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Facts about inequality

by Professor Brant Lee on April 10, 2010

in Brant Lee,General,Government,Uncategorized

Here's one for the economic libertarians that read this blog. These charts on wealth and income inequality in America are quite depressing. But the one that really got my attention was this one, focusing on the chances of rising from low income status into the upper middle class. I think you could make a good argument that in America we make an intentional trade-off against providing a high level of security for everybody. In exchange for less security–fewer handouts, if you will–we allow people the opportunity to get rich, and that incentive is what makes the American economy so dynamic and productive. Obviously, in assessing this argument it makes a difference what the odds of getting rich are. Not everybody is going to (or deserves to) get rich. But at the other extreme it shouldn't be like winning the lottery. At some point that would just become a pipe dream that serves to entertain the masses and suppress their discontent at inequality. What is a fair, but not common, shot at the American dream? Should it be a one-in-five chance? A one-in-10 chance? That's roughly what it was during the 40's. For the last 20 years it's been steady at below 4%. Is that enough to justify this level of inequality?

{ 13 comments }

larry d. April 10, 2010 at 4:09 pm

Who cares if the rich get richer? It seems to me that if you set aside personal jealousy or some kind of political/social bigotry, the problem exists only as far as the poor are getting poorer.

I don't know that the poor are getting poorer, except in "proportion" to the richest one percent, which is moot. In fact, from the mobility chart that "really gets" you, it looks like the probability of moving down has decreased since the 1940s, right along with the probability of moving up. With the New Deal came stasis.

Volatility is good. Where it is absent, the rich stay rich and keep getting richer while the poor (everyone else, really) stay where they are at, too. It's feudal. Volatility means people are getting out of life what they put into it.

N. E. Frye April 10, 2010 at 4:37 pm

The poor are getting more numerous. The wealthy generally have fewer children; those below the poverty line have more. Although it is a politically incorrectitude of the most heinous sort to touch upon it I believe there have been studies indicating that intelligence – insofar as it is measurable – is directly ralated to economic success and inversely related to family size. (duck to avoid flying missiles)

This seems to me to be at least part of the explanation; another part being the apparently increasing concentration of wealth.

Both of these factors seem to me to indicate a need for an increasingly graduated marginal tax rate.

P.O.L. April 10, 2010 at 8:06 pm

Professor, you need to be careful with you use of statistics. The 4% reflects the probability of jumping from the lower 40% in one year to the upper 40% in the immediately following year. That means over a person’s working career (say 40 years) there is a reasonably good chance at some point they will make the jump (and/or the fall). More importantly, this measure excludes any person whose income increases gradually over time in relation to the population. Thus, someone who is in the 25th percentile in 2008, the 50th percentile in 2009, and 75th percentile in 2010 would not appear in the chart.

In any event, I don’t think any level of income inequality can justify theft, extortion, or otherwise depriving wealthier people of their liberty or property for the benefit of the poor.

Professor Brant Lee April 10, 2010 at 10:52 pm

larry d.: I think we're in agreement on the mobility/volatility point–that more is good. And you're right that the chart I linked to shows only relative income. Does anyone know what's happening to real personal income across the income spectrum? My impression was that for most people it's been pretty stagnant, but I don't know that for sure.

P.O.L.: Hmm. You're right that the chart was for a single year. I think Figure 11a in this source document (http://emlab.berkeley.edu/users/webfac/dromer/e291_f07/Saez.pdf)
shows that upward mobility from the bottom 40 to the top 20 over a 20-year period is about 8% (eyeball). Is that high enough?

P.O.L. April 11, 2010 at 7:36 am

If I understand the source document correctly, 8% doesn’t seem that low. Assuming there was perfect mobility (i.e., one’s initial income relative to the population had no correlation to one’s future income), the probability in Figure 11 would only be 20% since only 20% of all wage earners can finish in the top quintile by definition. 8% compared to a maximum of 20% doesn’t seem very low considering that many factors that affect earning power (e.g., education, work ethic, intelligence, etc) are fairly well developed prior to one entering the work force.

N. E. Frye April 11, 2010 at 8:09 am

Professor, when you watch graduating classes of J.D.'s I imagine that you are occasionally surprised to note that so-and-so flunked the bar; but I'll bet there are lots of others who flunk it as no great surprise to anyone. It appears to me that you could look at young people coming out of school and make the same comparison. Yes, here and there a total screwup goes off and becomes a rock star and here and there an extremely promising shoot turns into a crackhead. What percemtage of young people have any goal at all beyond getting blasted this weekend?

