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The Challenge of Credibility
August 30, 2012 | 13 comments
Economics
The Mirage of Income Mobility
Americans’ income mobility may be falling, but an undue focus on the fact misses the bigger picture.
Much is made of the low levels of income mobility in the United States. According to a Pew study released in July, Americans who are born into the very top or bottom quintiles are likely to stay there as adults. Last year, in his celebrated speech in Osawatomie, Kansas, President Obama famously deplored falling social mobility. After World War II, according to the president, “a child who was born into poverty had a slightly better than 50-50 chance of becoming middle class as an adult…. [I]t’s estimated that a child born today will only have a one-in-three chance of making it to the middle class.”
Social mobility is an integral part of the American Dream. It is also a relatively recent phenomenon. In fact, the free enterprise system is the first and only one that enables poor people to become rich, both in absolute and relative terms. That said, an undue focus by policymakers on income mobility instead of real issues — like barriers to economic opportunity and a sluggish economy suffocated by policy uncertainty — can do more harm than good to those it is purported to help.
At the present time, the much-discussed fall in income mobility is an artifact of the data and a symptom of serious problems facing America’s poor — but not a problem by itself. As Tyler Cowen has argued on his blog, there is a trivial reason why Europe’s relative mobility is higher than that of the United States. Europe is a continent with high marginal tax rates, a plethora of public service jobs, and generous social services. As a result, many highly talented Europeans choose to pursue careers that don’t pay much. However, their equally talented children may choose otherwise.
In America, in contrast, high-ability individuals of all generations will almost invariably choose occupations in which they end up earning high incomes. To the extent that intelligence and ability are either hereditary or result from high-quality parenting, children of high achievers will also tend to be high achievers. As Mr. Cowen writes, “‘High intergenerational mobility’ is sometimes a synonym for ‘lots of parental underachievers.’”
Also, the image of the United States as a rigid class society results from looking only at relative measures of income mobility, i.e. moves among different income strata of the society. A look at absolute income mobility provides a more cheerful picture. Eighty-four percent of Americans have incomes that exceed what their parents earned at a similar stage in life, according to the Pew study. The figure is 93 percent for those raised in the bottom quintile of the income distribution.
True, income mobility in the United States might be falling, which is an indication of deeper problems — namely the erosion of the private enterprise system, and the existence of barriers to economic opportunity for the poorest. In the present economic, political, and ideological environment, entrepreneurial success is difficult to achieve, and when achieved, it is taxed, regulated heavily, and sneered at in the infamous “you-didn’t-build-that” style.
A concern for income mobility, without an understanding of what is wrong with the society’s economic and institutional fundamentals, is a bad guide to policy. If higher income mobility is what policymakers care about, all they need to do is to tax the rich at high enough rates, and give sufficiently large handouts to the poor. Of course, they will have to disregard the disastrous consequences of such policies, which shrink the size of the total economic pie.
But the size of the economic pie matters. People, especially those at the bottom of the income ladder, care whether they see their prosperity rising — compared to an absolute or a relative standard — and whether they have an opportunity to succeed in life, regardless of whether that involves moving to the next income quintile or not.
Existing barriers to economic opportunity need to be lifted, especially those with a disproportionately debilitating effect on economic opportunity for the least well-off. The list is long: prohibitive regulations of certain professions and uncertainty about future tax rates, but also minimum wages, unionization, and constraints on parents’ choice of schools and school districts. To attempt to increase social mobility, without fixing these problems, is to put the cart before the horse.
About the Author
Dalibor Rohac is an economist at the Legatum Institute in London.
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Appleby| 8.9.12 @ 6:48AM
Of course, for some of us, income mobility (or what class we decide to join) has a lot to do with the fact that some of us don't want to waste our lives in the office. Some of us learned from our Dads, who came back from World War II at the age when most Occupiers are still being diapered and burped by their Mommies, having seen that life is uncertain and ought to be enjoyed rather than anticipated. I don't own anything much but books and clothes, and the furniture my Dad made me when he retired and decided to see if he could make furniture; and I don't have a Career; but I have a lifetime of memories that nobody can take from me and no matter what happens tomorrow, I've had all my todays. Some people don't want to be upwardly mobile. Lots of us Baby Boomers, for example. As for those who want to be, a surprising number of them seem to think they'll get there by being carried up the ladder by Somebody Else. Being clean, quiet, referent, showing up on time and bending their days to pleasing the boss don't figure in there anywhere. Screaming and demanding, that's the way. They will fall as the leaves do fall and die before October. Tra la.
