the time, without any adequate definitions to guide us. The populists and class warfare hawks (like John Edwards) thrive on the fact that many people conceptualize "rich" and "poor" as fixed positions over time.

In the real world, those positions change with regularity. On the Forbes 400 list, for example, there are sources of wealth listed that did not even exist a decade or two ago. 270 of the 400 (67.5%) are classified as entirely self-made, while 74 (18.5%) inherited their fortunes. 56 (14%) inherited some of it, but made some of it on their own. The top of the Forbes 400 list is not populated exclusively by Rockefellers and Carnegies and other old wealth.

Similarly, people at the very bottom of wealth and income levels in America do not remain there forever, either.

Even more impressive is the increase in mean (rather than median) income of the lowest quintile (.pdf):


Appropriately, this 232.5% increase indicates that, while the median income of the lowest quintile almost doubled (the median part indicating widespread improvement), the impressive gains in the mean show that some in the lower quintile (like the ones who made it all the way to the top 1%) far outperformed others. Inequality in action.

You simply do not see these kinds of numbers in many countries, especially those with rigid pro-union labor laws and punishingly high taxes. Yet, many of those countries are moving toward flatter, lower taxes, while Democrats in America want to move us backward toward a frightening and stifling era of economic policy. As it should be noted any time equality is cited as a aspirational goal of public policy, let's pause here and recall that the heydays of income equality in America were the 1930s and 1970s.

Do we really want to emulate the policies of the 1930s and/or 1970s, the two worst decades for the economy in the 20th century, in order to achieve a greater level of equality? Yuck.

No wonder so many people are confused by the whole concept of equality (and inequality). Fortunately, my intuition tells me that most Americans "get" that when The Declaration of Independence declares "that all men are created equal," it doesn't guarantee Soviet-style equality of outcomes. America does guarantee, as John Adams wrote to Patrick Henry a month and a day before the drafting of The Declaration, equality under the law: "The decree is gone forth, and it cannot be recalled, that a more equal liberty than has prevailed in other parts of the earth must be established in America."

Equal liberty. In other words, the equal treatment, under the law, of all citizens, from the government. The equal opportunity to fail, middle out, or succeed.

Sticking it to successful people-- via graduated and progressive income taxes, for example-- seems inherently antithetical to the very concept of America.

Because incomes and wealth are always changing, inequality is fleeting. The fact that "the poor" and "the rich" are not the same people after ten years essentially makes inequality moot as a problem -- or symptom of a problem-- that needs attention. The constant harping on inequality in the political arena, meanwhile, will probably remain a peeve of reasonable people as long as populists need an easy backup plan to fall back on when nothing else is working.

I second that!

Update: from this article:

Those who are concerned with income inequality often present their argument as though there are two choices. One can either side with the market fundamentalists whose "blind faith" claims that the market will work itself out or they can side with "realists" who believe government intervention is necessary to correct for this market failure. However, this is a false dilemma. As Arnold Kling so eloquently explained, there are many of us who concede that markets fail, but we are much more concerned with government failure. And there is certainly reason to believe that the government will fail to equalize economic outcomes. For example, the most frequent solution to income inequality, and the one advocated by Krugman in nearly every interview about his book, is higher taxes on those at the top of the income scale. While this may give the appearance of lessening inequality, in actuality it does very little. Essentially, it is equivalent to twisting the ankle of the fastest runner in the world in an attempt to make other runners faster. In no way does this make other runners faster.

...income inequality is a poor measure of prosperity. In reality, economic growth and innovation will do more to help the poor and the middle class than any conceivable government policy.

1 comment:

Bret said...

I was gonna post on the treasury study as well, but Howard beat me to it (and I'm glad since it's a nicer post than I would've been able to crank out).

The one thing that slowed me down, though, was that it focused exclusively on "taxpayers." The very poor don't pay taxes, do they? Do they file returns? Are they considered taxpayers? If not, wouldn't that severely skew the results of the study?

I actually read the whole study but still wasn't clear on the concept.