September 29, 2005

Income Inequality + Economic Mobility = Long-Term Prosperity

From Dan Seligman in Forbes, on the decades-long misconceptions about and continued harping on income inequality (bolds are mine):

…. Given the editorialists’ recurring objections to George Bush’s tax cuts, their implication here was clear: The Bush Administration has been especially awful in creating inequality. That implication is wrong. The reality is that measured inequality has been rising steadily for close to 30 years and hit successive new highs in the Carter, Reagan, elder Bush and Clinton administrations before doing the exact same thing under the younger Bush.


The standard measure of inequality is the Gini coefficient, signifying the extent to which a society deviates from absolute equality. If everybody has the same income, the coefficient is 0; if the entire GDP belongs to one person, the coefficient is 1. In the U.S. the latest reported coefficient is 0.466. In case you are wondering, it rose more under Clinton–from 0.433 to 0.462–than under any of those other chaps. It rose by only 0.004 during George W. Bush’s first four years. In case you are also wondering how many times Times editorialists complained about Clinton’s inequality record, the answer is zero. The Washington Post has been equally tendentious, and at one point (Sept. 25, 1998) it ran a front-page story on the 1997 income report in which it stated firmly that the census data showed “income inequality did not increase,” even though the data clearly pointed to a substantial one-year increase of 0.004. There was no correction.

…. Recent figures for Japan have been 0.249, for Germany 0.283, for France 0.327. But those countries have paid heavy prices for their relative income equality. Just about all of them have had lower growth rates than the U.S., and most of them (an exception is Japan) have far higher unemployment rates. The reality is that in democratic free-market societies, more inequality tends to mean more growth.

….. And in periods of boundless technological innovation, like the present, brains and talent are suddenly worth a lot more. The demand for mental skills has exploded. The total U.S. labor force has grown by a little more than one-third in the past two decades, but managerial and professional jobs have roughly doubled, from 24 million to more than 48 million.

Ah, but aren’t the people at the bottom stuck there? Mostly not, according to a Heritage Foundation “study of studies” based on government data (footnote references to supporting publications were removed but are available at the link; bolds are mine):

Many academic studies have found remarkably consistent results that suggest there is substantial income mobility in the United States. For example:

  • A 1992 Treasury Department study showed that between 1979 and 1988, 86 percent of those in the bottom income quintile moved to a higher quintile, and 35 percent in the top income quintile moved to a lower quintile.
  • A 1995 Federal Reserve Bank of Dallas report showed that almost three-fourths of those in the bottom quintile in 1975 were in a higher quintile by 1991, and almost 40 percent in the top quintile moved down to a lower quintile over the same period.
  • A 1996 Urban Institute study showed that large numbers of Americans move into a new income quintile, with estimates ranging from 25 percent to 40 percent in a single year. The same study found even higher mobility rates over longer periods: about 45 percent over five years and 60 percent over 9-year and 17-year periods.
  • In 1998, the Census Bureau reported that, on average, over 41 percent of Americans increased their inflation-adjusted income by 5 percent or more per year from 1984 to 1994. The primary reasons for changes in income from year to year were changes in marital status, changes in the number of workers in the household, and moving into or out of full-time, year-round employment.
  • A 2000 Economic Policy Institute study showed that almost 60 percent of Americans in the lowest income quintile in 1969 were in a higher quintile in 1996, and over 61 percent in the highest income quintile had moved down into a lower income quintile during the same period.

The Heritage link displays this stunning graph demonstrating how impressive the economic mobility in the US really is:


So in essence, being on the low end of the income totem pole is very often a temporary condition. People move up and down for a variety of reasons, most of which have nothing to do with a supposedly “unfair system.” I daresay that similar studies in the “social democratic” countries seen as more “fair” by the likes of The New York Times would show less economic mobility, not more.

BizzyBlog’s Take

Income inequality is not necessarily a bad thing, as long as it is:
– Primarily the result of economic efforts.
– There is a safety net for people in unfortunate low-income circumstances.
– There is (as is generally true in the US) real opportunity for people to move up the economic ladder through education, hard work, and creativity, with as few as possible barriers to success.

The fact that low-income children have lacked the same educational opportunity as upper-income children is probably the biggest barrier to sustaining future economic mobility, which is why initiatives like No Child Left Behind, charter schools, school vouchers, and the like are so important. Conservatives tend to favor these initiatives; liberals, especially teachers’ organizations, usually oppose them.

Attempts to reduce income inequality through higher taxes on higher earners have not only failed to reduce income inequality, but have held back economic growth from what it could have been (see: Western Europe). It also should be noted that the standard of living enjoyed by most US citizens in the bottom income quintile is significantly higher than that of most of the rest of the industrialized world.

Remember all of this the next time you hear whining about how “unfair” income inequality is. The very people who bemoan income inequality ignore the remarkable economic mobility in this country, and are the same ones who oppose the educational reforms that would make even more upward mobility possible.


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