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Tuesday, November 13, 2007

Inequality and Income Mobility

Paul Krugman is unhappy with reporting on income inequality on the WSJ editorial page:

Movin' On Up, Editorial, WSJ: If you've been listening to Mike Huckabee or John Edwards on the Presidential trail, you may have heard that the U.S. is becoming a nation of rising inequality and shrinking opportunity. We'd refer those campaigns to a new study of income mobility by the Treasury Department that exposes those claims as so much populist hokum. ...

The study ... show[s] 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 key point is that the study shows that income mobility in the U.S. works down as well as up -- another sign that opportunity and merit continue to drive American success, not accidents of birth. The "rich" are not the same people over 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. Some journalists and academics have cited selective evidence to claim that income mobility has declined in recent years. ...

All of this certainly helps to illuminate the current election-year debate about income "inequality" in the U.S. 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. ...

As the Treasury data show, we shouldn't worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.

Here's what he says:

The WSJ goes green, by Paul Krugman: Let it not be said that the editors of the Wall Street Journal lack ecological awareness. Today they save energy, both theirs and mine, by repeating exactly the same bogus arguments about income inequality that they made — and I refuted — fifteen years ago.

Let me just highlight what I had to say about essentially the same calculation highlighted by the chart in the middle of today’s piece:

We have finally come to the last, and perhaps most effectively confusing, conservative argument.

Let’s give the fact first: families who start out with high income on average have low or negative income growth over the next decade, while families who start out with low income on average see their incomes rise rapidly. This is true in both the Urban Institute and the Treasury data. In the Urban Institute’s numbers, families in the bottom quintile in 1977 saw their income rise 77 percent by 1986, while families in the top quintile saw their income rise only 5 percent. The editorial page of the Wall Street Journal, Paul Craig Roberts, and others have seized upon this kind of number as evidence that the poor actually did better than the rich in the 1980s. Let me call this the “WSJ calculation.”

The WSJ calculation seems striking; but on reflection it is completely consistent with the conclusion that the U.S. has rapidly growing inequality. It shows only that there is indeed some income mobility but nobody denied that. And it is no more a sign that supply-side policies helped the poor than the fact that very few people win the lottery several years in a row.

Unfortunately, it is hard to explain this without a numerical example: Imagine an economy in which in any given year half of the families earn $100,000 and the other half earn $200,000. And imagine also that this economy fits the blender model, so that a family that starts in the bottom half has a 50 percent chance of being in the top half ten years later, and conversely.

Now do the WSJ calculation. Families that start in the bottom half begin with $100,000; ten years later, on average they have $150,000, so they gain 50 percent. Families that start in the top half begin with $200,000; ten years later, on average they also have $150,000, so they lose 33 percent.

But has the distribution of income gotten more equal? No: it is unchanged. All that we see is the familiar statistical phenomenon of “regression toward the mean.” Essentially, the initially rich have nowhere to go but down, the initially poor nowhere to go but up. So if the income distribution were stable, any income mobility would inevitably produce the WSJ result; and it is not surprising that we still get it even when income inequality is rising.

Now, wasn’t that easy?

Meanwhile, Greg Ip looks at the report on  income mobility and how outcomes differ by race:

Blacks Trail in Growth of Income. by Greg Ip, WSJ: Blacks born into the middle class in the late 1960s are far more likely than whites to earn less than their parents, a new study of economic mobility has found.

The study examined how children born in the late 1960s fared in the late 1990s and early 2000s. ... Children of black parents earning in the middle 20% of all families in the late 1960s had a 69% chance of earning less than their parents, the study found. For white children, that chance was just 32%.

"Economic success in the parental generation...does not appear to protect black children from future economic adversity the same way it protects white children," the study's author, Julia Isaacs, a scholar at the Brookings Institution, writes in the report... "Black children and white children do not have equal chances of moving up the income ladder," Ms. Isaacs writes.

    Posted by on Tuesday, November 13, 2007 at 08:46 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (70)


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