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Poor, Rich, and Very Little Movement in Between: Part One of a Two-Part Series on Income Mobility and Inequality

Economic InequalityThere has recently been an outpouring of discussion about economic inequality, especially in response to the surprising popularity of Thomas Piketty’s blockbuster bestseller, Capital in the Twenty-First Century. Given the current ubiquity of such discussions, people might be forgiven for forgetting that, for quite some time, it had been simply odd for Americans to discuss inequality, or even to acknowledge it.

As recently as this past January, I wrote a column here on Verdict in which I discussed “the reemergence of distribution as a respectable subject of discussion.” Only a few weeks before that, President Obama had surprised friends and foes alike by suddenly declaring that inequality is “the defining challenge of our time,” echoing similar statements by Pope Francis, who has attempted to bring the Roman Catholic Church back to its roots in advancing the interests of the poor and forgotten.

Unlike the brief flurry of commentary surrounding the emergence of the “occupy” movement a few years ago, the conversation recently seems to have taken a decisive turn, with people on all sides engaging in serious ongoing discussions of inequality and how (or whether) to reduce it. True, any discussion of inequality is still sure to elicit sneers and catcalls (as well as open red baiting) from the apologists on Fox News and similar sources on the political right. Even they, however, now seem to understand that they cannot simply laugh off the reemergence of concerns about inequality.

We have now, therefore, begun to enter the phase where actual arguments (rather than mere name-calling) are on offer, allowing us to evaluate whether people (like me) who worry about income and wealth inequality can calm down in the face of convincing contrary evidence and logic. Sadly, however, the arguments by those who wish to change the subject away from addressing inequality are weaker than ever.

In this column, I will focus on an old argument that some conservatives have attempted recently to revive, regarding the idea that income inequality is not a big deal because of income mobility. In a companion column next week, I will discuss where the arguments that Professor Piketty has offered fit into the arguments over inequality, mobility, and redistribution.

The List of Excuses for Inequality: A Tired Set of Arguments Gets Set for Another Uncomfortable Close-Up

Although the current debate about inequality seems new, the arguments from conservatives are all really quite worn (and the worse for wear). Over the last few decades, whenever there has been even the slightest possibility of action against growing inequality in the United States or elsewhere, conservative economists and commentators would reliably roll out a list of arguments designed to obscure or distract from the underlying reality.

Back in 2009, in preparation for a presentation at an academic conference, I gathered a long (but by no means complete) list of arguments offered by conservatives in response to any showing of concern about inequality in the U.S. political debate. The arguments could be gathered under three broad labels: (1) “There is no problem,” (2) “Even if there is a problem, there is nothing we can do about it, and (3) “Even if we could do something about it, whatever we might do would only make matters worse in some much more important way.”

This “argument in the alternative” style of debate, in turn, shows up under each of the broad categories noted above. Under (1), for example, the right argues simultaneously that “poverty does not exist,” and “even if poverty does exist, the poor deserve to be poor,” and “even if the poor do not deserve to be poor, the market will eliminate poverty,” and “even if . . . .” Similar sequences of arguments can be found under categories (2) and (3) as well.

Although it is possible to arrange these arguments in a logical sequence, the standard practice among conservative commentators has been to repeat any and all arguments that might serve their purpose, no matter how inconsistent. Moreover, although I have used the term “poverty” in the examples above, conservatives quite easily interchange “inequality” with “poverty,” all in an effort to make sure that the argument never leads to actions that would in any way discomfort the very rich.

It should be no surprise, therefore, that we are now again seeing the full range of inequality denial in the U.S. political debate. Surprised to find themselves on the defensive, conservatives are throwing anything and everything against the wall, hoping that something will stick.

The Mobility Dodge: Do Changes in Income and Wealth Over Time Make the Problem of Inequality a Non-Problem?

In the long list of conservative arguments referenced above, perhaps the most dishonest is the claim that inequality is not a problem—or, perhaps, even if it is still a problem, it is so small as not to matter—because what really matters is income mobility. If people can readily move up in the world, we are told, then who cares if they are only temporarily poor?

