Economic Mobility Report from Pew

Following up on the earlier post on whether rags to riches tales in America are just myths, note that the Pew Trusts have issued a short report on economic mobility.

Relevant excerpts on the background issues of American attitudes and statistics on the American distribution of wealth:

As the data in Figure 2 indicate, the Congressional Budget Office finds that between 1979 and 2004, the real after-tax income of the poorest one-fifth of Americans rose by 9 percent, that of the richest one-fifth by 69 percent, and that of the top 1 percent by 176 percent. Focusing on the familiar story of rising inequalities between CEOs and their employees yields figures that are perhaps even more striking. Between 1978 and 2005, CEO pay increased from 35 times to nearly 262 times the average worker’s pay.4 Said another way, by 2005, the typical CEO made more in an hour than a minimum-wage worker made in a month.
...
Perhaps driven by widening inequality and a concern about the fairness of the game, there is a tangible and growing sense of pessimism among the American public. In exit polls after the 2006 election, less than one- third of the voters said that they thought life would be better for the next generation.5 In another poll, over half of Americans surveyed thought that the American Dream is no longer attainable for the majority of their fellow citizens.6 Other polls suggest that Americans are increasingly worried that they will be able to maintain the standard of living they currently enjoy.7
...
In a March 2007 Pew Research Center poll, 73 percent of respondents — an 8 percentage increase since 2002 — agreed with the statement, “Today it’s really true that the rich just get richer while the poor just get poorer.”9
...
One thing is clear. A society with little or no absolute mobility is one in which for every winner there is a loser. It’s a zero sum game. And a society with little or no relative mobility is one in which class, family background or inherited wealth loom large. Equal opportunity is a mirage. Recalling the three hypothetical societies, it is easy to envision why, for these reasons, high levels of both absolute and relative mobility are desirable. Society should strive for both. But rates of growth in mature economies are often slower than they are in societies that are still developing, and this fact makes a focus on relative mobility of increasing importance.

The report also includes a graph which compares "The U.S. versus the world." Here are the percentages of people agreeing with statements that:

1. “People get rewarded for intelligence and skill”
US------------------------------------69%

Median response from
25 other countries-----------------39%


2. "People get rewarded for their efforts”

US------------------------------------61%

Median response from
25 other countries-----------------36%


3. Coming from a wealthy family is ‘essential’ or ‘very important’ to getting ahead”

US------------------------------------19%

Median response from
25 other countries-----------------28%

4. “Income differences in this [country] are too large”

US------------------------------------62%

Median response from
25 other countries-----------------85%


5. “It is the responsibility of government to reduce differences in income”

US------------------------------------33%

Median response from
25 other countries-----------------69%


Note however that presenting the "median" from the other countries can be misleading. Looking at the above, you could easily assume that the US opinion was drastically different than ALL the other 25 countries, when in reality some of the 25 countries expressed more extreme views than the US. The ranges of responses from individual countries, for example, ranged from 5%–69% on question 1. On question 2 the range was 5 to 64; on question 3 it was 10 to 61; on question 4 it was 62 to 98; and on question 5 it was 33 to 89.

The Wealth of Nations Revisited; Awareness as the Key

Adam Smith's famous "invisible hand" purportedly led all individuals to follow their own self interest in a way that produced the greatest good for all. Just reading that idea leaves me shocked--shocked that such a counterintuitive idea has come to be so thoroughly accepted by really smart people with really good educations.

On the micro level, the idea doesn't hold up at all. Just imagine living in a relationship with other human beings in one family household. If the husband always acts only for his own self interest, how exactly will that serve the interests of the family? How does the family benefit if dad spends the entire month's food budget on a trip to Las Vegas? The same analysis holds for the wife, and the same holds for each child.

The one way in which Smith's theory might apply to a family is if each member of the family recognizes that part of his/her self interest is the health and survival of the family unit. If Dad recognizes that going to Las Vegas will cause the family hardship, and is sufficiently committed to the family that he views family hardship as contrary to his self interest, he won't take the trip.