Mike in N.C.| 8.9.12 @ 8:36AM
This is a frustrating article. It acknowledges that income mobility has declined in the United States and grudgingly concedes it is a problem. Instead of giving a detailed discourse about the barriers to opportunity, the author leaves the topic to the end of the article where he lists, but does not explain, them.
Rohoc lists "prohibitive regulations of certain professions." The wording suggests these regulations are imposed by the professionals, or is he talking about government licensing requirements? Minimum wage. People earning minimum wage are doing all they can to keep their head above water. It is difficult to lift one's self up by one's boot straps when living in this situation. Is the author suggesting raising the minimum wage or eliminating it? Unionization. Union membership is at an all time low and the decline coincides with the stagnation of middle and lower class wages. Does he want more vigorous unions or the elimination of unions?
Bottom line is that there is little substance in this article.
Jacob McCandles| 8.9.12 @ 11:16AM
There are no barriers to success in this country except the government. Some are much less likely to succeed because their parents failed them or are absent. Some are just plain lazy or lack intelligence. But to suggest there are "barriers" is ridiculous. That implies that someone else is putting up the barriers.
Mike in N.C.| 8.9.12 @ 12:48PM
What are the government's barriers to an individual's success?
David T| 8.9.12 @ 1:47PM
The minimum wage, for one, causes unemployment and prevents many unskilled workers from gaining basic skills through entry-level jobs. Also, unions, which the government bends over backwards to support, restricts the labor market and drives up costs through membership and licensing requirements. There are many more examples of how government impedes success in the marketplace.
Mike in N.C.| 8.9.12 @ 2:32PM
Well, if wages on par with developing wages is your definition of a barrier to success, I guess you are correct. Why not remove any restrictions on hours? And, child labor laws? Let return to the Gilded Age.
JD| 8.9.12 @ 7:45PM
Are you having dinner tonight? Well, why not eat 200,000 calories? Gain 1000 pounds!
Extension to absurdity makes sense in some cases, but is easily abused. In the case of unions, Democrats have people convinced that giving an inch to Scott Walker means everyone in America becomes a slave. Sorry, but no. Unions could go away completely and we'd be fine, given all the other protections we have now.
wolf| 8.9.12 @ 2:27PM
well mike..lets start with the 27+% tax out of my income..then the 10.25% sales tax..and .. utility taxes (study your phone bill..10%+ on mine is tax..property tax..and all the auto related taxes..gas..insurance..etc...all said and done..its pushing 40% .. i call that a barrier...
Mike in N.C.| 8.9.12 @ 2:34PM
Of course, you get absolutely nothing in return for those taxes you pay because you are an island, totally self sufficient and living off the grid.
wolf| 8.9.12 @ 4:20PM
see mike you can be condescending if you really try..
yes i realize i get return of my tax payments..but i also realize that the bureaucracy of these tax agencies are in often cases redundant and corrupt at least...as for the "return" ..cities such as detroit, st. louis, philadelphia, chicago, los angeles (california has many cities on the verge of failure) ..point being..there is never enough tax money to "fix" the problems..as welfare, unemployment, health care education..because it feeds on itself..problems..we need more employees to help solve the problems..thus more expense..and more tax increases to pay for the new employees..notice the problems are not addressed or corrected..
should you disagree..explain the aforementioned cities..as being they are all democratic strong holds and have been for decades in most cases..detroit being an economic engine literally and figureatively..los angeles..having one of the best public school systems to one of the worst in 30 years..(californias cure...raise taxes ALOT..and build a 100 billion dollar bullet train - to nowhere..being a solid blue state and receives alot of fed money for many pet projects..such as the bullet train..and a subway system (in earth quake country!) the addage is true..you can not tax yourself to prosperity..
Mike in N.C.| 8.9.12 @ 6:08PM
wolf,
We are on the same page. Bureaucracies are wasteful. There are redundancies in government at all levels, but we need government and government needs revenue to function. We can debate the appropriate level of taxation and government services, but taxes per we are not a barrier to success.
JD| 8.9.12 @ 7:25PM
Of course they are. They take money from a person. Government has an obligation to provide fair value in return. Only then are taxes worthwhile.
Von Mises Jr| 8.9.12 @ 8:38AM
The Progressives solution is to ensure that all non-political cronies have equality in the lower-lower class. It is a return to serfdom. It is "regressive" and dystopian.
The only societies that have had significant income and class mobility happened after the Industrial Revolution. You know the one that produced things like ATM machines that our dystopian regime of Luddites thinks is destroying the country.
