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The American Dream: Income Equality, Mobility, and Oppotunity

  1. Jan 23, 2008 #1
    I'm sure you've all heard over and over again that income inequality in the US has increased over the years. This often leads people to conclude that "the rich are getting richer and the poor are getting poorer" and that "income mobility and opportunity are gone (or at least decresing)." However, data on growing income inequality does not say anything about the degree to which individuals move up income brackets throughout a lifetime, as well as saying nothing about the degree to which all brackets are getting richer.

    Often times people seem to "care" about income inequality precisely because they think it "measures" the degree to which people in the US have the opportunity to move up the income ranks. In fact, income inequality data/studies tell us nothing about income mobility and opportunity.

    Although income inequality seems to be increasing, it also seems that there is a great deal of income mobility and opportunity in the US, in fact, it seems that income mobility has possibly increased. It also seems that income inequality and income mobility are possibly correlated (meaning that decreasing income inequality may also decrease the mobility and opportunity to move up the economic ladder).

    The reason that income inequality tells one nothing about income mobility is quite simple. Income inequality studies look at 5 income groups (broken up into 5 quintiles: bottom 20%, next 20%, next 20%, next 20%, top 20%). A widening between the bottom 20% and the top 20% tells us nothing about the human beings who make up these statistical categories. For all we know, last years bottom 20% is this years middle class or this years top 20%. For all we know, most of the people in the bottom 20% are mostly young people who are either in college, or are in the early stages of a job (either way, they're likely to move up significantly over the next few years). In other words, to say that the "rich are getting richer and poor are getting poorer" from income inequality data is to assume that yesteryear's rich is this years rich, and yesteryears poor is this years poor, and to make this assumption is a logical error.

    In order to measure income mobility, one must follow individuals throughout time, and see the degree to which they moved up (or down) the income ladder. I just read a report which did exactly that, and the results are very different from the rhetoric one often hears from politicians, academics, and the media. In fact, income mobility is a very strong and alive force in the US. The following report was published by the Federal Reserve Bank of Dallas, and was released in 1995. Suprisingly, the discussion is still very relevant today, and I also have heard that many of the studies they discuss in this report have been updated and found the same results.

    Lastly, if you're not going to read this report, then don't even bother responding to this thread. I only want to hear from people who've actually read the report, so that we can keep the discussion mainly based around the points made in the report. If you disagree with me and the report, that's fine, and honestly I would love to hear your feedback, but please read the report first. Also, even though it looks long, the actual report only goes half way down the page.

    http://www.dallasfed.org/fed/annual/1999p/ar95.cfm

    Here's some quotes:

     
    Last edited: Jan 23, 2008
  2. jcsd
  3. Jan 23, 2008 #2

    russ_watters

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    I'll get into this more later (we've discussed this before and it is a good topic), but just want to point out one thing:

    Stats on income mobility don't necessarily paint the whole picture. They tell you how many people do move up, but they don't tell you how many people can move up. One of the most distressing things about this country is how so many people let the opportunities provided to them just slip by. That's an American cultural flaw that undercuts the otherwise excellent mobility potential in the country.
     
  4. Jan 23, 2008 #3
    That's a valid point. However, I don't really know of any data that would allow one to measure how many people can move up. In fact, from an empirical standpoint, that might be an impossible thing to measure (it even seems difficult to find proxies for it).

    Furthermore, the fact that high percentages of people do move up the income level at least shows that a high percentage of people can. As opposed to a situation in which there was very little upward mobility, which could make it trickier to distinguish between the who does and who can.
     
    Last edited: Jan 23, 2008
  5. Jan 25, 2008 #4
    I don't understand what's going on. Income mobility is a huge topic and on several occasions I've seen people on this forum state that people are stuck in the US, and the rich get richer while the poor get poorer and blah blah blah. I've also seen people use income inequality as a proxy for income mobility in discussions on this forum. Then I go out there, read an interesting and credible paper on the topic, take about 1 hour writing up a thoughtful post (especially considering people have been giving me a hard time lately for not writing enough when I post a link). And pretty much nobody responds to it??? Either one of two things is probably happening: 1) people are thinking to themselves, "Forget this stupid paper, I'm sure it's flawed, income mobility and oppotunity in the US sucks and income inequality data proves it. I'm not even going to respond to this thread because I know what's going on in the world." Or 2) people are saying, "Man I've been wrong all along. Income mobility and opportunity are pretty impressive in the US. Thanks Economist for your insightful link!"