It seems to me that need to recognize that the health of the larger unit is part of the self interest of the individual is the key to Smith's theory. Without that recognition, I think Smith's theory turns out to be false in many circumstances. With that recognition, however, Smith's theory holds up much more frequently. But it still suffers from failure to recognize that individuals do not, in fact, follow what is in their self interest, they only follow what they perceive to be in their self interest. If their perception is wrong, if they stink at understanding their own self interest, they will not produce what is good for all of us.

So how in the hell does Adam Smith manage to hold the allegiance of so many smart, educated people? Easy. There are two parts to that answer:

1. Smith's Followers Are Among Those Who Misperceive Their Own Self Interest

Many Smith followers are the very people who cannot understand how their own interests are affected by the interests of others. They are the ones that cannot see how a massive increase in poverty in their own country will be bad for them, even though they have millions upon millions of dollars. They are the ones who think that self interest is measured only in the short term, and only in terms of $$ and power.

2. Smith's Followers Frequently Don't Understand Smith

As JK Galbraith could have told you, many Smith lovers simply find his theory a convenient cover for being as selfishly greedy as they feel like being. They are uninterested in what Smith actually thought, only in how they can act as selfishly as possible and still claim to be doing good for the rest of us.

Smith did not write in a vacuum of time, and Smith did not speak as unqualifiedly as he is portrayed as having spoken.

Here, for example, is one author's summary of the explicit and implicit limits on Smith's theory:

Classical free market economic theory originated with Adam Smith and David Ricardo in the early days of the Industrial Revolution (late 1700s, early 1800s). It was intended to apply under certain conditions and certain conditions only, namely:

(1) All business was small-to-medium sized and entrepreneurial (not corporate). Mostly the people who ran the business owned the business, and financed it with their own capital, or capital raised in partnership with others (1). There were stock exchanges, but corporations (joint stock companies) were rare and required a special act of parliament, so there were few of them listed (2).

(2) The free market was defined as a market of potentially unlimited numbers of these small/medium sized businesses, competing on a more or less equal footing, in a market which newcomers could freely enter, and in which none could control prices.

(3) The economy was national; capital must not flow freely across national borders or the theory did not hold (Ricardo)(5).

(4) The market had to be supervised by a sovereign government which (a) protected the public interest (b) made sure all businesses played by the rules (c) provided a stable currency, and (d) ran public utilities, which were regarded as not profitable for private enterprise.

Here's a concrete example of limitations in Smith's The Wealth of Nations (emphasis added):

...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

How many people leave out that FREQUENTLY qualifier? How many people leave out the fact that he talked about ANNUAL REVENUE as an equivalent of the greater good? How many people are aware of Smith's assumption that people prefer support of domestic industry to that of foreign industry?

Probably just as important, how many people realize:

--Smith was deeply religious, and believed that God Himself had endowed human beings with such character that they would produce good simply by following their self interest?

--Smith described a world in which most business, especially domestic business, was not corporate, but sole proprietors, with no distance between ownership and management, and no means of limiting the personal liability of the owner?

--Smith described a world in which it was quite difficult for capital to travel from one nation to another, and barriers of physical distance virtually precluded the import of goods and services which were already available locally?

JK Galbraith realized those things. Milton Friedman....probably not.

Proof of citizenship requirements takes its toll on Oregon health care

The federal mania for ID requirements, manifest as a requirement that you prove US citizenship in order to get state health benefits to which the feds contribute, has apparently taken a bite out of the butt of the group most sane people predicted would be hurt by the new requirement: legal citizens fully eligible for the benefits.

From Oregon Live:

PORTLAND, Ore. (AP) — According to a state report, more than 1,000 Oregonians have been denied access to health services under a new federal law that requires them to prove they are citizens.

State officials say they think almost all of the people affected are citizens. But they, or their parents, were unable or unwilling to round up all the required documents, according to a the recent report from the Oregon Department of Human Services.

The report looked at the experience of nearly 200,000 people in 125,000 Oregon families who had to prove their citizenship to get or retain state health services during the first six months the law was in effect — September 2006 through February 2007.

