Class Clash

Paul Krugman's piece for The Nation on the death of American economic mobility has been getting abundant link love over the last few days. I don't have much to say here, especially since I tend to agree that the Hubbard study he mentions has a number of problems that make it a poor ground for the strong claims often made by those who cite it. As I recall, for instance, it looks at people who filed tax returns in ten consecutive years. That may be necessary to get a good longitudinal picture, but it introduces some obvious selection bias.

Still, it's worth noting this:

But what these studies measure, as the economist Kevin Murphy put it, is mainly "the guy who works in the college bookstore and has a real job by his early 30s." Serious studies that exclude this sort of pseudo-mobility show that inequality in average incomes over long periods isn't much smaller than inequality in annual incomes.

I understand why that sort of mobility isn't the kind with which people are concerned, but it seems we've got to be consistent. I'm pretty sure that most claims about the degree of American income inequality don't exclude people who have low incomes because they're 20 and working in the college bookstore. If you count these folks when you're looking at inequality snapshots, but then exclude them when tracking mobility, that's going to skew your perspective as well.

Comments

[Reality]

What bothers me most about the phrase "income inequality" is that it contains the buried premise that "income equality" is both desirable and attainable.

[fyodor]

Shouldn't income mobility be measured across generations? I.e., how folks do compared to their parents? Cause that's what I thought income mobility was all about, that you're not condemned (or privileged) to your parents' (or your parents' parents' parents') level. As for what happens during a person's adulthood, wouldn't we expect that to be fairly stable no matter how much mobility a society provides? Also, while I don't have the time nor inclination to read Krugman's article at the moment, I wonder if he makes comparisons to previous time periods, as in before American economic mobility supposedly died...?

[fyodor]

Reality,

I'd say that all other things being equal (no pun intended!), relative income equality is a good thing. Of course the things that are generally done to try to insure such a thing are usually far worse.

More importantly, however, is that it appears (again, I haven't read the article, so I'm judging from the quote given) that Krugman is using "income equality" as an indicator of "income mobility," but perhaps this is preumptuous.

[keith]

Fyodor,

There is one multigenerational result discussed in the article: after WWII, 23% of the children of the lowest quartile of "father's income" achieved upper quartile of income themselves. The corresponding datum from recent past was 10%.

"A classic 1978 survey found that among adult men whose fathers were in the bottom 25 percent of the population as ranked by social and economic status, 23 percent had made it into the top 25 percent. In other words, during the first thirty years or so after World War II, the American dream of upward mobility was a real experience for many people.
Now for the shocker: The Business Week piece cites a new survey of today's adult men, which finds that this number has dropped to only 10 percent.
"

[Ricky]

There are a lot of reasons this article is meaningless. For instance, why should anyone complain if the rich get richer while the poor get richer as well? But the central problem is we seem to be talking about relative rankings--a zero-sum game. In other words, even if you believe there was greater "mobility" in the good old days, that simply means more rich people saw themselves drop down to the bottom than they do now.

[Steve Horwitz]

Reality's comment about the implicit endorsement of income equality in the phrase "income inequality" is to the point. P. T. Bauer used to always talk about "income differences" rather than "income inequalities" for just that reason.

And Julian's last point is dead on. The snapshots of income inequality that get trotted out all the time DO INCLUDE the folks who are in the college bookstore at 21 then a real job at 30, so why shouldn't the mobility studies include them as well? That point doesn't get Krugman anywhere. The whole point of the mobility studies is to show that the snapshots DO include those folks and thus are misleading about the question of whether any given *individual* or household will move up the ladder in his/their lifetime(s).

One last point: even if mobility is not what it used to be, neither is having a low income. The various good and services consumed by low income Americans dwarf what the middle-class had 25 years ago. So even if one isn't moving up the relative income scale, one's absolute standard of living is improving.

[Steve Horwitz]

One further note for Julian: the Dallas Fed study you linked to uses the Hubbard study only secondarily. Its main source of data on mobility is the Panel Study on Income Dynamics from the U of Michigan. That data set does not have the selection bias of the Treasury set, and it is a data set frequently used by social scientists across the political spectrum because it tracks actual households through time. The claims made for THAT data are much stronger.

[keith]

Krugman reminded me: I keep vacillating between the ideas of 0% estate tax and a 100% estate tax.

Yes, diehards, all taxation is theft. But nothing would promote self-reliance and individual responsibility among my fellow Americans like a 100% estate tax. (In my thought experiment, I assume: "joint tenantcy with rights of survivorship" for real estate and titled physical property like cars. Probably will also assume for no taxes on marital joint accounts. It gets hairier with the question of life insurance benefits to underage dependents.)

I'm not sure if I'd prefer to model "no substantial trans-generational gifts" or "unlimited volume trans-generational gifts with the following restrictions:
1) no death bequests
2) no special condition trusts"

It seems to me that this regime could encourage self reliance and personal responsibility, and also break down the effect Krugman points out.

And here's my "crappy" libertarian argument: why should governments be in the business of probate anyhow? Where ever the assets fall at the time of death, they stay. Let's let "intestate" mean "default to the state".

