News How Accurately Do Income and Wealth Statistics Reflect Reality?

[boomtrain]

Well there are economic limits due to scarcity.
For the purpose of argument, let's pretend there exists a pie, and all Americans are competing for a slice of it.

This analogy will only make sense if this is a magic pie that grows in line with the economic activity of the Americans competing for it

Suppose a Janitor does a great job cleaning, and he or she is over-rewarded for his job by being given half of the pie. Everyone else in America must not complete for the remaining half of the pie. Suppose an actor does a good job in a movie, he or she is over-rewarded with half of the remaining half of the pie. The rest of America must now compete over 1/4 the pie. Now suppose a great scientists cures cancer, creates an amazing new type of battery, and just does amazing stuff in general. The most he could be rewarded is 1/4 of the pie since 3/4 of the pie is already given out through over-rewarding people. And this is despite the fact that his work is much greater than theirs.

Who decides who gets what slice of the pie?

 

[Dale]

You may argue this is not unfair; I'm just stating this as a fact (tho I do not believe it is fair.))

I would argue that fairness itself is an over-rated and usually self-serving concept developed by four-year-old children in order to get their own way. It is embarassing for mature adults to fret over fairness.

 

[Mentalist]

That is circular reasoning. What is your argument against fairness?

The laws act as an agreement among citizens to follow a certain guideline establish and agreed upon by most if not all parties. If one side-steps the law, is that person not being fair to the others?

 

[SixNein]

This analogy will only make sense if this is a magic pie that grows in line with the economic activity of the Americans competing for it

Who decides who gets what slice of the pie?

There is nothing magical about the analogy. We have limited resources that we divide up with whatever economic policy we use.

Economic policy will ultimately decide who gets what. For example, suppose the US decided to employ Marxism and try to achieve equality. In such a case, the pie would be divided evenly across the population. But this in turn has negative consequences that I think everyone here would accept without argument.

The government needs to set a policy targeting the most optimal Gini coefficient. And every economic policy it creates needs to begin with how it effects the reward system we have.
And this is not only true for America, I think most western nations need to do this.

At any rate, America's social mobility is very bad. If your born poor, your probably going to die poor.

Our reward structure created from our economic policy is out of whack.

 

[D H]

That is circular reasoning. What is your argument against fairness?

It is not circular reasoning. One issue is that life isn't "fair", whatever that is. This leads to another issue: "fairness" is an ill-defined concept.

The laws act as an agreement among citizens to follow a certain guideline establish and agreed upon by most if not all parties. If one side-steps the law, is that person not being fair to the others?

First off, that's irrelevant for the most part for the simple reason that the vast majority of citizens abide by the law.

More importantly, the law is not concerned with "fairness", whatever that is. It's concern is justice and protection of the public. Consider the fate of three criminals. One is an armed robber who at gunpoint steals a cheap watch and a bit of cash from a couple who accidentally walked down the wrong street. Net take: $200. The second is a burglar who breaks into a house while the owners are on vacation and steals jewelry galore, a couple of computers, and a fancy TV. Net take: $20,000. The third is an embezzler who over time steals little bits of money but from lots and lots of people. Net take: $2,000,000.

Which one gets the harshest penalty? It's the armed robber, of course. The law is very cognizant of the fact that the victims who suffered the greatest trauma was the couple who were robbed at gunpoint. The law is also very cognizant of the fact there is a pencil-thin line between armed robbery and murder. The fact that the armed robber did not harm his victims is irrelevant. Is this fair? Some think not. That's not the point of the penalties. The point is to protect and serve the public.

Back to the law abiding citizens, is it fair that someone who is a foot and a half taller than average and has far better reflexes than average can make millions of dollars a year just playing a game? Is it fair that someone with immense people skills can make hundreds of times what the average citizen makes, just because of those people skills? Is it fair that someone who is perhaps a bit reckless with her investments can eventually become a billionaire while ordinary people have struggle to build up a rather modest retirement nest egg? Is it fair that someone who happened to have ultrarich parents can fool around this week in Aspen, next week in Europe, and the following in the Hamptons, while everyone else works day in, day out? Life isn't fair. That's just how it goes. Besides who decides what constitutes "fairness"?

Stop fretting over fairness and make the best out of your own life.

 

[mheslep]

What does "very bad" mean in the context of social mobility? What does "poor" mean in the US?