It found that 99 percent of them eventually were able to qualify, but that 1,011 Oregonians were cut out of state programs. Many of the people cut were children.

The law was designed to save money by ensuring that illegal immigrants do not get free health care on the government's tab. But an earlier Oregon study found that few noncitizens were receiving government-paid health care, and officials say few of the people denied coverage in Oregon under the new law are noncitizens.

Of those turned down for lack of proof, 91 percent came from English-speaking households, the report says. Only three Spanish-speaking adults were unable to document their citizenship.

The state tried to help people by checking Oregon birth certificates via computer for free. It also devoted thousands of hours to retraining employees and spent $44,000 buying certified copies of birth certificates and other documents from other states for applicants who could not afford them.

Do you mean to tell me that the federal lawmakers were unaware that a big chunk of US citizens does not run around with their certified birth certificates, and pretty much lacks the money and the knowledge to go about acquiring those birth certificates?

"Real earnings" fall again

From today's Bureau of Economic Analysis reports on real earnings and on inflation:

[real earnings]
Real average weekly earnings fell by 0.5 percent from March to April after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor. A 0.3 percent decline in average weekly hours and a 0.5 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were partially offset by a 0.2 percent rise in average hourly earnings.
...

Average weekly earnings rose by 3.4 percent, seasonally adjusted, from April 2006 to April 2007. After deflation by the CPI-W, average weekly earnings increased by 0.9 percent. Before adjustment for seasonal change and inflation, average weekly earnings were $589.90 in April 2007, compared with $566.81 a year earlier.

[inflation]
During the first four months of 2007, the CPI-U rose at a 4.8 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The acceleration thus far this year was due to larger increases in the energy and food components. The index for energy advanced at a 25.3 percent SAAR in the first four months of 2007 compared with 2.9 percent in 2006. Petroleum-based energy costs increased at a 40.0 percent annual rate and charges for energy services rose at a 9.4 percent annual rate. The food index has increased at a 6.7 percent SAAR thus far this year, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.2 percent SAAR in the first four months, following a 2.6 percent rise for all of 2006.
....
Medical care costs rose 0.4 percent in April and are 4.0 percent higher than a year ago. The index for medical care commodities-- prescription drugs, nonprescription drugs, and medical supplies--increased 0.4 percent, as did the index for medical care services . Within the later group, the index for professional services was virtually unchanged, while the index for hospital and related services increased 0.8 percent.

Try paying college tuition on those wages. Or going on any kind of vacation. OR keeping your health insurance. Or....

Are the rags to riches tales really just myths?

An enduring belief of most Americans is that we have greater mobility than folks in other countries: poor boy makes good, every kid can grow up to be president.......

But a piece in June's The Atlantic magazine, titled "Rags to Rags, Riches to Riches," by Senior Editor Clive Crook (page 23), casts some serious doubt on whether that belief is based on reality. According to him:

Most researchers now give America much lower marks than they used to for intergenerational economic mobility.
...
America stands lower in the ranking of income mobility than most of the countries whose data allow the comparison, scoring worse than Canada, all the Scandinavian countries, and possibly even Germany and Britain (the data are imperfect, and different studies give slightly different results).
...
Strikingly, the research suggests that mobility within America's middle-income bands is similar to that in many other countries. The stickiness is at the top and the bottom.

Crook doesn't cite the data he's talking about, but I found a study by Tom Hertz, of American University, which he conducted for the Center for American Progress. Dated April 26, 2006, this is the study's Summary:

Summary
This report discusses two aspects of economic mobility in the United States. The first is the question of intergenerational mobility, or the degree to which the economic success of children is independent of the economic status of their parents. A higher level of intergenerational mobility is often interpreted as a sign of greater fairness, or equality of opportunity, in a society.

The second aspect is the short-term question of the amount by which family incomes change from year to year. By studying short-term mobility we can determine whether incomes are rising or falling for families at different points in the income distribution. We can also determine whether the size of these income variations, or the level of annual income volatility, is changing over time. Increased volatility is undesirable to the extent that it represents an increase in economic insecurity.