    Somehow I imagine the reality is closer to number 1.
     
    Last edited: Jan 25, 2008
  6. Jan 26, 2008 #5

    Gokul43201

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    Uncorrelated...correlated...uncorrelated? I'm confused!
     
  7. Jan 26, 2008 #6

    russ_watters

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    3. What I said in my post - it's a lot to read and an intelligent response to a post you put so much effort into requires a similar amount of effort. For me, it was the middle of the work week and I didn't want to put that much effort into it. (not that I would have disagreed anyway)
     
  8. Jan 26, 2008 #7
    LOL! (Good point actually)

    I'm saying that one cannot necessarily infer from the increasing income inequality in the US, that the rich are getting rich and the poor are getting poorer, or that people don't have the opportunity to move up the income ladder. In order to test for that, you'd have to follow individuals over time, which is what the article discusses. It seems from the article that income mobility is actually pretty strong in the US.

    I should have specified my second point a little more clearly. The article mentioned that on the national level, countries with high income inequality generally have more income mobility than countries with low income inequality. Suprisingly, it seems that countries that have more dispersion in incomes offer their citizens more opportunity to move up (and also down) the economic ladder. Just for the record, I almost didn't even put in the second part you quoted because one would have to control for many other factors when comparing across countries.

    Here's what I should have said. Are income inequality and income mobility correlated? I don't know, that's an empirical question, they may be and then again they may not be. Definitely, they're not necessarily correlated, and data on income inequality will not actually tell us anything about income mobility. In order to measure income mobility we have to follow people across their life cycle and see what they earn. It seems from the data analysed in the article that income mobility is alive and well in the US. Lastly, it's actually possible that income inequality and income mobility are correlated in the opposite direction as most people assume (in other words, they're positively correlated with one another). In other words, there may be a trade off, and legislation aimed at reducing income inequality may have the unintended consequence of decreasing income mobility. Once again though, that's even an empirical question, and one that I haven't seen any very convincing data on.
     
  9. Jan 29, 2008 #8
    Economist, I think there is a measure for income mobility although one would probably not see individuals but perhaps you would see groups. You have heard of the shrinking middle class? It implies that middle income brackets are moving downward towards poverty and with the mortgage crisis maybe that is truer today than before. Even so there would be a number also moving into the high income brackets.

    There are stats; I’m sure even demographic stats, which show income levels and household composition (Census data for one). And if, they were examined over some particular time period; Graphs featuring trends involving income movement within ethnic and geographic groups could likely be extracted.

    Mobility and dispersion of income seem to me to be related in this way. Ideally, wide differences in income would, intuitively speaking, be open for greater income mobility; one reason being dissatisfaction with ones standard of living and associated with that the motivation is for more satisfactory conditions. With more even dispersion of income, there is greater satisfaction and therefore less motivation for upward mobility and probaby a spreading out or bunching as peoples' minimun needs get met.

    I don’t think anyone yet uses a system that allows any and every one to reach a level where they feel comfortable and satisfied with their standard of living. Such system would provide for all people, so they may enjoy a sustainable and satisfactory livelihood, shelter, and quantity of sustenance. It would not be a free ride. Everyone would be asked to produce in some mutually acceptable capacity to help benefit everyone. Let me stop there I didn’t mean to go so far OT. Sorry. ; ~ )
     
  10. Feb 1, 2008 #9
    For a more personal view on the situation, I come from a family of immigrants. My parents and all the family on my dad's side of the family came to this country from Cuba a year or so before I was born. They had nothing: no money, no knowledge of English, and even only a vague, propaganda-laden understanding of capitalism. But since then (about 19 years ago), everyone from my dad's side of the family has attained at least middle class status, with more than one relative of his breaking into six digit income. All of them became business owners in completely unrelated industries, and all of them have made a good living. It took a ridiculous amount of hard work and some pretty dreadful hours at the beginning (my dad had almost 60-hour work weeks with one day off per month at the onset), but slowly everyone has risen considerably. My sister and I are the first children of the family at college age, and while she is currently enrolled, I am enrolling next year (hopefully at the University of Chicago). She plans for a career in industrial psychology, while I am hoping for physics in academia.