The NYT article (which references Jantii) cites the following. Of US men raised in the bottom fifth: 58% move off the bottom; 35% will move up two fifths; 8% will migrate to the top fifth. And that's according to Jantti's research w/ the provocative title, who apparently is well respected but there is research all over the place on the subject as mentioned in the article. I suspect good data is hard to come by, as would be expected since the results require data on what happens to individual parent - child income, generation to generation.

http://www.sciencedirect.com/science/article/pii/S0049089X03000437
http://www.mitpressjournals.org/doi/abs/10.1162/rest.91.4.766?prevSearch=allfield%253A%2528solon%2529&searchHistoryKey=&
http://www.sciencedirect.com/science/article/pii/S0049089X0300043
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-232X.2007.00456.x/abstract
http://www.ssc.wisc.edu/jhr/2008ab/aaronson1.htm
http://www.chicagofed.org/digital_assets/publications/working_papers/2002/wp2002-08.pdf

 

[chiro]

Most people define fair to be what they themselves think is fair rather than what every single thing can agree on with the incredible amount of variation in both needs and desires and for this reason alone, fair-ness and an adequate definition there-of, will probably never be defined for a quite a long time to come.

 

[Mentalist]

It is not circular reasoning. One issue is that life isn't "fair", whatever that is. This leads to another issue: "fairness" is an ill-defined concept.

You are certainly entitled to your opinion but do not make it seem as if it is a true one. I'd rather you put, "in my opinion".

First off, that's irrelevant for the most part for the simple reason that the vast majority of citizens abide by the law.

More importantly, the law is not concerned with "fairness", whatever that is. It's concern is justice and protection of the public. Consider the fate of three criminals. One is an armed robber who at gunpoint steals a cheap watch and a bit of cash from a couple who accidentally walked down the wrong street. Net take: $200. The second is a burglar who breaks into a house while the owners are on vacation and steals jewelry galore, a couple of computers, and a fancy TV. Net take: $20,000. The third is an embezzler who over time steals little bits of money but from lots and lots of people. Net take: $2,000,000.

Which one gets the harshest penalty? It's the armed robber, of course. The law is very cognizant of the fact that the victims who suffered the greatest trauma was the couple who were robbed at gunpoint. The law is also very cognizant of the fact there is a pencil-thin line between armed robbery and murder. The fact that the armed robber did not harm his victims is irrelevant. Is this fair? Some think not. That's not the point of the penalties. The point is to protect and serve the public.

Back to the law abiding citizens, is it fair that someone who is a foot and a half taller than average and has far better reflexes than average can make millions of dollars a year just playing a game? Is it fair that someone with immense people skills can make hundreds of times what the average citizen makes, just because of those people skills? Is it fair that someone who is perhaps a bit reckless with her investments can eventually become a billionaire while ordinary people have struggle to build up a rather modest retirement nest egg? Is it fair that someone who happened to have ultrarich parents can fool around this week in Aspen, next week in Europe, and the following in the Hamptons, while everyone else works day in, day out? Life isn't fair. That's just how it goes. Besides who decides what constitutes "fairness"?

Stop fretting over fairness and make the best out of your own life.

Justice and fairness are closely related as one constitutes, as you pointed out within your three propositions, a process given and judged because of the veracity of each situation. The exact content of fairness is indicated by the legitimacy and executed within the circumstances of the case. Justice comes in when one is given their due process for an injustice committed upon them.

Your next points about a person being taller, etc..., is not what I am concerning when speaking on fairness. As stated above, fairness is going by the established rules. You can say my position is “irrelevant” all you want, but you cannot also deny the main tenant of fairness I have pointed out within this thread, to which you have. I will state it again, fairness, is the account of everyone following established rules and when an injustice is committed upon a person, the guilty party is judged based upon the propensity of the damage, i.e. by the governing party and are judged based upon an impartial view of the law. That is justice or fairness, they aren’t mutually exclusive ideas.

So, when I say fair, I mean it within my reasoning given above, not what your argument is trying to make it out to be.

I will readdress one being taller, one being shorter, etc... Within my own reasoning of fairness, those would be considered acts by nature. One is taller simply because a combination of nature and genetics, thus he can reach further. Should he have his arm lopped off because he is taller than another? No because within my reasoning it would not fit the context and reasonableness of what is considered ‘fair’ and would be an injustice committed upon ‘said’ person. As goes the same for the rest of the examples. Nature has not agreed upon the rules of human society. Nature only acts upon society, it does not make decisions, holding it to a standard and attempting to reduce my argument to something as absurd of nature making conscious decisions concerning human society is something I take offense to.

