Inequality, Mobility, NDD Spending, and the American Dream

September 10th, 2011 at 9:46 am

Putting aside for a moment the short-term and the hurly-burly of Jobs-Act politics (I’ll get back to those later), I’ve been thinking about inequality and mobility.

Income (or wealth, or wage) inequality is the distance between income classes at a point in time.  That distance has of course gotten much wider over time.

Income mobility is the rate at which people or families move across those distances, from one income class to another.

Think of the income distribution as a hotel (if you like the usual quintile analysis, think of it as a hotel with five floors).  Inequality measures the distance between the floors; mobility measures how likely families are to move from one floor to another.

[One further nuance that I won’t reference here, but for aficionados —there’s absolute and relative mobility.  “Absolute” mobility just measures how a person or family moves around the income scale in real income terms; “relative” measures examine how they move around relative to other families.  The latter is most common because it links conceptually to inequality in a way I’ll emphasize in a moment.   Also the “absolute” analysis is tricky because we expect a family’s income to rise as they age—every few years, someone writes a silly article about how things must be fine because if you follow families as they age, their income goes up.  But the question is how fast relative to past generations?]

So why is this interesting?  For one, because it’s such a key component of the American dream—working hard, getting ahead, a better life for your kids.  If such mobility is threatened, if folks are truly beginning to worry that their kids won’t have the opportunities they had, as some recent polling and data suggest, that constitutes a foundational problem.

But I’d like to look at it from a different angle.   What’s  the relationship between inequality and mobility?

I became interested in this question years ago, when conservatives who wanted to downplay the increase in inequality cited mobility as a reason why that increase didn’t matter.  Essentially, they argued that sure, the floors of the hotel are further apart but people move between them all the time so what’s the big deal?

Except they don’t.  More than half of the families who start out in the bottom and top fifths of the income scale are still there a decade later.  The correlation between parents and their kids’ income is about 0.5—such a correlation would be very low in a highly mobile society.   (What do such numbers mean?  One study, which finds a correlation of 0.6, points out that with that level of “intergeneration mobility,” it would take a poor family of four persons 9-10 generations—about 200 years—to achieve middle-class income.)

Another fundamental flaw in the conservative inequality/mobility dismissal has to do not just with the existence of inequality, but with its sharp increase over time.  For mobility to offset the increase in inequality, the rate of mobility has to accelerate.  It’s not enough to assert that “mobility exists”—the rate at which people switch floors in the hotel has to become faster, and there’s no evidence for that—if anything, the rate of mobility may have slowed in recent years (certainly this chart shows that, but other research finds no change—no research finds an increase).

Also, and this is one of the more remarkable findings from this literature, income mobility is actually higher in every other advanced economy with the exception of the UK (see here).  It’s counterintuitive to some, given that we have fewer social protections and hew more to free market principles, etc…but it’s that finding that got me thinking:

What if the conservative dismissal is not just wrong…it’s backwards?  That is, what if higher inequality creates new barriers to mobility?

As I noted above, with some exceptions, the research on the rate of mobility does not yet show significant declines in the rate of mobility, but such research depends on “longitudinal data”—data sets that follow people across time, and there’s a long lag with such data sets.

I predict that future research will find this slowdown, and I strongly suspect there’s a linkage between slower mobility and higher inequality.

The connections I’m thinking about here include disinvestment in public educational quality for lower income communities, as well as access to and completion of college education, as these are among the most well-documented correlates of higher mobility (the Obama administration has made useful inroads to improve college access).

But I’m also thinking of decent parks, libraries, food/nutrition, health care, and basic exposure to interesting, mind-expanding experiences when you’re young (some research suggests your income mobility future is determined alarmingly young, like around five, but I’m not yet ready to swallow such determinism without more evidence).

Which leads me to my last point—you know I had to go to the policy place with all this.

Many of the budget cuts we’re (pretty blithely) contemplating in what’s called non-defense discretionary (NDD) spending –as obfuscating a label as you’ll hear in DC—have mobility implications.  Much of this spending has been shown to help lower mobility barriers, and in an era where inequality makes those barriers higher, we need more, not less of such investments.