Mike in N.C.| 8.9.12 @ 8:53AM
Von Mises, Jr.
I agree with this statement: "The only societies that have had significant income and class mobility happened after the Industrial Revolution." I'm thinking of the period following World War II when progressive reforms were firmly in place. I'm not thinking about Dickensian England or America's Gilded Age. You?
Von Mises Jr| 8.9.12 @ 11:09AM
Actually you are spot on with the American Gilded Age from 1860 to 1896. The country according to Mises and Rothbard was a free market capitalist economy until this period influenced the progressive movement that took hold after 1900. The Roaring Twenties and the Fifties had revivals of capitalism, but the TR to Wilson era, FDR's "New Deal," LBJ's "Great Society" and the recent progressive era of Clinton to Obama has only been interrupted by the "Reagan Revolution."
I am not a defeatist that this cannot be turned around, but this is probably the last chance to save the Constitutional Republic for posterity. If I didn't think the American people had the right stuff to make it happen, I would not spend so much time reading and commenting. I would rather be fishing or hiking a mountain.
THKrupp| 8.9.12 @ 11:49AM
Von Mises,
Its interesting to note that all the periods you mention are postwar periods and in the 1860-1896 is basically when the West was being settled.
Von Mises Jr| 8.9.12 @ 1:03PM
Perhaps they were not dumb cowboys after all. Where do we flee if the socialist masses make the same mistakes in November?
Mike in N.C.| 8.9.12 @ 1:40PM
Maybe you can punish the socialist masses by sitting down, like John Galt, and doing nothing. Yeah, that'll teach them.
Von Mises Jr| 8.9.12 @ 3:06PM
I already did. I am waiting for jobs that are better than hamburger flipper. I will not contribute to the socialist cause.
In the meantime, I am earning capital gains and paying 15% taxes. It pays for allot of good books and lots of beer if you know how to trade.
Mike in N.C.| 8.9.12 @ 6:12PM
Well, capital gains are good. Given my circumstances, I would be be lying to say otherwise. However, this tax system is not fair.
JD| 8.9.12 @ 7:26PM
Indeed, it is not fair. But not in the way you think.
A fair system would have each person pay for what he gets. Today's system isn't close to that.
sbark| 8.10.12 @ 10:54PM
That period was actually a deflationary time span.....(via S&A)..The 1880s saw the greatest increase in per-capita GDP in American history. Unemployment fell to 2.5%, despite high immigration. Real wages rose 23% between 1879 and 1889. The country boomed, led by heavy capital investment. The amount of rail track laid, for example, grew from 2,665 miles in 1878 to 11,568 miles in 1882. The value of building permits increased by 150% between 1878 and 1883.
And here's the most fascinating part of the story… prices steadily fell from the end of the Civil War until the early 1890s, when they finally stabilized. You'd be hard-pressed to find a working economist today on Wall Street who could explain why the greatest decades of economic growth in American history could have been achieved during a period of deflation.
Mainstream economists all believe prices ought to only fall during economic depressions because they've become so blinded by paper money. But I can explain what happened in the 1880s easily: With real money in place, investors were willing to make long-term investments.
The result was an economy led by capital investments – not consumption.
THKrupp| 8.9.12 @ 9:32AM
There was a study done recently that if a person graduates high school, graduates college, gets married and stays married they have an 80% chance of being at least middle class. Im not sure that a study was needed to confirm something so obvious. Its not a very difficult formula. That doesnt say you will end up wealthy or start out middle class. That depends on other choices you will make. To achieve middle class isnt a big hurddle. To be honest I dont really know what middle class is or what it means to achieve it.
Ole| 8.9.12 @ 9:51AM
Two things that are commonly not mentioned with discussions of income mobility: First, for every person that climbs to a higher class, another person has to fall - in other words we cannot all be above average. Second, in a meritocracy you would expect those with the best intelligence, talent, and worth ethic to rise to the top and stay there. Similarly, by whatever combination of nurture and nature, these above average people are also more likely to have children with similar high quality characteristics that keep them in the higher income categories as well. You would expect high income mobility only in societies that eliminate discriminatory practices against certain groups which have previoulsy kept talented members of the discriminated groups from rising to their natural status. For example, before the color barrier was broken in major league baseball, talented black players were prohibited from rising to the top of their game and earning the top salaries that they have enjoyed since the barrier was eliminated in the 1940s. When widespread discriminatory practices are not present, lack of income mobility is a sign of a healthy society that rewards talent and effort for the benefit of everyone.
