Friday, April 15, 2011

The rich aren't getting richer


PBM said...

Even if this argument holds up (I'll let Patrick be the deciderer), the author doesn't talk about how wages for everyone but the rich have stagnated or declined even though productivity has continued to increase. Even if the top 1% isn't the same people, everyone else is still getting screwed. His social mobility argument doesn't hold up for me, because it's not like every 1% of the bottom 99% is rotating for the top spot. I realize it may be different people, but there are certainly a lot of people who are continually stuck at the bottom. Also, how is it that a member of the top 1% like Lloyd Blankenfein, Warren Buffett, the Koch Bros, George Soros, or any other CEO of a large company drop out of the 1% in a 5 year period? I'm pretty sure that even if they switch jobs, their income stays the same or increases, helping them stay in the top 1%.

Now, on policy. I think he is trying to connect this to the debate over raising taxes on the wealthy. Even if everything he is saying is true, and he isn't leaving out glaring details about income inequality and social mobility, I still think that the richest 1% of Americans can afford to pay more in taxes to a country that helped foster their success. That is just a ideological difference I'm going to have with conservatives and I'm ok with that. Contrary to the GOP talking point that the richest are the job creators so we can't tax them more, tax cuts for the rich are shown to be the least effective economic stimulus because those who receive the cuts are shown to save most of that money rather than invest it.

TJE said...

Data > Intuition.

Patrick_L said...

Sigh. For now I’ll post what I have, but I’m continuing to work on stuff. I’ll probably do additional comment(s) on economic inequality later. For now, I’ll discuss Williamson’s article and socioeconomic mobility in the U.S. As this article demonstrates, inequality and mobility are very complex issues so we need to think very carefully about the evidence, arguments, and implications being made.

First of all, the argument about mobility doesn’t cut against using progressive taxes, shareholder control of CEO compensation, or other means to address the fact that the top 1% or .1%- whoever they may be- are benefiting enormously from a society and market structure that enables them to be tremendously (and from a historic or comparative perspective, unusually) successful while much of America has seen an economic stagnation or minimal growth. It doesn’t matter that the composition of those top households is changing over time, it just matters that the economy is producing this arguably unhealthy, accumulation of market prosperity. For instance, some researchers have found that counties where income inequality grew the fastest also showed the biggest increases in symptoms of financial distress. Other research has shown that people make consumption decisions or self-happiness evaluations based on relative comparisons to those above them, so if economic gains flow only to the top it can reduce the happiness of others and lead them to over-consume and inadequately save. Reduced happiness can increase social tension, while overconsumption and inadequate saving create an unstable economy and weaken growth prospects. Another argument is that these people are clearly benefiting enormously from the current structure of the U.S., so there “fair” share of taxes is higher because they have benefited the most from the society taxes have helped to generate through funding public policies like education and health care.

Second, Williamson is making a classic conservative argument about “actual households” that attempts to throw cold water on the argument that income inequality has been growing. Williamson is drawing correctly on the facts from the Treasury study, but they can’t be used to draw the conclusion Williamson is hoping readers will take away. Williamson points out that there is mobility in American society (duh!), and the income of households who started rich actually declined while income among household starting at the bottom in 1996 grew. However, there is a huge, inherent flaw to using that trend to cut against rising inequality. With any kind of mobility in a society, households that start at the top will a few years later be worse- there’s nowhere for them to go up, so any mobility in a society will cause those actual households’ position to decline. Similarly, if you start at the bottom, a few years from now those households on average will have to be better off. The only way to avoid these outcomes was if a society had NO mobility, no socioeconomic movement.

Paul Krugman does a good job of explaining these kinds of results as being self-evident and not cutting against the rising inequality argument. Please don’t just dismiss his writing- actually read it and you’ll see the very clear flaw in the type of point Williamson is trying to make. Here I’ll quote heavily, but for the original source see here:

Patrick_L said...

“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…

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…

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.”


Okay. So we’ve clearly established that Williamson’s argument just shows that there is some socioeconomic mobility in the U.S. His point does not show that income inequality isn’t growing. His !shocking! discovery that there is some socioeconomic mobility in the U.S. (oh wait- everyone knew that) does not cut against the need or reasoning for government policies like a progressive taxation system.

Patrick_L said...

Let’s talk about U.S. socioeconomic mobility. As I’ve discussed on this blog before, the United States actually fails the ideal of “American exceptionalism” and being a land of unusual opportunity. The United States actually has less socioeconomic mobility than other developed nations. The evidence is quite clear that Nordic countries in particular have higher socioeconomic mobility than the U.S., with other Western countries falling in-between. The evidence shows that these differences in mobility across countries are almost entirely explained by differences of mobility in the tails of the country’s socioeconomic distributions (i.e. the poorest and the wealthiest households). The U.S. has MUCH lower mobility for the most affluent and least affluent families. Ron Haskins and Isabel Sawhill referred to this phenomenon as “stickiness” around the high and low-ends of our socioeconomic distribution. Basically, if you’re poor in the U.S. it’s harder for you to escape poverty than it is in other nations. If you’re rich, it’s much less likely that you’ll end up middle- or low-class. If you’re not born in the high-end of the socioeconomic distribution, you’re less likely to break into the high-end than if you were in another country.

Now, differences in mobility across the socioeconomic distribution, countries, and time can be explained by a variety of factors working in combination. For instance, conservatives often draw upon associative mating (people likely to be rich/successful marrying one another at higher rates) and inherited genetic factors to explain mobility levels- and they are correct to a point. This allows them to claim that low mobility isn’t a problem, though they rarely provide an argument for why it’s okay for the U.S. to have less mobility than other nations. Note that the intergenerational genetic transfers are unlikely to change significantly from country to country, and researchers agree that nature (genetics) play a much smaller role than nurture (family practices, public investments, etc.). The third important explanatory factor for mobility is endogenous public policies.

For instance, many researchers argue that better public education systems are important because they can increase mobility by giving everyone more equal opportunities to succeed and limit how much advantage rich children have over other children. Research in this area- why the U.S. does more poorly than other countries on mobility- is still ongoing with minimal consensus. However, there is some quality evidence out there that the quality of public education institutions plays an important role in explaining why the U.S. does so poorly. Another factor that is being explored is access to higher education as explaining some intergenerational mobility.

Another interesting fact is that the U.S. does worse on intergenerational correlations and elasticities of education. The evidence suggest that the U.S. might do worse on this measure because the returns to education are higher here (so better-off families have a greater incentive to invest in education which they obviously have a greater ability to do). Also, we may do worse because we don’t provide equal opportunities through a strong public education system.

Patrick_L said...

Conclusion: The U.S. does poorly on intergenerational mobility compared to other developed countries, particularly Nordic ones. This failing can almost entirely be explained by the U.S.’ much lower mobility at the tails of the distribution, with entry and exit from poverty and affluence being much stickier in the U.S. family background factors play a much greater role in the U.S. than elsewhere at explain mobility, with public policy factors playing a much smaller role at promoting social mobility. (Note that this trend is probably a bad sign, since it means there is lower equality of opportunity, with much opportunity and mobility being explained by your parent’s ability or inability to support you and offer you access to social mobility pathways).

Data > Intuition

P.S. Data which I'll explain shows rising inequality