The key findings relating to intergenerational mobility include the following:

• Children from low-income families have only a 1 percent chance of reaching the top 5 percent of the income distribution, versus children of the rich who have about a 22 percent chance.


• Children born to the middle quintile of parental family income ($42,000 to $54,300) had about the same chance of ending up in a lower quintile than their parents (39.5 percent) as they did of moving to a higher quintile (36.5 percent). Their chances of attaining the top five percentiles of the income distribution were just 1.8 percent.


• Education, race, health and state of residence are four key channels by which economic status is transmitted from parent to child.


• African American children who are born in the bottom quartile are nearly twice as likely to remain there as adults than are white children whose parents had identical incomes, and are four times less likely to attain the top quartile.


• The difference in mobility for blacks and whites persists even after controlling for a host of parental background factors, children’s education and health, as well as whether the household was female-headed or receiving public assistance.


• After controlling for a host of parental background variables, upward mobility varied by region of origin, and is highest (in percentage terms) for those who grew up in the South Atlantic and East South Central regions, and lowest for those raised in the West South Central and Mountain regions.


• By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.

Key findings relating to short-run, year-to-year income movements include the following:

• The overall volatility of household income increased significantly between 1990-91 and 1997-98 and again in 2003-04.


• Since 1990-91, there has been an increase in the share of households who experienced significant downward short-term mobility. The share that saw their incomes decline by $20,000 or more (in real terms) rose from 13.0 percent in 1990-91 to 14.8 percent in 1997-98 to 16.6 percent in 2003-04.


• The middle class is experiencing more insecurity of income, while the top decile is experiencing less. From 1997-98 to 2003-04, the increase in downward short-term mobility was driven by the experiences of middle-class households (those earning between $34,510 and $89,300 in 2004 dollars). Households in the top quintile saw no increase in downward short-term mobility, and households in the top decile ($122,880 and up) saw a reduction in the frequency of large negative income shocks.


• For the middle class, an increase in income volatility has led to an increase in the frequency of large negative income shocks, which may be expected to translate to an increase in financial distress.


• The median household was no more upwardly mobile in 2003-04, a year when GDP grew strongly, than it was it was during the recession of 1990-91.


• Upward short-term mobility for those in the bottom quintile has improved since 1990-91, with no significant offsetting increase in downward short-term mobility.


• Households whose adult members all worked more than 40 hours per week for two years in a row were more upwardly mobile in 1990-91 and 1997-98 than households who worked fewer hours. Yet this was not true in 2003-04, suggesting that people who work long hours on a consistent basis no longer appear to be able to generate much upward mobility for their families.

Those year-to-year income movements findings are as grim as the intergenerational findings; "overall volatility of household income increased significantly between 1990-91 and 1997-98 and again in 2003-04" indeed.

It's unfortunately difficult to make these mobility measurements with any precision, of course, and there are many different aspects of "income mobility" that could be measured. A study titled "The Many Facets of Economic Mobility," by Gary S. Fields of Cornell University, published in July, 2005 is a good source for anyone wanting to get into more detail. But Crook's article and the Center for American Progress study don't bode well for our self image as Americans.

Now the Pew Trusts is investing more than $2 million, to fund a joint study of the ability of Americans to improve their economic status both during their lifetimes, and from generation to generation. The study is to be performed by four Washington think tanks: The American Enterprise Institute, The Brookings Institution, The Heritage Foundation and The Urban Institute.

On the Pew web site, the project is described as follows:

For the first time, data related to economic mobility in the United States will be consolidated and presented in terms the American public and policymakers can understand, debate and discuss. How do my children’s opportunities for economic advancement compare to mine, to those of my parents? Is mobility thriving in other countries while waning here in the U.S.? How much economic mobility is there for people in poverty? To what extent is mobility affected by inherited wealth? How is mobility impacted by gender, race, and level of education?

Sounds like it will be worth reading. Assuming that representatives of those four think tanks can actually agree on the state of things, which is asking a lot given today's state of partisan warfare, how inflammatory the study would be if it confirms Crook's feeling that mobility is greatly exaggerated, and the types of folks who fund the two conservative think shops.