This argument can seem to be especially potent in U.S. political debates, because it ties so smoothly into the All-American notion that it is “opportunity” that matters, not outcomes. If we lived in a world where people were poor, but we knew that getting out of poverty could be done quite easily, then we could all sleep more comfortably at night.

In an extreme form, this argument could actually make sense. Imagine an absurd world in which people woke up each day to find themselves in a different percentile of the income or wealth distribution. Today, you are among the top 23 percent in incomes, tomorrow the bottom three percent, and the next day the bottom 45 percent. On average, after every hundred days, you would be at the 50 percent level, and so would everyone else.

Under those circumstances, we might indeed not want to worry about the very poor, or the super-rich, or anyone in between. No one would truly suffer, because the days on which a person was on the lowest rungs of society would be infrequent, and the long-term, grinding effects that poverty in the real world has on people’s lives (health impacts, family dysfunction, and so on) would never have the chance to take root.

At the other logical extreme, imagine that people’s economic status is set for life, but that their children and future generations might end up in different economic strata after today’s generation dies off. Even if we were then willing to imagine the ridiculous possibility that the children of the poorest one percent have an equal chance of being on the next generation’s top rungs as do the children of today’s richest one percent, the picture that emerges is hardly comforting.

“Don’t worry about losing the life lottery during your lifetime, because the wheel will be spun once again after you die,” is cold comfort indeed. And given that we know that the chances for significant changes in economic status across generations are actually quite limited, the argument carries even less weight.

We are clearly living in a world in which people and their offspring are not permanently stuck in one income status over dozens of generations—but whatever mobility actually exists is not enough to address today’s inequality. Knowing that some people (or their children) will have some amount of mobility over some span of time does not tell us anything meaningful about the nature of inequality or its harms to real people today and in the future.

The point is that simply saying, “But things can change over time,” even in the rare cases in which that is a meaningfully true prediction, is hardly sufficient to support the idea that we can safely ignore inequality. It matters that you are poor today. It matters to you, it matters to your children, and it matters to society as a whole, especially (but not by any means exclusively) when economic status becomes a matter of inheritance rather than anything resembling merit.

The Real-World Versions of the Mobility Argument: Still Lazy After All These Years

In the late 1980’s and early 90’s, when the extreme turn toward inequality that had begun in earnest in President Reagan’s first term was first becoming obvious, there was a brief spate of discussion about income inequality among economists and political commentators. The argument that “mobility is what matters, not inequality,” was on prime display.

At that time, a conservative economist in the Bush I Treasury Department tried to support the mobility-not-inequality argument by gathering data on the incomes of people over the courses of their lives, starting in college. He then concluded that people were likely to be in many income categories over the course of their lives, supposedly proving that we need not worry that people seem poor today, because most people transition to better lives after not too many years, and people with high incomes come back down to earth at some point.

Amazingly, however, as described in a 1992 article by Paul Krugman, that study’s results were driven by the simple reality that people (no matter their lifetime income status) almost surely have low-to-nonexistent incomes during their college years, rising incomes during middle age, and then lower incomes during retirement. The finding of “mobility” in incomes, then, was not a finding that poor people can become middle class or rich, but that most college students eventually get jobs and (much later) retire. Krugman quoted another economist as follows: “This isn’t your classic income mobility. This is the guy who works in the college bookstore and has a real job by his early thirties.”

An updated version of the mobility-not-inequality argument arrived in The New York Times in late April of this year, in an op-ed called “From Rags to Riches to Rags.” There, two academics tried to show that income mobility was a significant feature of modern life in the United States. They argued, for example, “that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year,” and that “a whopping 73 percent will spend a year in the top 20 percent of the income distribution.”

Sounds pretty good, right? But this should hardly be surprising. If the break between the bottom 95 percent and the top five percent is at about $200,000 (as it was in 2010), which is a high but not breathtaking number, then there would naturally be a fairly large number of people who could jump back and forth over that particular breaking point over time, sometimes earning $190,000 and other years earning $210,000, and so on. That is not evidence of income mobility, but simply random variation. Even that large 73 percent of the population that will “spend a year in the top 20 percent” involves an even larger group of people who are jumping above and below the 20 percent cutoff (which was $97,000 in 2010).