 

[SixNein]

What does "very bad" mean in the context of social mobility? What does "poor" mean in the US?

The NYT article (which references Jantii) cites the following. Of US men raised in the bottom fifth: 58% move off the bottom; 35% will move up two fifths; 8% will migrate to the top fifth. And that's according to Jantti's research w/ the provocative title, who apparently is well respected but there is research all over the place on the subject as mentioned in the article. I suspect good data is hard to come by, as would be expected since the results require data on what happens to individual parent - child income, generation to generation.

http://www.sciencedirect.com/science/article/pii/S0049089X03000437
http://www.mitpressjournals.org/doi/abs/10.1162/rest.91.4.766?prevSearch=allfield%253A%2528solon%2529&searchHistoryKey=&
http://www.sciencedirect.com/science/article/pii/S0049089X0300043
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-232X.2007.00456.x/abstract
http://www.ssc.wisc.edu/jhr/2008ab/aaronson1.htm
http://www.chicagofed.org/digital_assets/publications/working_papers/2002/wp2002-08.pdf

Bad meaning that it's in decline.
Poor is generally defined in this topic as the bottom fifth. Let's call them the poorest fifth to be clear.

Here is a nice little read on it by Economist:
http://www.economist.com/node/3518560?story_id=3518560

 

[CAC1001]

There is nothing magical about the analogy. We have limited resources that we divide up with whatever economic policy we use.

Economic policy will ultimately decide who gets what. For example, suppose the US decided to employ Marxism and try to achieve equality. In such a case, the pie would be divided evenly across the population. But this in turn has negative consequences that I think everyone here would accept without argument.

Well actually, the pie would be mostly concentrated among the ruling elite (the Communist Party) with the rest of the scraps left for the general population.

At any rate, America's social mobility is very bad. If your born poor, your probably going to die poor.

Our reward structure created from our economic policy is out of whack.

I'd be careful with any article that cites a study by the Economic Policy Institute though. Not saying they are wrong, but they have a left-leaning political bias. It would be like citing a Cato Institute study that is critical of Obamacare. Doesn't mean it's wrong, but it would be a source that has a right-wing bias.

 

[mheslep]

Bad meaning that it's in decline.
...

If it is.

Our results, which pertain to the cohorts born between 1952 and 1975, do not reveal major changes in intergenerational mobility...

this paper shows that the transmission of high-income status significantly increased while the transmission of low-income status remained stable. These results suggest that it has now become easier for high-income sons to maintain their economically advantaged status than in the past. In contrast, low-income sons’ chances of escaping from their economic disadvantage have not increased to the same exten...

I find no evidence of a linear trend in the intergenerational elasticity of family income for those born into the Panel Study of Income Dynamics between 1952 and 1975 and observed as adults between 1977 and 2000...

We find that mobility increased from 1950 to 1980 but has declined sharply since 1980. ... Our preferred results suggest that earnings are regressing to the mean more slowly now than at any time since World War II, causing economic differences between families to become more persistent...

 

[Dale]

That is circular reasoning. What is your argument against fairness?

Arguments against fairness:
1) Factual: life is not fair
2) Ambiguity: there is no agreed upon objective standard of fairness
3) Motivational: concerns over fairness drain effort from productive activities
4) Moral: fairness is used as a moral justification for otherwise immoral acts
5) Maturity: fairness is a key focus of immature individuals

 

[chiro]

Arguments against fairness:
1) Factual: life is not fair
2) Ambiguity: there is no agreed upon objective standard of fairness
3) Motivational: concerns over fairness drain effort from productive activities
4) Moral: fairness is used as a moral justification for otherwise immoral acts
5) Maturity: fairness is a key focus of immature individuals

Ironically fairness is meant to be something that everyone can agree on, but this currently isn't the case so what people think fair is isn't fair at all since the definition is meant to be uniform, but in reality is riddled with so many exceptions.

When most people say life isn't fair, what they are really saying is that its not "fair for them" as opposed to "fair for everything".

 

[Astronuc]

Incomes Flat in Recovery, but Not for the 1%
http://www.nytimes.com/2013/02/16/b...ins-after-recession-went-mostly-to-top-1.html

. . . .
The numbers, produced by Emmanuel Saez, an economist at the University of California, Berkeley, show overall income growing by just 1.7 percent over the period. But there was a wide gap between the top 1 percent, whose earnings rose by 11.2 percent, and the other 99 percent, whose earnings declined by 0.4 percent.
. . . .
Excluding earnings from investment gains, the top 10 percent of earners took 46.5 percent of all income in 2011, the highest proportion since 1917, Mr. Saez said, citing a large body of work on earnings distribution over the last century that he has produced with the economist Thomas Piketty of the Paris School of Economics.
. . . .
After accounting for inflation, median family income has declined over the last two years. In 2011, it stagnated for the poorest and dropped for those in the middle of the income distribution, census data show. Median household income, which was $50,054 in 2011, is about 9 percent lower than it was in 1999, after accounting for inflation.
. . . .

 

[mheslep]

Incomes Flat in Recovery, but Not for the 1%

Given the 1% statistical bracket took the biggest losses in the financial crises, I think it make sense that group sees a larger bounce.

 

[russ_watters]

... the 1% statistical bracket took the biggest losses...

Just once, I'd like to see a news or scholarly article with that in the title! I guess it isn't popular to highlight that side of the coin.

 

[Tosh5457]

Those 3 points in the initial post are all true, but it's also true that US Gini coefficient is bad in regards to other developed countries. Though it also has to do with US population not being as homogeneous as other countries, not just policies. But I won't talk about this because I'd probably get banned given the warnings I got from talking about the role of race in society.
And it's also true that US economic mobility is bad comparing to other developed countries
And wow, 7% of the population are illegal immigrants... I'm perplexed how there are people in US who still oppose more border control, I guess they don't know the definition of illegal and what a country is.

 

[Vanadium 50]

Incomes Flat in Recovery, but Not for the 1%
http://www.nytimes.com/2013/02/16/b...ins-after-recession-went-mostly-to-top-1.html

I find the reporting very misleading (and Ann Lowrey knows better than this) The data makes it clear that the "top 1%" is not following a single cohort, as Lowrey implies, but is a different set of people every year. According to the US Treasury, who compared 1996 and 2005 tax filers, more than half of the top 1% in 1996 were not in the top 1% in 2005.

The mobility of the top 1 percent of the income distribution is also important. More than half (57.4 percent = 100 – 42.6) of the top 1 percent of households in 1996 had dropped to a lower income group by 2005. This statistic illustrates that the top income groups as measured by a single year of income (i.e., cross-sectional analysis) often include a large share of individuals or households whose income is only temporarily high. Put differently, more than half of the households in the top 1 percent in 2005 were not there nine years earlier. Thus, while the share of income of the top 1 per cent is higher than in prior years, it is not a fixed group of households receiving this larger share of income. As suggested by the Schumpeter hotel analogy, many of the more luxurious rooms are occupied by different people at different times.

Those 3 points in the initial post are all true, but it's also true that US Gini coefficient is bad in regards to other developed countries

Why is a low Gini coefficient "good" and a high one "bad"?

Imagine 20 people in a bar, each with $10 in their pocket. The Gini coefficient is zero. In walks a man with $3000, who proceeds to give each man $100. If I did the math right, the Gini coefficient is now 0.28. I would find it difficult to argue that the men are now worse off.

 

[russ_watters]

Those 3 points in the initial post are all true, but it's also true that US Gini coefficient is bad in regards to other developed countries.

That's a value judgement that Gini measures something bad. That's an opinion and not everyone agrees with that.

 

[Tosh5457]

Imagine 20 people in a bar, each with $10 in their pocket. The Gini coefficient is zero. In walks a man with $3000, who proceeds to give each man $100. If I did the math right, the Gini coefficient is now 0.28. I would find it difficult to argue that the men are now worse off

Of course you can't analyze GINI index alone, it only measures income inequality, not total income. For 2 countries with the same wealth/capita (measured by GDP/capita for example), if one has less income inequality than the other, there is a larger % of the population of that country that is better off than in the other. That's because above a level of income you don't really get better off than you were, at the very least your well-being doesn't increase nearly as fast as people with low incomes who get higher incomes, for the same % variation of income. That's why IMO a high income inequality is bad.

 

[russ_watters]

Of course you can't analyze GINI index alone, it only measures income inequality, not total income. For 2 countries with the same wealth/capita (measured by GDP/capita for example), if one has less income inequality than the other, there is a larger % of the population of that country that is better off than in the other. That's because above a level of income you don't really get better off than you were, at the very least your well-being doesn't increase nearly as fast as people with low incomes who get higher incomes, for the same % variation of income. That's why IMO a high income inequality is bad.