Appleby| 8.9.12 @ 10:20AM
You are assuming that the only thing people aspire to in life is to make more money. People may "get to the top and stay there" in their own chosen field (e.g. a woman may be a very successful nun, or a man might be an outstanding Pullman porter) but never make any money to speak of. These people would lack "income mobility" yet they might be considerably more intelligent, energetic and successful than people ahead of them in the cash olympics.
THKrupp| 8.9.12 @ 10:31AM
I agree with you Appleby, being fixated on generating more income doesnt mean you will have a fullfilling life. Having more stuff doesnt make you happy. At the end, all you are going to have is your friends family and memories.
JD| 8.9.12 @ 7:27PM
However, if someone makes the choice to eschew wealth, he ought not to then gripe about his poverty and demand redistributive compensation.
THKrupp| 8.9.12 @ 10:26AM
I disagree that its a zero sum game. I guess if you look at all of society as a bell curve it would be. Class is not on a bell curve though. There are several small countries where in the words of Garrison Keiller...all the children are above average. You can have a society made up of mostly poor people or mostly wealthy people.
JD| 8.9.12 @ 7:29PM
And the average person in the poor country would be poor, and the average person in the wealthy country would be wealthy, and in all cases some would be poorer than the average and others would be richer.
Mike in N.C.| 8.9.12 @ 10:45AM
Ole,
Your contention athat for everyone who rises, one must fall is incorrect. It is based on the assumption of a zero sum economy, a fixed pie if you will. The better metaphor is Kennedy's a rising tide lifts all boats.
But, Garrison would appreciate your observation.
JD| 8.9.12 @ 7:29PM
Actually, he's right. When we talk of "classes" we're talking about a relative place in society. One cannot move into a higher percentile without another moving down.
However, everyone in all percentiles could double his wealth, or halve it, with no change in relative wealth.
The two concepts are different.
THKrupp| 8.10.12 @ 2:35PM
well it depends on where the line is drawn for instance. If upper class is at say a net worth of 100,000..everyone whose net worth is over 100,000 is upper class. That can have an infinite number of individuals. If you rank everyone according to net worth and decide only the top 30 of net worth individuals are upper class then you are correct
Joe D.| 8.9.12 @ 12:38PM
You also touch on it but did not go into further detail. But morals and values play into this as well. What is taught to him/her by there parents, teachers and media play a part in where they have the drive, etc. to achieve.
Slacker| 8.9.12 @ 1:02PM
Today’s poor are nothing like the WWII era poor. The war on poverty took place.
Looking back it was a bad idea to pay stupid people to procreate. Three or four generations of reverse eugenics gave predictable results (curiously a secondary effect caused the dipshits to grow incredibly fat).
Accepting hordes of third world immigrants may also have been a mistake. Poverty is damn persistent when you import it. But, it was a catch-22: Menial jobs needed to be filled and the domestic underclass was excused from work.
Butch| 8.9.12 @ 5:59PM
"Looking back it was a bad idea to pay stupid people to procreate." Ya think? You just said a mouthful, my friend.
Petronius| 8.9.12 @ 2:09PM
Everything is controlled by authoritarian institutions. All institutions are rackets. Those on the outside cannot get in by any means short of extortion like the NAACP does. If there's no pressure group for you to join, tough. If you're not already one of "them", you never will be unless you have a big appetite for their excrement. These are the biggest barriers to people with no advantages and no connections not mentioned here. It's also the primary reason why the disadvantaged turn to government. They Do Not belong. Back in the late 80's and early 90''s when the working middle class began to accumulate some assets, the plutocrats simply raised the prices and raised the bar to keep those below away from their subdivisions, schools, and clubs. Opportunities may be offered and success can be achieved. But if those who wield real power in or out of government want to prevent you rising, you don't stand a chance in a million.
JD| 8.9.12 @ 7:34PM
CNN ran an article last fall sometime in which it complained that many people born into the middle third of American income earners in the 1960s are now in the lower third of income earners among people born in that decade. The fools!
The very fact they complained about was proof that a sizable chunk born into the lower third had moved into a higher third! It was proof of upward mobility!
If 30 people are ranked by income, 1-30, and persons number 12, 15, and 17 move into the 20s, then surely three who were in the 20s had to move up to make room for them! The net of rankings cannot change!
CNN is so dead-set on pushing its "declining middle class" narrative that it's complaining about proof up upward mobility!
chuckbryant| 11.30.12 @ 3:26PM
If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire