Economic Inequality: Facts, Theory and Significance
Table of Contents
- Executive Summary
- The Basic Facts about Income Inequality
- The Factors Behind Income Inequality
- Are the Rich Getting Richer while the Poor Are Getting Poorer?
- Potential Pitfalls of Redistribution
- The Effect of Income Mobility
- The Economic Justification for Income Inequality
- The Philosophical Justification for Income Inequality
- The Difficulty of Redistribution
- About the Author
The Effect of Income Mobility
The idea that income inequality measures anything important is undercut to the extent people shift frequently from one quintile to another. And in the United States, as in many other relatively free countries, income mobility is substantial.
To repeat: income mobility is substantial. Why does that need to be emphasized? Because of a spate of articles three years ago in the New York Times and the Wall Street Journal that, to careless readers, communicated the opposite.
“Increasing taxes on additional income can raise measured inequality.”
“As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls,” read the headline on page one of the May 13, 2005, Wall Street Journal. Viewing such a headline, one would think it means that the income mobility of Americans is no longer as great as it was. That is what many tend to think upon seeing the verb “stalls.” If it were really true that it had become more difficult for Americans to move from one income group to another, there would be cause for alarm. It would certainly justify a front-page article in the Wall Street Journal. But it is not true. Moreover, amazingly, the Journal’s very own article never claimed that income mobility was falling.
Thus, an article with a dramatic headline about income mobility having “stalled” doesn’t claim that income mobility has in fact fallen. In the third paragraph, when the article’s author, David Wessel, finally gets to the important facts, he writes:
As the gap between rich and poor has widened since 1970, the odds that a child born in poverty will climb to wealth — or a rich child will fall into the middle class — remain stuck. Despite the spread of affirmative action, the expansion of community colleges and the other social change designed to give people of all classes a shot at success, Americans are no more or less likely to rise above, or fall below their parents’ economic class than they were 35 years ago.
In other words, income mobility has not changed over the last 35 years. It turns out that the Journal used the word “stall” to mean “remain constant.” Just imagine what headlines would look like if the newspaper’s editors had the same news sense when writing about other things that didn’t happen or that continued on normally. For example: “California goes another month without earthquake;” “War between France and U.K. nowhere on the horizon;” “Women continue to get pregnant.”
In misleading readers about income mobility, Wessel was not alone. Just two days later, the New York Times carried an article similar in tone: “Class in America: Shadowy Lines that Still Divide.” A careful reading of the article leads one to the conclusion that, if its data are correct, income mobility is unchanged. According to the Times, “mobility seems to have stagnated.” Note the use of the word “stagnated.” It means the same thing as “stalled.” When the article’s authors, Janny Scott and David Leonhardt, get to the facts, they admit:
Some economists consider the findings of the new studies murky; it cannot be definitively shown that mobility has fallen during the last generation, they say, only that it has not risen. The data will probably not be conclusive for years.
Yet throughout their piece, the reporters add lines that undercut the message that income mobility is unchanged. They write, for example, “Conservatives tend to assert that mobility remains quite high, even if it has tailed off a little.” Yet they cite no evidence that mobility has tailed off. Elsewhere they quote Amherst College president Anthony W. Marx as saying, “If economic mobility continues to shut down, not only will we be losing the talent and leadership we need, but we will face a risk of a society of alienation and unhappiness.”
“Many people born in one income class move to another.”
But Marx’s statement assumes that economic mobility has shut down. A careful reporter trying to give his readers accurate information would not have bothered using this statement because it contradicted the truth, or would have at least offset it with a quote or a comment pointing out the statement’s falsity. Scott and Leonhardt did neither.
What is often missing from these arguments is that many young people start out in the bottom or second-lowest income quintile and move up as they acquire skills and are promoted. Yet even free-market economists have ignored this fact. Commenting on the aforementioned 1992 Treasury study, University of Chicago economist Kevin M. Murphy stated, “This isn’t your classic income mobility. This is the guy who works in the college bookstore and has a real job by his early 30’s.” But Murphy is wrong. This is classic income mobility. In other words, age is the main factor that causes people to move from one income category to another.