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.