Consider WIC— the Special Supplemental Nutrition Program for Women, Infants, and Children .  It’s about a $7 billion program in which more than half of all newborns, and about one in four children under five, participate.   It also provides nutritious food, counseling on healthy eating, and health care referrals to around nine million low-income pregnant and postpartum women and their babies.

Head Start is also part of this funding stream, as are many other education boosters for low-income families.

And all of these programs have been shown, in pretty extensive and consistent research, to be associated with lifelong advantages.  They are, in short, tools to reduce mobility barriers.

As commenter DCS reminds me, this line of thinking also implies an explanation for the Euro/Scandinavian result–it shouldn’t surprise us that greater social protections are associated with greater economic mobility.  Once again, it may well be the case that the classical economics model is backwards: such protections don’t incent laziness and stagnation, as the model argues…they reduce increasingly entrenched societal barriers and thus enable people to better realize their intellectual and economic potential.

So when you hear people talking about cuts to “non-defense discretionary spending” or even when the White House brags that under their watch NDD will be “the lowest as a share of the economy since the Eisenhower years” ask not for whom the bell tolls.  It tolls for those whose futures depend on pushing back on the ever-rising barriers to income mobility.  Or even more fundamentally, it tolls for the American dream.

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9 comments in reply to "Inequality, Mobility, NDD Spending, and the American Dream"

  1. D. C. Sessions says:

    Don’t dismiss the safety net as a mobility enhancer.

    There’s some qualitative research (courtesy of my sociologist daughter) suggesting that just as with a circus, a social safety net encourages risk taking. Bill Gates could afford to drop out of Harvard and start his own business in part because he had a $1 million (and this was the 70s!) trust fund and parents [1] who could help him with second (and third, and ) chances if it didn’t work out.

    Having a wealthy family is a great safety net, but at least in countries like Canada you don’t have to give up health coverage to start your own business, and in countries that have a good safety net you’re not taking a chance of your children starving. So contrary to the usual conservative dogma, those “nanny state” programs actually encourage entrepreneurial initiative.

    Or maybe the whole entrepreneur schtick is best left to people like Romney who can start a business without risking everything they have?

    [1] Anyone remember Preston, Gates, and Ellis? Yeah, that Gates.


  2. Jim says:

    Coming from inside the Obama administration, it would be most interesting to hear a truthful account of its political agenda. From an outsider, it sure seems obvious that they don’t represent the average American but rather a Wall Street attitude constrained by a public relations need to maintain some degree of cordiality with center and center-left mass opinion. A mass opinion of course that’s heavily manipulated by business control of most key institutions.

    The interesting question is who are these men representing and can money dominated capitalist democracy produce anything but such men.


  3. pjr says:

    Nobody likes downward mobility, including for their children. I think this is relevant to policy and politics. When policies promote economic growth concentrated at the top, downward mobility represents a stronger threat (higher risk) to those not at the top–as does upward mobility from below them, because the two are related. Also, downward mobility from the top promotes upward mobility, and inheritances matter a great deal at the top–the higher the concentration of wealth, the larger the inheritances and the less downward mobility.


  4. David D. says:

    This is the type of post that really feeds my economic jones. Thanks for your time on this. Please give us more like this when you can.
    Peace.


  5. Rick Schaut says:

    “Once again, it may well be the case that the classical economics model is backwards: such protections don’t incent laziness and stagnation, as the model argues…they reduce increasingly entrenched societal barriers and thus enable people to better realize their intellectual and economic potential.”

    I don’t think it’s the case that classical economic models get the incentives wrong. Rather, I think that people who have certain political agendas have a tendency to ignore certain incentive effects as they pertain to that agenda. For most recipients of welfare, for example, a full time job would represent a substantial increase in income over their welfare benefits. Apparently, however, that incentive pales in comparison to the incentive effects of changes in the top marginal tax rate.


  6. perplexed says:

    Thank you Dr. Bernstein!

    The paradox of wealth concentration! This story needs to be shouted out with a megaphone as our press corps has failed miserably in telling it (or more likely they’ve been seriously dissuaded from doing so). It was long ago recognized that “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” – J.M. Keynes (surprise, surprise) His assumption at the time is that this would be addressed through proper taxation, not that it would be allowed continue unimpeded until it would threaten to bring the entire system down from its ill effects:

    “Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation — income tax and surtax and death duties — especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity. Our argument does not affect the first of these considerations. But it may considerably modify our attitude towards the second. For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital. Moreover, experience suggests that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.
    The existing confusion of the public mind on the matter is well illustrated by the very common belief that the death duties are responsible for a reduction in the capital wealth of the country. Assuming that the State applies the proceeds of these duties to its ordinary outgoings so that taxes on incomes and consumption are correspondingly reduced or avoided, it is, of course, true that a fiscal policy of heavy death duties has the effect of increasing the community’s propensity to consume. But inasmuch as an increase in the habitual propensity to consume will in general (i.e. except in conditions of full employment) serve to increase at the same time the inducement to invest, the inference commonly drawn is the exact opposite of the truth.” – J.M.K.

    Is there any economic justification for the enormous wealth and income concentration that exits in this country today? What exactly is the benefit to the country of allowing this? The wealth concentration has gotten so out of control that not even the wealthy benefactors of these policies gain anything from further increases in their wealth. So much wealth has accrued to the small group at the top that additional amounts of wealth that accrue to this group do little if anything to change their lives in any significant way. Yet we continue to sit by and do nothing as the process continues unabated. The impacts of having allowed this to happen have so undermined the “American Dream” that we should suspend using the phrase “Land of Opportunity” until it is sufficiently rectified.

    As you point out (and the research supports) there are enormous benefits to a society that accrue from wide distribution of wealth and income. Keynes pointed out that two of these benefits are likely to be increased income and increased capital. Its time we started to talk about what level of wealth concentration is “optimal” for the country as whole, how we move quickly toward that level, and how we keep it from being exceeded to our detriment in the future. Let’s start talking about tying wealth taxes, inheritance taxes, and progressive income tax rates to a national target for a gini coefficient that gets us to a wealth concentration that provides incentives for all without the negative impacts of our current, dangerous situation. Once we recognize how far we are from any possible “optimal” level, it will become obvious that the wealth taxes needed to get there will pay down a huge amount of our deficit and give us the room we for the increased stimulus spending we so desperately need. Where would we be today if the increases in demand of the ’90′s & early 00′s had come from redistribution of extreme wealth & income instead of increased borrowing from the rentier class we have created through our mis-management? Would we really need TBTF banks or would we have eliminated the need to expose ourselves to this kind of risk? Would we have generated enough new revenues from increased economic activity to offset some of our foreign policy mistakes? I think Keynes was trying to tell us is that its likely that we would have.

    Capitalism provides no automatic correction for the “arbitrary and inequitable distribution of wealth and incomes” that Keynes talked about. The only solution to the tendency towards incredible wealth concentration is proper taxation to prevent it. The survival of the system depends on governments properly managing these bizarre outcomes. While proper management of wealth concentration makes capitalism more “socially responsible,” this is an added benefit to keeping it from self-destructing by systematically moving income and wealth from those with a high propensity to consume to those with low ones. The result is lower total capital and a smaller economy (not to mention the disastrous social consequences) . Enormous debt, deficits, wealth concentration, and lack of demand are all symptoms of the same problem-disastrous tax policies; same origins, same solutions.

    A number of articles lately have discussed the prospect that capitalism itself may be threatened and may not be up to the task. (e.g. Roubini’s article for instance: http://www.project-syndicate.org/commentary/roubini41/English ) Roubini points out that: “To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.” The anarchists (or libertarians, or laissez-faire-ists, or whatever the current label is) have no solution to this, they encourage us to rely on the beneficiaries of this un-managed system without providing any rationale for why these beneficiaries would act in our interest, or why we should put ourselves in a position to have to rely on them.