    I figure that if my family can make it coming from such a disadvantaged situation, then this country isn't quite as bad as some people say. Of course, I am still in favor of those less ambitious than my parents making a more livable wage--not everyone wants to be a business person, after all, and all the years in communism must make business rather exciting for the Cubans. I know my dad is absolutely infatuated with it.
     
  11. Feb 4, 2008 #10
    WHILE Americans believe in the American Dream, the irrefutable theme that dominates and permeates American society,
    there are problems with it, as an institutionalized ideology that justifies inequality.
    From an IHT piece on the failure of neoliberalism:
    An excerpt from The Guardian, 2003:
    Quotations from a conference paper:
    In terms of your article, Economist, I'm surprised you did not differentiate the difference between wealth and income. Wealth, as it stands, continues to be passed down by generation. Wealth, as in capital, securities, and assets - is the big thing to look at here - not income. Because wealth is what plays a big role in social development - most CEO's make just as much as lawyers (100k-200k), but it is their control of corporate shares that make the difference.
     
  12. Feb 4, 2008 #11
    I don't get what your survey is supposed to prove. I'm an (aspiring) economist, and in case you haven't noticed, we don't care what people claim they feel or think, we care about what's actually going on. It doesn't mean much when a survey shows that the majority of American's think the American Dream is alive and well, just like it means nothing when the majority of American's think the economy is doing good or bad. This is the reason economists rarely use surveys, because we don't think they are very useful. Talk is cheap, and people's personal statements or feelings are not necessarily accurate, which is why we look for more systematic ways to study these topics.

    So you admit that peoples incomes vary greatly and people move up and down income brackets frequently? And you admit that the bottom income brackets have a high probability of moving up to middle class or better in the future? So much for low income mobility and a stagnant under class and middle class. Also, if according to you, income isn't very important then why have I heard you refer to income inequality as a big deal?

    Wealth may continue to be passed down, but what does that prove? Are you saying that wealth should not be passed from one generation to another? I say it's their money, they can do what they want with it. Besides, there is no way of getting around this, because any attempt at not allowing people to pass wealth down after they die will just lead to incentives to do other things (spend like crazy in your old age by blowing money on stupid things, or even just giving your loved ones large sums of money or gifts before you die).

    Interestingly enough, even wealth mobility is much less set than you imply. It maybe true that wealth is passed down, but it hardly lasts for ever. On Greg Mankiw's blog he pointed out that the correlation between one's wealth and their grandchildren's wealth is very low. Furthermore, this is only anecdotal but the overwellming majority of the Forbes richest people (which looks at wealth not income) are self-made (meaning their wealth is not a result of inheritance).
     
  13. Feb 4, 2008 #12

    russ_watters

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    I'd really like to see the actual data for that. I realize that Europe hasn't advanced as fast as the US, but I cannot believe that that is true. In the US, over the long term, every income bracket has seen gains against inflation. It's been a few months since I've had to debunk this socialist myth, so here's the same data I link every time it comes up: http://www.census.gov/hhes/www/income/histinc/h01ar.html

    And btw, Europe is more socialist than the US, so if they are in fact losing ground, it wouldn't be the fault of capitalism, it would be the fault of their socialism.
    And that's a big reason why I don't trust socialists. These pieces of information often follow each other in their arguments in a way that is intended to make you believe one supports the other. But this has nothing whatsoever to do with the issue. Everyone knows and accepts that free market systems have high income inequality, but when socialists and liberals try to make you believe that that means 'the rich get richer while the poor get poorer' (that's what this quote is intended to imply), it is a flat-out lie. As the income stats clearly show, the rich get richer faster, but the poor still also get richer. The fact that the share of the total wealth/income is decreasing doesn't mean anything at all. It is a completely worthless statistic for showing if people are making progress.

