Tuesday, November 13, 2007

Forget Everything You've Heard in the Media About Income Inequality and Income Mobility

Here is the link to the full Treasury study "Income Mobility in the U.S. From 1996 TO 2005" and here is an excerpt:

Using three different measures of income mobility that track changes in the incomes of a large sample of individual taxpayers over time, this study presents new evidence on income mobility over the decade from 1996 through 2005. Key findings include:

• There is considerable income mobility of individuals in the U.S. economy over the 1996 through 2005 period. More than half of taxpayers moved to a different income quintile between 1996 and 2005. About half of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

• Median incomes of taxpayers in the sample increased by 24% after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Further, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. The median inflation-adjusted incomes of the taxpayers who were in the very highest income groups in 1996 declined by 2005.

• The composition of the very top income groups changes dramatically over time. Less than half (40-43% depending on the measure) of those in the top 1% in 1996 were still in the top 1% in 2005. Only about 25% of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.

• The degree of relative income mobility among income groups over the 1996 to 2005 period is very similar to that over the prior decade (1987 to 1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility has neither increased nor decreased over the past 20 years.

In other words, almost everything we hear in the media about increasing income inequality, the disappearing middle class, the rich getting richer and the poor getting poorer, and the lack of income mobility is either flawed, deficient, incorrect, incomplete or wrong. The data show that:

1. There is significant income mobility up and down the income quintiles over longer periods of time, e.g. 1996-2005. Many of today's poor are tomorrow's rich, and many of today's rich are tomorrow's middle class or poor. The richest quintile is not a private club closed to new members, but a shifting, dynamic quintile composed of an ever-changing group of different individuals from year to year. Consider that 75% of the individuals in the richest group in 1996, the top 1/100th percent, moved down into a lower income group by 2005, making room for a completely different group of individuals in that super-rich category.

This is exactly the shifting pattern of quintile compositions that economic historian Joseph Schumpeter had in mind when he compared income distribution to a hotel where some rooms are luxurious, and others are small and shabby. The rooms are always occupied, but by a shifting, dynamic changing pattern of different people from day to day, or year to year. (Note: this paragraph is paraphrased.)

2. Real incomes are not stagnant, and the middle class is not disappearing. The real incomes of 2/3 of all taxpayers increased from 1996-2005.

3. The rich are not getting richer, and the poor are not getting poorer. The median incomes of those in the lowest income groups in 1995 increased more in percentage terms by 2005 than the median incomes of those in the higher income groups.

10 Comments:

At 11/14/2007 9:19 AM, Anonymous holymoly said...

"About half of those in the bottom income quintile in 1996 moved to a higher income group by 2005."

So, in other words, just over half of people in the lowest income quintile remained STUCK there after 9 years.

 
At 11/14/2007 9:42 AM, Anonymous holymoly said...

Prof. Perry --

This is a direct quote from the Treasury study summary:

"Economic historian Joseph Schumpeter compared the income distribution to a hotel where some
rooms are luxurious, but others are small and shabby. The rooms are always occupied, but often
by different people.


Here are your words from the front page post:

"This is exactly the shifting pattern of quintile compositions that economic historian Joseph Schumpeter had in mind when he compared income distribution to a hotel where some rooms are luxurious, and others are small and shabby. The rooms are always occupied, but by a shifting, dynamic changing pattern of different people from day to day, or year to year."


Your post makes it sound like this was YOUR observation, not simply a restatement of something the Treasury report had said. You might consider paying more careful attention to source attribution.

 
At 11/14/2007 11:03 AM, Blogger Walt G. said...

holymoly;

The second sentence logically follows from the first sentence’s room attribute idea, and the first sentence is correctly cited. That's a common way to cite sources in academic writing; there’s no plagiarism involved in the post.

 
At 11/14/2007 11:08 AM, Blogger Mark J. Perry said...

Note to Holymoly: I added some text to note that my paragraph was paraphrased, just to be clear and avoid any confusion.

(Thanks Walt)

 
At 11/14/2007 11:39 AM, Anonymous holymoly said...

Walt -- actually, the first sentence wasn't cited. But it's OK now, Prof. Perry has made a clarification in the text. Sometimes in the rapid-response world of blogging, it's hard to tell where someone else's thoughts leave off and others' begin. I think it's a good idea to be as clear as possible. Or else, another blog (or Kudlow) might pick up the Schumpeter comment and attribute it to Carpe Diem.

I find it ironic, actually, that Schumpeter would be invoked at all on this topic. It's been about 15 years since I read "Capitalism, Socialism and Democracy" -- but I seem to recall that he predicted that capitalism "sows the seeds of its own destruction" (or something like that), and that income mobility leads to a form of "democratic rationalization" that eventually leads capitalism to be replaced by "corporatism" and eventually by democratic socialism. If I recall correctly, Schumpeter was intensely conservative (i.e., classical liberal), but more or less concluded on a neutral/empirical basis that democracy + capitalism is an inherently unstable mix. But where he saw democratic socialism as the inevitable end, I see corporate-controlled state fascism as being equally likely. Neither are desirable, in my opinion.

 
At 11/14/2007 7:42 PM, Blogger juandos said...

"So, in other words, just over half of people in the lowest income quintile remained STUCK there after 9 years"...

So you'd rather see them ALL stuck in the lowest quintile?

 
At 11/14/2007 11:09 PM, Blogger Palermo's Blog said...

The Treasury Report referred to is extremely poor in my opinion. It makes no adjustment for retirement from the higher income levels nor for the lower earners who mature over the 10 year period. It is also worded in some instances in ways that make it misleading when quoted. For example, the quote about the 24% gain for all tax filers is all tax filers in the study (which you would expect as they age). In a footnote, the report notes the average increase for all families in the US over the time period was closer to 5%. You can get additional details at my blog if you like.

 
At 11/17/2007 8:39 PM, Anonymous Anonymous said...

This is why we have crime. The folks with no upward mobility take what they want and go. They stab the luxuirious room occupiers in the face and take their loot. It sucks to have a shabby room.

In true Schumpetarian style, the criminals are using technology to better arm themselves. Shabbyness precipitates change.

 
At 11/18/2007 10:15 PM, Blogger Douglas said...

If you want to that the US is income-Mobile, you should do it with intergenerational data sets, not ones which treat Harvard Students -- who grew up rich -- as being among the lowest income earners just because they have paid summer internships...

 
At 3/28/2009 3:27 PM, Blogger PIC said...

"About half of those in the bottom income quintile in 1996 moved to a higher income group by 2005."

holymoly, what about France or Germany? Are there the same figures better?

I think half of the poor moving up is a great thing.

Regards,

PIC

 

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