    Ultimately we have to deal with the reality that, if we want to rely on the benefits of capitalism, managing it through proper government is a necessary condition for its survival. Good government, far from being the problem, is the solution. The United States of America is not going “to shrink to greatness.” But before the government can again be trusted to act “in the best interests of the people,” it must again become representative of the people and the representatives must be under the “control” of their constituents, not their campaign financiers. We must liberate our representatives from their campaign financiers so they can truly act in our in our interests without fear of retribution. 100% public financing of campaigns costs no more as a share of GDP, can be paid for by the same people as are paying now with the proper tax laws, and can reinforce the connection between the voter & his or her representative instead of undermining it. Can you imagine what the political conversation would be like today if congressional campaigns were funded in accordance with voters’ wishes instead of having to “beg & promise” for funding from wealthy donors? Its way past time to start talking about how to strengthen our government instead of how to undermine it. Is there another institution that the American people share as group other than our federal government? We don’t share a religion, we don’t share a culture, we don’t really even share a language. Its truly “our” most important resource and we must secure it from those who attempt to control or influence it for their own personal (or corporate) benefit at a huge cost to the rest of us.

    Throughout the cold war we had to endure the ideological battles of communism vs. capitalism, as if they were somehow “polar extremes,” one of which needed to be chosen over the other. Now we find ourselves instead in the position of “who can better manage capitalism, communist (or totalitarian) governments, or democracies?” But if we allow our “democratic republic” to bought out from under us and turned into the oligarchy that it has become, a true democratic republic isn’t even in the contest is it?


    • Chigliakus says:

      Well said. Your last two paragraphs seem to be a rehash of your rather cogent analysis here http://jaredbernsteinblog.com/the-question-is…/#comment-16148 which I have directed many friends and acquaintances to read. We have a long way to go in repairing our democracy and our country, but getting more people to understand the points you touch on here seems like a good first step. Do you happen to have a blog of your own?


      • perplexed says:

        Thanks for your comment. No, no blog yet; so far Dr. Bernstein continues to tolerate my long – winded tirades (although I’m sure I’m testing his patience).

        Sorry about the repetition. I guess I’m more than a little surprised over the lack of outrage over this “representation” issue. The relationship between the voters and their representatives in a democratic republic is so fundamental & critical to its proper functioning that I find it hard to believe we tolerate any outside influence at all, let alone forcing our representatives to appeal to a wealthy minority of voters and their special interest groups as a condition of their holding office. Not only do we make it financially undo-able, we are systematically filtering out all that would like to serve but won’t be put in this absurd position. Then we blame the politicians for the results we get?

        Maybe most Americans believe that they are saving money by having the wealthy “voluntarily” fund their elections or maybe they really believe there are no alternatives. Either way, the results are the same; influence for sale and the filtering out of many who would serve us well. Its certainly no bargain as we currently are experiencing the real costs of doing this.

        If our government was truly “representative” of the American people as designed, then the outcome of the decisions of this “group of representatives” would be something we’d all have to live with as “price” or “cost” of living in a democracy; I’m willing to abide by that and believe most Americans are. However, if it is not truly “representative,” than whose decisions are we being asked to abide by? An extremely powerful minority in a democracy should be an obvious red flag that something has gone seriously awry! I suppose its theoretically possible, but I for one doubt that a group of representatives of the American people, with the complete independence to act in the interest of the respective constituencies involved, would not be doing what our government is doing.

        With so many problems to fix its hard to know where to begin and how to prioritize, but I think this ranks at or near the top of the list. If we make mistakes with our own collective will I think most of us are willing to live with and correct that. But few are willing to tolerate being brought down by a powerful minority that acquired its power by subverting the process.

        For another post along the same line check out http://justfortheyellofit.blogspot.com/2011/08/whos-calling-shots.html


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