[Shultz]

The data being skewed by younger workers who eventually obtain experience and/or education isn't the only problem.

How much of the upward mobility curve are they missing because of retired people's income dropping after they retire? Real Estate equity being a prime example, just because an elderly person's income has dropped doesn't mean they're poor. Is Mr. Krugman correcting for that?

P.S. Having been outside of academia for a while now, does anyone in Economics take Krugman seriously anymore? I mean, would anyone quote him in a dissertation without being laughed at?

[fyodor]

Finally read the Krugman article. (I shouldn't have expected it to be very long or complicated. At least he's good at being easily read.)

He implies that reductions on the estate and capital gains taxes, the creation of tax shelters "for the rich," and cutbacks in healthcare, public school quality and state aid for higher education are responsible for the decrease from 23 to 10 percent of intergenerational transfers from lowest quarter to richest quarter, yet he cleverly never explicity claims this. Good thing, since he provides no data or analysis to back his implication. Probably the most relevant of his implied factors is the decrease in public school quality, but of course no one has decreed such a decrease in quality. Conservatives (his equally implied yet unstated bogeyman) are every bit as upset about bad public education as are he and the left, they just have a different solution.

This apparent decrease in mobility is interesting and potentially disconcerting if further study can corroborate it (since I value freedom, economic and otherwise, that allows for mobility), but my best guess is that the responsible factors have nothing to do with public policy but are rather a matter of a relatively natural ebb and flow. In other words, the previous generation's 23% may have been an abberation, or maybe the more recent 10% is the abberation but one which will correct itself just as the low point of a business cycle does. Now, I don't have evidence that my own explanation is any better than Krugman's, but my point is that Krugman provides no support himself. In fact, he stops short of even admitting that his explanation is really just that.

[Mike Force]

Read poorandstupid.com for a detailed fisking of Krugman's selective use of stats. The man is a stone cold liar.

Oh well, you know what the left says, "if you can't redistribute the wealth, you may as well redistribute the poverty."

[Jeff Smith]

A few remarks:

1) The website mentioned in the previous report
does a pretty good job of tearing apart the
nation article. Krugman is very sloppy here.

2) You can still cite Krugman's early work w/o
getting laughed it. Krugman is now a pundit
or a television economist or whatever else
you want to call it, but not a real economist.

3) I am always entertained that lefties can
simultaneously complain about our horrible
consumer society and how material goods
really do not make anyone happy, and then
bemoan inequality in the distribution of
income. To me, real poverty - no food and
no clothes and no place to live - is a
legitimate concern of government. The
value of the Gini coefficient is not, to
the extent that rich people get that way
by providing things people want to buy,
and not by buying off politicians directly
or indirectly.

4) Most of Krugman's policy suggestions decrease
inequality by making the rich poorer instead
of the poor richer. On of the few that do
not, strong unions, consists at its heart
of paying people more than the value of what
they produce, more or less at random based
on who they know, while at the same time
distorting labor and product prices. A
more efficient way to accomplish the same
thing would be to increase the payout rates
on state lotteries. This would have the
virtue of not mucking up prices, and of
allocating the extra income more fairly.

Jeff

[Jimbo]

Income differences are neither here nor there, except in the case of those whose income is not enough to sustain life itself; but differences in endowment and opportunity could, if unchecked, lead to class stratification that would be unhealthy and unproductive.

An estate tax could eliminate the higher monetary endowment of the upper classes; but it would probably have the unintended consequence of driving the rich to shift away from accumulating a monetary endowment and towards accumulating educational or social endowments such as Harvard educations, which are valued as much for the social contacts forged thereby as for their intellectual content, and elite club memberships.

This already happens. Despite all the controversy over affirmative action, the fact remains that disproportionate numbers of students at elite educational insitutions come from a small number of school districts or private schools. School district assignments are based on residence. Housing values in favorable school districts exceed those in less favorable school districts. One pays a significant premium to live in and have one's kids educated in such a school district. Of course the federal income tax encourages this by allowing uncapped deductions for property taxes and mortgage interest on primary residences.

Another question as well is, what would the state do with revenues from the confiscation of estates? A sound principle of efficiency would be that taxes should be levied for the purpose of funding government activities and not for the purpose of advancing social agendas.

[joe]

"Another question as well is, what would the state do with revenues from the confiscation of estates?"k How about, reduce the most regressive taxes, like sales and, especially, payroll taxes? Hard to argue that won't make the poor richer, while rewarding work at the same time. Or, increase local aid to municipalities with high poverty rates, in order to defer property taxes, thus reducing the tax burden on low income homeowners, rental property owners (who, in theory, would keep rents down), and upper income potential homeowners, who find buying in those cities a better deal.

"A sound principle of efficiency would be that taxes should be levied for the purpose of funding government activities and not for the purpose of advancing social agendas." But the fact is, every tax has some sort of social impact. Why, oh why, do conservatives insist that tax policy decisions be made in an environment of purposeful ignorance of these impacts?