By contrast, the income ranges are actually quite wide at the top, with the top one percent beginning at roughly $500,000 in annual income, while even the least prosperous among the top 0.1 percent earn more than $2 million each year. (And, by definition, there are many fewer people in the lower income category who are close enough to the upper category to randomly jump over the line.) Middle-class people making $60,000 per year do not find themselves suddenly in those categories, even for one year.

The authors of the op-ed even helpfully explain why people jump above and below these income cutoffs: “Individuals we interviewed spoke about hitting a particularly prosperous period where they received a bonus, or a spouse entered the labor market, or there was a change of jobs. These are the types of events that can throw households above particular income thresholds.”

It is, therefore, truly puzzling that the authors then argued that “[u]ltimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income.” Actually, it does no such thing. By their own evidence, the authors have shown only that some people are lucky enough to have once-in-a-blue-moon events that make them look momentarily somewhat richer than they are, after which point they return to their places in the “rigid class structure.”

There is certainly no evidence offered that supports the claim that “the United States is indeed a land of opportunity, that the American dream is still possible,” even if the authors quickly admit “that it is also a land of widespread poverty.” They definitely provide no evidence that would prove that people actually go from “rags to riches to rags.”

The harsh reality of economic inequality, therefore, is hardly softened by the evidence regarding income mobility. Even though it is possible to imagine a make-believe world in which poverty is brief enough not to visit permanent damage upon the people who would otherwise suffer under its oppressive weight, and where wealth is so fleeting that the rich never gain permanent advantage (socially or politically) because of their fortunes, the world in which we live is, quite unfortunately, a very different place, indeed. We must stop allowing fantasies about people working their way from poverty to prosperity to distract us from the real task of providing true opportunity and justice for all.

Neil H. BuchananNeil H. Buchanan, a Justia columnist, is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org, and he is the author of The Debt Ceiling Disasters: How the Republicans Created an Unnecessary Constitutional Crisis and How the Democrats Can Fight Back.
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4 Responses to Poor, Rich, and Very Little Movement in Between: Part One of a Two-Part Series on Income Mobility and Inequality

  1. Joe Barnes says:

    This is just a silly argument. Income inequality starts with government policy and Keynesian economics.
    first: Government policy cripples the poor.
    second: Government policy skews capitalism by regulation and policy away from capitalism which is the best system ever invented to expand wealth to working people.
    Third: Keynesian theory makes Government reward the rich for doing nothing.
    1) The first point is the easiest to explain. At the turn of the last century poor and working people did what? They stayed together as multigenerational family units sharing their work and saving their pennies. they became America’s middle class of the 1900s. What did the government do? in 1965 it created the great society. Overnight all the men disappeared from the projects. Poor are allowed to save. Get $3,000 together to help your kid or move out, get a job, start a real life and the bureaucrat social workers will cut you off and make to spend it all. Don’t believe that I can give real world examples. People are often amazed how immigrant families, arriving with less than nothing, rise in less than a generation to economic health even wealth. They remain a family unit, save and work. The “progressive” governments’ war on family, work and savings is the disaster that has created multigenerational poverty in America. 3.5% growth rate through the 19th into the 20th century, near zero today. So you blame capitalism?
    2) Capitalism is the greatest engine of wealth creation for regular people in the history of the world. Capitalists to make money must produce goods and services people want and will pay for. They profit and get rich if their products are wanted in a free market, which by definition means the people who buy such products are also see themselves as enriched, or they wouldn’t buy! The poor lived in darkness until cheap kerosene lamps were made possible by Rockefeller who got very rich providing it. that ended when government started picking winners and losers, “crony capitalism” its called. Government takes a lion’s share of everything produced in the world, taxes, fees, regulations, bribes, extortion. No capitalist had such power, he had to earn it. Only government can take from the poor and working people. Capitalists must earn their money by providing something of value. The handful of give-backs called welfare (or “fairness”)merely returns some, subsidizes, what the government is taking form people to begin with, at that at about 40% (the government keeping 60% for “overhead!”).
    Most complaints against capitalism actually attack remnants of mercantilism, colonialism, and, today, cronyism all of which need government power to exist.

