Monday, January 4, 2016

A deeper look at economic mobility

I recently wrote several posts on the issue of income differences. My central argument is that, to meaningfully measure the economic gap, one must observe individuals and how they fare over time.

Regrettably, most studies instead take a snapshot of statistical categories in time—such as the “top one percent” and the “bottom 99 percent”. Problem is, categories are not people, which is why major studies that track individuals over time contradict the popular studies.

My counterpart Tim differs with me, and in a recent post he makes his case in large part by critiquing a study from the U.S. Treasury, which shows high income mobility. There are a few points he raises that are worth further reflection.

But before diving in, and in the context of focusing on the merit of a single study, it’s worthwhile to note that the Treasury’s findings are not unique; in fact, they’re confirmed by scores of major studies, including research from the University of Michigan, the Federal Reserve, and private economists and public policy institutions. Indeed, the Treasury report itself carefully pointed out that “the degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility" [emphasis added]. Still, let’s take a look at where my counterpart and I differ.

Tim acknowledges the Treasury’s findings that “roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005,” but he questions whether there’s high mobility because the “study also found that 75 percent of individuals in the top 5 percent in 1996 were still there in 2005”.

While this is true, it’s important to recognize the mobility within that category. For instance, 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! One wonders how many more fell out after 15 or even 20 years.

Tim also maintains that the top regions of the income scales are largely populated by the same people year after year—the “very rich” and those “just barely below that threshold”—and cites as evidence a report from the Congressional Budget Office:
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.
But note that the CBO is looking at households, not individuals. “Households” is simply another category that disguises the mobility of living and breathing human beings. As I’ve explained:
Household sizes have changed over the years and have thus masked individual income growth.  For instance, the average household today consists of fewer working people than the average household a few decades ago. If average household income today is the same as average household income from 1980, that cannot be assumed to represent income stagnation. For example, $50,000 in household income in 1980 may have consisted of three income earners, whereas $50,000 in household income today may consist of two earners—which represents a 50 percent increase in income per person over that period.  As it turns out, that is exactly what has happened.
Hence why studies that follow people over a period of years reach contrary conclusions. To cite research from the University of Michigan:
Among individuals who are actively in the labor force, only 5 percent of those who were in the bottom 20 percent in income in 1975 were still there in 1991, compared to 29 percent of those in the bottom quintile in 1975 who had risen to the top quintile by 1991. More than half of those in the bottom quintile in 1975 had been in the top quintile at some point during these years [emphasis added].
Quite the opposite of a largely permanent group of people huddling at or near the top.

Finally, Tim raises a thoughtful question about the cycle of poverty—whether someone from a poor or lower-income family has a better chance of rising than in an earlier generation. My own view is that, to the extent that the impoverished remain there over time, the swollen welfare state combined with the war on traditional middle-class values has at least partly encouraged economic stagnation or worse.

But despite these negative forces, evidence from overwhelming amounts of research demonstrates strong economic mobility. Only by observing categories rather than people can we pretend the reverse.

Cross-posted at Liberty Unyielding

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