Typically when GINI is cited, it is cited alone and that's the main problem with its use. Liberals and conservatives tend believe different relationships exist between GINI and per capita income:

-Liberals tend to believe there is no relationship between GINI and per capita income. Hence, the naked citation of GINI.
-Conservatives tend to believe there is a positive - if weak - correlation between GINI and per capita income. Hence, high GINI may actually be reflective of a positive economic situation.

Moreover, economic conservatives tend to value freedom over forced equality, so whether a correlation exists or not is often irrelevant in policy preferences.

 

[mheslep]

...
And it's also true that US economic mobility is bad comparing to other developed countries
And wow, 7% of the population are illegal immigrants... I'm perplexed how there are people in US who still oppose more border control, I guess they don't know the definition of illegal and what a country is.

Arg. Not even the NYT or the reports they point to say that such is "true". They instead point to a report and say things like "studies in recent years have found", some of it conflicting. One fact likely to confuse the issue is indeed uncontrolled immigration, of which Canada (ref'd in the NYT) and the US do not have an equal share. That point was made in post #1:

2. Demographics matters. ...

Additionally, there has been an increase in the number of illegal immigrants to the US. Illegal immigrants make up about 7% of the population (according to the Bear Stearns remittances study), up from about 1.5% fifteen years ago. Today this group makes up a large chunk of the bottom decile in both wealth and income; that was much less true in the past. Any study needs to clearly state how this was treated for it to be interpreted.

This NYT was discussed before in this thread; I referenced it back in #66.

 

[mheslep]

(and Ann Lowrey knows better than this) ...

Why must that be? I doubt her bond to former organizer extraordinaire of the opinions of journalists, (journolist) Ezra Klein helps with objectivity.

 

[Vanadium 50]

I'm afraid Gini is an envy index, nothing more. Country-by-country the number of people in poverty is uncorrelated with Gini. Country-by-country, the 2nd, 3rd, 4th and 5th quartiles are negatively correlated with Gini, and the bottom half of the 1st quartile is fairly flat. So what this is actually telling us is that the top 10% drives that index, effectively erasing any information on poverty or the middle class.

There is actually a fairly strong correlation between Gini and per-capita income, but countries fall on three different bands: one for Africa, one for the Former Soviet Union, and one for everybody else. In light of the first point, I am not sure what this actually tells you, but it is interesting.

 

[Vanadium 50]

I discovered this plot while looking for something else. The internet is an amazing thing.

First, as a plot I think this does an outstanding job of presenting information.

Second, it shows very clearly that wealth and income are two different things. If they were good proxies for each other, this would be a straight line. That's not what we see.

It appears to me that there are two large populations. At the lower left, wealth is a function of income (and of the time you have had to collect it). At the upper right, income is a function of wealth. (Typically a few percent, and highly variable)

 

[Dale]

At the upper right, income is a function of wealth. (Typically a few percent, and highly variable)

There is very little systematic shading for age in that region.

 

[Vanadium 50]

I noticed that too. I think that's also an argument for that being a different population, and one where income comes from wealth, not the reverse.

 

[russ_watters]

I discovered this plot while looking for something else. The internet is an amazing thing.

Do you have a source for the actual data? Because I'd be interested in zooming-in a bit, to incomes between 10K and a million, and/which would show net worth under ten million. The verticality of that section is interesting, but it isn't super clear how age is a better correlation with wealth than income is in that presentation. It's an important issue, and I don't think most people get it -- and I'm not sure this graphic as it is presented shows it clearly enough.

Also; blue on blue on blue? I mean, I'm not color-blind, but still that's tough to read.

 

[Vanadium 50]

It comes ultimately from here https://www.federalreserve.gov/econres/scfindex.htm Unfortunately, it's in Excel format not well arranged to reproduce this graph.

 

[russ_watters]

At the upper right, income is a function of wealth. (Typically a few percent, and highly variable)

There is very little systematic shading for age in that region.

I noticed that too. I think that's also an argument for that being a different population, and one where income comes from wealth, not the reverse.

It's really hard to read the blue-and-blue color scheme. However, given that the top 5% of incomes starts at $250K, that seems like a good cutoff: you can save $5 million for retirement on a <$250k middle class income, but you can't earn >$250k on a $5 million middle class retirement savings (ehh - it's right on the edge).

I think I may have just devised a workable definition of "rich". It's an income that enables a retirement income greater than your mid-career income.

[edit] This seems like a logical formula for "retirement", so it is feeling less profound the longer I think about it...