One of the most provocative and persistent arguments against free-market capitalism claims that it's a rigged system in which those who are already wealthy are the only ones who really benefit. Under the pretense of being a wide-open meritocracy, the critique goes, what we call capitalism is really a closed system that not only distributes income gains unfairly but makes the poor feel as if their position in their lives is their fault. Market critics call for all sorts of interventions, transfers, and limits on freedom to make things right.
In a new and important article at Medium, economist Russ Roberts, who produces the great weekly podcast Econtalk and has written a shelf full of books defending a libertarian view of markets and culture, provides a powerful critique of the idea that the rich are simply getting richer while poor and middle-income Americans see their incomes and options stagnate. When critics of market economies such as Thomas Piketty, Paul Krugman, Jared Bernstein, and others say that middle- and low-income Americans haven't gained income over the past 30 or so years, argues Roberts, they typically mis-measure the rate of inflation, ignore the growing role that fringe benefits play in total compensation, and include the elderly, who are less likely to be working full-time and thus skew results. But the really important omission, says Roberts, is that most critics fail to track specific individuals over time. Instead they track statistical averages. When you follow an individual income earner over the years, a very different—and much more optimistic—picture emerges:
Researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. When they find little or no change, they conclude that the average American is making no progress….
When you follow the same people over time, you get very different results about the impact of the economy on the poor, the middle, and the rich.
Studies that use panel data?—?data that is generated from following the same people over time?—?consistently find that the largest gains over time accrue to the poorest workers and that the richest workers get very little of the gains. This is true in survey data. It is true in data gathered from tax returns.
What do the data show? One study finds that when you compare the income of parents working in the early 1960s to their children's income from the early 2000s, "84% earned more than their parents, corrected for inflation. But 93% of the children in the poorest households, the bottom 20% surpassed their parents. Only 70% of those raised in the top quintile exceeded their parent's income." A different study also found that kids in lower-income groups were far more likely to outstrip their parents' income than those born to wealthy parents: "70% of children born in 1980 into the bottom decile exceed their parents' income in 2014. For those born in the top 10%, only 33% exceed their parents' income."
Roberts notes that it's obviously easier for a kid whose parents made, say, $20,000 to earn more than it is for those who were born to millionaires. But there's more going on here, and it's all to the good. He cites another study that
looks at people who were 35–40 in 1987 and then looks at how they were doing 20 years later, when they are 55–60. The median income of the people in the top 20% in 1987 ended up 5% lower twenty years later. The people in the middle 20% ended up with median income that was 27% higher. And if you started in the bottom 20%, your income doubled. If you were in the top 1% in 1987, 20 years later, median income was 29% lower.
Perhaps the most stunning indicator comes from a study that looks at income changes for individuals between 1980 and 2014. If you simply measure statistical averages, "the average income of the top 1%…went from $189,000 to $843,000, which seems to confirm the view that most of the gains from economic growth go to the richest of the rich while people in the middle or the bottom make no progress at all. But the people in the top 1% in 2014 are not the same people in 1980. What happens when you follow the same people?"
The answer, Roberts writes, is that the
richest people in 1980 actually ended up poorer, on average, in 2014. Like the top 20%, the top 1% in 1980 were also poorer on average 34 years later in 2014. The gloomiest picture of the American economy is not accurate. The rich don't get all the gains. The poor and middle class are not stagnating.
Roberts is no Dr. Pangloss when it comes to the current U.S. economy, which he recognizes is filled with special carve-outs and privileges for the well-off and connected. The numbers he's mostly talking about have more to do with what's considered "absolute mobility" (how much better off are you than where you started) than "relative mobility" (whether each slice of society has the ability to move up), which he says is still too small. And he offers some policies that would certainly make the economy freer and fairer to all of us:
This does not mean that everything is fine in the American economy. There are special privileges reserved for the rich that help them reduce their risk of downward mobility?—?financial bailouts are the most egregious example. There are too many barriers like occupational licensing and the minimum wage that handicap the disadvantaged desperately trying to succeed in the workplace. And the American public school system is an utter failure for too many children who need to acquire the skills needed for the 21stcentury. But the glass is at least half-full. If we want to give all Americans a chance to thrive, we should understand that the standard story is more complicated than we've been hearing. Economic growth doesn't just help the richest Americans.
As Roberts' former George Mason University colleague Tyler Cowen said in yesterday's Reason Podcast, if we are serious about improving living standards, we need to commit to policies that promote long-term, sustainable economic growth. Roberts' focus on actual individuals and their relationship to growth helps to explain better not just where we are, but how to get to a place where mobility is even more likely to happen.
Read Russ Roberts' "Do the Rich Capture All the Gains from Economic Growth?"
Earlier this year, in April, I interviewed Roberts live in Reason's Washington, D.C., studio. Here's the podcast:
Don't miss a single Reason Podcast! (Archive here.)