Friday, January 1, 2016

King for a Day

Over the past few months, David has posted several times on the topic of income inequality (for example, see here, here, and here), which he deems to be a non-issue. To support his case, a recurring point of his is that comparing percentiles of the income distribution—such as the ‘top one percent’ and the ‘bottom 99 percent’—is fallacious. In a recent column, David explains that
"The late economist Joseph Schumpeter compared income groups to hotel rooms: just as the former ranges from high to low, so the latter ranges from high-end to low-end. But the different categories fail to reflect who occupies them and whether occupants move to higher categories over time." 
In other words, if we have high income mobility—that is, lots of movement up and down the income distribution—then comparisons between different portions of the distribution are meaningless. But unfortunately, we don’t have high income mobility.

One of the main sources for David’s claims about high mobility is a study conducted by the U.S. Treasury in 2007. David tells us that “roughly half of taxpayers who began in the bottom quintile in 1996 moved up to a higher income group by 2005.” That’s true, but the study also found that 75 percent of individuals in the top 5 percent in 1996 were still there in 2005. To borrow David’s analogy, that means if 100 people occupied high-end hotel rooms in 1996, 75 of them still occupied those rooms in 2005.

Okay, so the ‘very rich’ aren’t exactly the same people from year to year, but they’re mostly the same. Certainly enough to say that comparing income groups isn’t meaningless.

But it gets better: as Dean Baker points out, the Treasury study used all adults in its sample rather than prime-age working adults (ages 22-55). Combine that with the fact that earnings tend to peak between the ages of 45 and 65, and it becomes clear that a sizable chunk of those who were no longer in the top 5 percent in 2005 can likely be explained by people choosing to retire. As for the rest, well, they likely weren’t that much worse off than they were before, as the Congressional Budget Office explains:
“Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multiyear income measures also show the same pattern of increasing inequality over time as is observed in annual measures.”
So yes, many people who are ‘very rich’ may fall out of that category over time, but that’s typically because their income is just barely below that threshold. Moreover, those who replace them are typically those who were very close to being classified as ‘very rich’ the year before, not Joe the Plumber fulfilling the American dream. Yet it’s the latter that David has in mind when he talks about mobility.

And what about those 50 percent of taxpayers who managed to move up the income ladder? Even that figure is misleading. It is likely that much of the movement out of the bottom income quintile were individuals who were, say, medical students in 1996 but were doctors in 2005. Of course, this misses the point entirely; medical students have traditionally been upwardly mobile. Instead, what is useful to know 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. It seems obvious that mobility within one’s lifetime—for example, the chance of becoming a doctor—is no greater now than it was before. On the other hand, intergenerational income mobility is quite low in the U.S., especially compared to other advanced nations.

So the evidence David presents for high income mobility in the U.S. is exaggerated, yet he still believes the American dream is alive and well. Of course, this is not unique to David, as Brookings Institution scholar Julia B. Isaacs explains:
“Americans are particularly optimistic about their chances of moving up the economic ladder…but a growing number of studies show that when compared to other industrialized nations, the United States stands out as having less, not more, economic mobility.”
Contrary to David’s posts, not only does America have an income inequality problem, it also has a mobility problem. In fact, new evidence suggests that high inequality and low mobility actually move in tandem, so that as inequality worsens, so too does mobility. Gilded Age, here we come.

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