  2. Joe Barnes says:

    Third: Keynesian theory makes Government reward the rich for doing nothing.

    An American versions of Keynesianism ( probably not what Keynes himself would have created) found its way into government thought in the 1930s. FDR who had no idea what to do tried everything. the two fallacies of Keynesianism are that the government could create aggregate demand and two, that it didn’t matter what money was spent on, just so log as it was spent.
    Picture a silo, it represents the economy to a Keynesianism, It is only half full. the government will, by spending, fill the silo creating a fully functioning economy. Fill it with what??? money of course! From where??? Tax, Borrow or print! All three of which comes out of the economy and from productive use either directly by taxes, indirectly by removing financing from producers or by inflation. Add the fact that government keeps most of the “Stimulus” for itself (typ 60%), and you are feeding a silo with open doors at the base. Obviously it can’t work. Never has and isn’t now, even though policy to do so has created a series of collapsed bubbles and an economic house of cards boding a global financial collapse.

    The other Keynesianism fallacy is even worse. “it doesn’t matter where its spent as long as the government spends.” thus, paying to dig holes and fill them back up again is not just OK but REQUIRED, to put money in “circulation.” Paying for stone walls along rte 9 in NY, or ditches in marshes in CT had no effect on the great depression. Just paying charity to keep people alive would have accomplished the same thing without tying up millions of people in unproductive pursuits but leaving them to use their own creativity a free market society.
    Keynesians see the failure to “fix” the depression as simply “not spending enough.” That theory still holds true today. They point to WWII spending to justify that theory. They also believed we would return to the depression when the WWII stimulus ended. If the results don’t equal the theory the theory is wrong. The problem, still missed by them, is where you spend matters. WWII spending was paid to the rich and we demanded something for it, arms. They built and reopened factories, hired workers, made products. Welfare Keynesianism pays the rich without producing products. Recipients but what’s already on the shelf, paying the rich for what has already been produced. But it “Stimulates new production”? Not if the rich just buy from China. And if a factory costs $1Billion more to build here (Intel) then production will move oversees. More bad government policy stifling the greatest people on earth. Government is the problem not the answer.
    One last point because it always comes up from “progressives.” Didn’t the capitalists take advantage of workers in the early days. Sure, did but not more than the pre-capitalists or the government. Workers subsisted. Barely food etc to live. capitalists paid more but just barely. It was the vast wealth creation of capitalism that moved workers into the middle class from subsistence. It was labor finding its voice, fought by capitalists show still saw workers entitled to subsistence only (read: feudal and mercantile and colonial thinking, (King/slaves). And who enforced it? Government troops against the workers. Communism worked while it stole from the oligarchs Nazism worked while it could steel from the Jews, both eventually made its workers slaves, stealing the last thing the people possessed, their labor. Socialism is the enemy of the people.

    • Ian Quinn says:

