Monday, January 18, 2016

King for a Day, Reconsidered

A couple of weeks ago, I critiqued a number of David’s pieces on the topic of income inequality. In those pieces, David seemed to accept that income inequality had grown over time, but claimed that it was no big deal because people move up and down the income distribution over the course of their lives—what economists call ‘income mobility’. I pointed out that one of the main sources for David’s claims—a study conducted by the U.S. Treasury in 2007—seemed to 1) confirm the notion that income mobility is low in the U.S., yet still managed to 2) overstate the amount of income mobility we actually have. David promptly composed a follow-up post responding to the former but ignoring the latter, arguing that

“…more than half of the top one percent were no longer in the top one percent by 2005; and, as previously noted, only 25 percent of those in the top 1/100 of one percent remained there by 2005. What’s more, if only 75 percent remained in the top five percent, that means a full one-fourth had already dropped out of that income group within a mere ten years!”
While this argument sounds convincing, it ignores the findings I presented from the Congressional Budget Office (CBO) showing that even though some individuals may fall out of the ‘very rich’ category over time, that’s typically because their income fell from, say, $10 million to $9 million, not because they went back to being middle class. Moreover, those who replace them at the very top are typically those who were living just below the ‘very rich’ threshold the year before.

David does attempt to critique the CBO by claiming that because it looked at households rather than people, we should discredit the findings since households are “simply another category that disguises the mobility of living and breathing human beings.” The implication is that because the average household size today consists of fewer working people than the average household a few decades ago, income mobility is actually much higher than CBO’s household data would suggest. Fortunately, CBO already addressed this point, noting that its household income estimates are “adjusted for differences in household size.”

But never mind the results of just one study, David tells us, because “the Treasury’s findings are not unique; in fact, they’re confirmed by scores of major studies…” Of those other studies, David mentions two: one from the University of Michigan and another from the Federal Reserve Bank (Fed) of Dallas, the latter of which reports on the findings of the former. Unfortunately, the Fed study suffers from problems similar to those I raised for the Treasury study in my original post. To give just one example, the study follows a group of families from 1975 to 1991, then points out that several members of those families moved up the income distribution over that time frame. That sounds impressive until you realize that the study counts sixteen-year-olds from very rich families working as, say, part-time baristas as “low income.” Of course, working teenagers of millionaires aren’t low-income in any meaningful sense of the term.

It’s no surprise then that the Fed study found that the average earnings of the bottom fifth of the income distribution in 1975 was just $1,153 per year (in 1993 dollars)—far less than anyone could actually live on. As mobility expert Peter Gottschalk points out, these individuals are “probably not the poorest individuals, but the ones who worked only briefly in 1975…most of them were part-time workers with marginal links to the formal labor force: students with after-school jobs, housewives who worked at the post office in the Christmas rush, and so forth.” By 1991, the Fed study tells us, the average earnings of this same cohort had risen to $26,475 (in 1993 dollars). “I'd be surprised if my teen-ager, who now earns pocket money delivering newspapers, doesn't do equally well,” Gottschalk added.

There are other issues with the Fed study, but the broader point is that most studies that track individual income over time, rather than family or household income, are prone to overstating actual income mobility. As I said in my original post, these types of studies tend to miss the point of the income mobility debate entirely: what matters is whether someone from a poor or lower-income family has the same or better chance of attaining such a position than in an earlier generation—what economists call intergenerational income mobility. Unfortunately, there is a preponderance of evidence showing that, by this measure, income mobility is quite low in the U.S. David suggests that this may be due to our “swollen welfare state,” but if that’s the case, someone forgot to tell Scandinavia—all of the countries in that region have larger welfare states than the U.S., and also higher intergenerational income mobility.

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