Corporatism vs. the Free Market

Don't blame the "mobility gap" on the free market. Blame it on crony capitalism.

"Americans enjoy less economic mobility than their peers in Canada and much of Western Europe." That's how The New York Times began a page-one news story yesterday.

It is a thoughtful story that offer a variety of explanations'"some of them mitigating'"for the so-called mobility gap. This subject merits attention because we should aspire to live in a society in which someone born in (relative) poverty can work his or her way up to better material circumstances, even if lower-income people are richer than their earlier counterparts.

Those who advocate the freeing of markets have no reason to receive the news of the gap defensively. If we are right about the breadth and depth of bureaucratic interference with the peaceful, creative activities of individuals, as well as the extent of government privileges for the well-connected'"and we are'"then drags on mobility are at least partly the consequence of that interference. In other words, the mobility gap can't be the result of the free market because there isn't one. The economy is systematically misshapen by intervention. (The Times cites concern about the gap among some conservatives.)

The Minimum Wage and Public Schools

When I think "limits to mobility," two phrases immediately occur to me: minimum wage and public schooling. If you wanted to impede upward mobility, there could hardly be better ways than to scuttle job creation for the unskilled and to give poor people a bureaucratically produced "education." Those are not features of the free market.

Nor are these the only ways government throws sand in the eyes of the those who start out with little. In the current issue of The Freeman, Gary Chartier discusses this matter at length: "Government Is No Friend of the Poor." (For more, see Charles Johnson's "Scratching By: How Government Creates Poverty as We Know It.")

This will be readily conceded by free-market advocates, but some harbor a belief that the U.S. economy is much freer than Europe's and Canada's socialistic welfare states and so to make negative comparisons with those countries is to cast aspersions at freedom. Not so. The economies of America, Canada, and Europe are all variations of corporatism in which government power primarily benefits the well-connected and well-to-do, with secondary interventions intended in part to ameliorate some of the harsher consequences of the primary interventions. As I wrote on another occasion:

In reality the debate [between America and Europe] is not between socialism and free enterprise.  Rather it's between two forms of corporatism, America-style and European-style.  I don't want either, but it's not obvious to me a priori that the American variant is superior in every respect to the European variant. . . . One variant may indeed cushion the victims of political privilege-granting better than others. Considering who writes the rules over here, I see no grounds for thinking that we necessarily have it better than the Germans do in every possible way.

The Gap

Here are some particulars in the Times story:

At least five large studies in recent years have found the United States to be less mobile than comparable nations. A project led by Markus Jantti, an economist at a Swedish university, found that 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent) '" a country famous for its class constraints.

Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes. [The study, in PDF format, is here.]

Despite frequent references to the United States as a classless society, about 62 percent of Americans (male and female) raised in the top fifth of incomes stay in the top two-fifths, according to research by the Economic Mobility Project of the Pew Charitable Trusts. Similarly, 65 percent born in the bottom fifth stay in the bottom two-fifths. [See PDF here.]…

While Europe differs from the United States in culture and demographics, a more telling comparison may be with Canada, a neighbor with significant ethnic diversity. Miles Corak, an economist at the University of Ottawa, found that just 16 percent of Canadian men raised in the bottom tenth of incomes stayed there as adults, compared with 22 percent of Americans. Similarly, 26 percent of American men raised at the top tenth stayed there, but just 18 percent of Canadians.

Not the Whole Story

As usual, the statistics don't tell the whole story, and Timesman Jason DeParle acknowledges this.

Skeptics caution that the studies measure "relative mobility" '" how likely children are to move from their parents' place in the income distribution. That is different from asking whether they have more money. Most Americans have higher incomes than their parents because the country has grown richer….

A Pew study found that 81 percent of Americans have higher incomes than their parents (after accounting for family size). There is no comparable data on other countries. [Emphasis added. PDF here.]

Higher U.S. rates of poor single motherhood and of incarceration could also help explain the relative lack of mobility.

DeParle notes further that 1) "[s]ince they require two generations of data, the studies also omit immigrants, whose upward movement has long been considered an American strength," and 2) "The income compression in rival countries may also make them seem more mobile."

Even by measures of relative mobility, Middle America remains fluid. About 36 percent of Americans raised in the middle fifth move up as adults, while 23 percent stay on the same rung and 41 percent move down, according to Pew research. The "stickiness" appears at the top and bottom, as affluent families transmit their advantages and poor families stay trapped.

Any way we slice it, the mobility gap impugns economic intervention by the bureaucratic State. We have every reason to think that mobility would be maximized in a freed market.

Sheldon Richman is editor of The Freeman, where this article originally appeared.