      So you’re argument is that inequality “starts” with the Guv’mint and Keynesianism which rewards the rich for doing nothing because the welfare recepients of this guv’mint spending simply use the money to purchase things that are already on the shelf (which have already been produced). So society would somehow be better off if the goods just stayed on the shelf rather than in the hands of the poor?
      Free market capitalism functions at it’s best when asymmetries among and between ALL participants are minimized (a basic microeconomics 101 assumption is that all parties have the same information – only then, can one say the goods/services are being allocated efficiently). The production of goods is only one side of the coin. Allocation of goods is the other side of the coin and that’s where inequality is at issue. Think about it – there is an abundance of wealth, there is no scarcity of food, entertainment, drugs, toys, vehicles, dwelling structures, etc. no physical scarcity at least. The same was true during the great depression – there was no physical scarcity of food, no drought or famine (the dust bowl drought did not cause a significant decrease in overall food supply – grain prices didn’t rise) there was no physical reason for people to be starving. Why then were people starving? Because there was a scarcity of jobs – that’s it. Plenty of food, but there just wasn’t any work to be done by those poor people for which rich people would be willing to pay them so that they might have some money with which to buy some of that cheap plentiful food. And it is the same situation nowadays – why are poor people struggling to have things like internet access, cable TV, transportation, or a fixed address? It’s not like allowing them to go online, see the same commercial filled tv channels as everyone else, or drive their car, or not be evicted actually makes it so there’s less internet, cable TV, convenient transportation, or housing for anyone else.
      And this is a fundamental absurdity that is intrinsic to capitalism – that if you can’t find something to do for which someone will give you money, then you don’t have any right to have anything – it’s not that capitalism is bad – I’m not attacking it at all. Capitalism is natural and there is a natural way for the situation to resolve itself when there is more than enough food but people are threatened with starvation – Decapitatalism. (think French revolution, etc) Violence, social collapse, riots, destruction. It is not an efficient or equitable mechanism and costs many innocent and a few not so innocent lives. The single most powerful predictor of a country’s homicide rate is it’s wealth/income distribution: the greater the inequality, then the greater the homicide rate. Check wikipedia.
      All this nonsense about capitalism being under attack by “so called progressives” who want to talk about inequality and Picketty’s recent book is just that – nonsense. If you want to participate in this rather cerebral line of the social dialogue (which is a line that has been going off-and-on for hundreds of years with Smith, Bentham, Ricardo, Mill, Marx, Keynes, Picketty, etc) then stop it w/ the red-baiting, fox news sound bite sloganeering. Capitalism v. Socialism is no longer a useful characterization of the debate – it might’ve been in the 19th century when it was anti-competitive, pinkerton-hiring, Robber-Baron Capitalists that were giving “Capitalism” a bad name and creating interest in possible alternatives to “Capitalism” – ie “Socialism” which was then synonymous “Communism”. Capitalists are not, nor ever have been, capable of existing without Governments. Governments are intrinsic to any type of money based economy.
      The new deal and great society efforts at fixing the inequality problem both had flaws (I myself don’t see why the government should have subsidized tenancies – I say the poor should just be granted free-hold estates of their own (that’s much more efficient and helpful than perpetual subsidies paid to landlords) Social Security is financed in a very regressive fashion – the rich don’t contribute anywhere near enough of their income into the system. But that’s policy discussion – and I’m not sure if a person who thinks that government spending causes poverty is capable of engaging in policy discussion. Socialism is not the enemy of the people – inequality is.

    • Rob_Chapman says:

      Reading Joe Barnes’ comments it is very hard to determine if he is serious, or if he is providing a satirical summary Professor Buchanan’s article.
      th
      But let us assume, in arguendo that Joe Barnes is serious and means what he has written.

      How does Mr. Barnes explain the stagnation of American incomes during the past forty years? Productivity has increased by multiples; population has grown more slowly than the economy by several percentage points and the amount of imports has never exceeded the foreign assets coming into this country as payment for exports; foreign direct investment or long term bank deposits. IF capitalism worked as Mr. Barnes described all incomes should rising precipitously and American households should be accruing assets instead of debt.

      How does Mr. Barnes explain the massive exploitation of foreign labor? The vast wage disparities between the industrialized countries and the developing countries can only indicate that capitalists hold such power in the labor force that they can actually drive down wages. China, the Philippines, Mexico and other emerging countries should be able to competitively undercut their American counterparts by 12-15% to gain a pricing advantage. Instead OECD investors are demanding and getting discounts of 97 to 99% of western wages for enterprises located in developing countries.

      Stated another way, the Mexicans or Chinese should be able to pay workers $ 9 or $10 dollars an hour to lure away factories paying US workers $15 an hour. Instead workers in Mexico get $2/day and in China even less. Clearly something other than market forces are at work here.

      The only period in which workers enjoyed any sort of power in the work-place was when there were socialist countries abroad and strong socialist movements in American domestic politics.

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