That said, I believe that wealth is becoming more concentrated and the odds become a little tougher on those who honestly want to get somewhere.

larry d. April 11, 2010 at 8:45 am

Eight percent moving from the bottom 40 percent to the top 20 seems pretty good, actually. It seems important to note that it is a sliding scale–if 8 percent move to the top 20 percent, the top 20 percent does not become a bigger pool of people; instead, it moves up in regard to the wealth of those within it. That is, the bar is raised in regard to reaching the top 20 percent as far as the amount of wealth needed, in comparison to the bar at the beginning of the 20-year period. As a corollary, those being bumped down to the bottom 40 percent by the movement of the 8 percent, will likely increase the average worth in that demographic.

In other words, there's always going to be a bottom 40 percent and top 20 percent and it will always seem unfair, even if the bottom 40 percent are buying more televisions, homes, cars, etc.

N. E. Frye April 11, 2010 at 1:34 pm

And 8% as a proportion of those who actually put any significant effort into improving their starting condition would be a much more impressive figure.

As to the sources of inequality, in addition to those already mentioned, Rousseau thought specialization and property ownership were the chief culprits.

Professor Brant Lee April 12, 2010 at 5:24 pm

I think the 8% doesn't compare directly to the 20%. That is, I think it's 8% of those in the bottom 40%, or 3-4% of the total. And note that downward mobility is at similar levels. SO generally speaking, rich people stay rich and poor people stay poor.

larry d. April 12, 2010 at 7:22 pm

I'm not sure what your point is, professor. Of course 8 percent of 40 percent is 3 percent or so of the total.

But three out of 100 Americans going from "poor" to fairly wealthy in 20 years is nothing to sneeze at. And nearly one tenth of poor people move up to the top 20 percent in less than a generation. Not everyone can go rags to riches in any society I'm aware of. I have to wonder how many tenths move up to the top 50 or 40 percent. And, as N.E. Frye points out, how many put significant effort into trying to move up to the top 20 percent. That's quite a jump, really.

Quidpro April 12, 2010 at 9:21 pm

The Professor's points seems to be that the Poor are worse off relative to the
Rich. But even if this is the case, it does not follow that America is more "unfair" than other countries in which the gap between Rich and Poor is less pronounced. In absolute terms, there is little doubt that the Poor in America at the present time enjoy greater material wealth than the poor of two generations ago.

It is also the case that the Poor in America are much better off than the poor in other countries, including the poor in countries in which the differences in socio-economic strata are less extreme.

If you were (are?) poor, where would you rather live: America or Greece?

Professor Brant Lee April 12, 2010 at 10:01 pm

larry d.: I guess I wasn't very clear–I was really responding to the post by P.O.L. where it looked like there was a comparison between 8% and 20%. I was just pointing out that those aren't the numbers to compare, I don't think. As to whether that eight percent is high enough to justify our relatively weak safety net–well that's the discussion point I'm offering up.

In theory, our system should provide greater mobility. I thought I read somewhere that that was not in fact the case–I'd love to see the numbers.

Quidpro: I don't know if your factual assertions are correct. I was under the impression that real wages, controlling for inflation, have been basically stagnant for quite some time. Much of any increase in household income is due to a second earner entering the workforce. So, we're certainly working harder. AND I was under the impression that it is better to be poor in many Western European countries than it is to be poor here. Indeed, I thought the libertarian premise was that removing/not providing the safety net for the poor is (in part) what results in greater mobility. If it's better to be poor here, then you would expect people not to care so much about self-advancement, yes?

Don't know about Greece.

P.O.L. April 13, 2010 at 7:33 am

I understand that it is 8% of the bottom 40% or 3.2% of the total population that make the jump. The point is that only 20% of the population can be in the top 20%. Thus the bottom 40% now will produce 16% (3.2/20) of the “rich” later on.

If it was a 20% probability in the chart then we would have 8% of the total population making the jump, and the bottom 40% would produce 40% (8/20) of the rich. This result is unrealistic because the poor are often poor for good reasons (uneducated, unskilled, bad work ethic, low intelligence, etc) that do not change over a twenty-year period. Today’s poor would not be proportionally represented in the future rich even if all wealth today were equalized. What percentage of top earners would you expect to stay top earners? If it is more than 20%, then the poor would necessarily have a probability below 20%.

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