    There is no "wealth transfer" from poor to rich. That's a common liberal/socialist lie. What the statistics show is merely that more of the newly generated wealth goes to the rich.

    That study on income mobility looks interesting......and long...... but I wonder if it adequately deals with the issue of immigration? For better or worse, people in all countries are largely constrained to the relative success of their parents, but since immigrants start with a blank slate, they are often a good way to gage the potential for mobility in a country. I believe that there is a reason why immigration to the US is so high. As stories like Joe's show (and I'd really like to see some statistics about this), the potential for mobility in the US is extremely high. It is sad to me that so many people who already live here do not sieze the opportunities presented to them on a silver platter.
     
    Last edited: Feb 5, 2008
  14. Feb 5, 2008 #13
    This is not completely true. In fact, a program that was set up in the name of transferring wealth from rich to poor, actually transfers wealth from poor to rich. Yes folks, I'm talking about Social Security. :smile:

    Well, from the report, it seems that many people are moving up, so I think many are actually taking advantage of the opportunities.
     
  15. Feb 5, 2008 #14

    ShawnD

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    Before this gets several pages long, there should at least be some numbers on the first page.

    Anual Inflation (can I trust this?)
    CPI - United States (wiki)
    Income - United States (Russ' link)

    And just for kicks here is a short video (42 minutes) about what causes inflation/deflation and how money works
    Money Banking and the Federal Reserve


    Based on those census numbers, here are the percentage income gains for the lowest quintile in the past 9 years. I'm using the "upper limit" for the lowest quintile. Next to the income change is the 12 month moving inflation average based on July (middle of the year) from that Anual Inflation link. Years where poor people beat inflation are bolded black, years where poor people lost to inflation are in red. It's hard to read the chart so I'll try to round to the nearest 0.25% of inflation
    97-98 = +4.6 vs 2.5%
    98-99 = +6.3 vs 1.5%
    99-00 = +4.5 vs 1.75%
    00-01 = +0.2 vs 3.25%
    01-02 = -0.3 vs 3.25%
    02-03 = +0.3 vs 1.5%
    03-04 = +2.7 vs 2.25%
    04-05 = +3.7 vs 2.5%
    05-06 = +4.4 vs 3.0%

    Poor people win 6/9 years. How is the bottom of the fifth quintile doing?
    97-98 = 4.4 vs 2.5%
    98-99 = 7.4 vs 1.5%
    99-00 = 2.2 vs 1.75%
    00-01 = 3.6 vs 3.25%
    01-02 = -0.3 vs 3.25%
    02-03 = 2.7 vs 1.5%
    03-04 = 1.9 vs 2.25%
    04-05 = 5.6 vs 2.5%
    05-06 = 4.8 vs 3.0%

    Rich people win 7/9. Poor people don't seem to be any worse now than they were before.
     
    Last edited: Feb 5, 2008
  16. Feb 5, 2008 #15
    That paints a clear picture.

    Poor people are getting richer, just not as fast as rich people. Which makes sense since rich people obviously know how to make money faster than poorer folks. Regardless, both classes have the opportunity to make more. Makes sense to me.
     
  17. Feb 5, 2008 #16
    Well, you can't draw any conclusions about mobility because "the rich" from one year may be "the poor" in another year (and vice versa).
     
  18. Feb 5, 2008 #17

    russ_watters

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    It's different than mobility in the traditional sense, but still relevant. "Mobility" typically means moving from one income bracket to another, while Shawn's stats simply show the whole bracket moves up.
     
  19. Feb 6, 2008 #18
    I know, I just want to point out the difference as people often confuse the two. Yes, "all boats are rising."
     
  20. Feb 10, 2008 #19
    Interesting article from NY Times, I read about it here: http://cafehayek.typepad.com/hayek/2008/02/american-consum.html (you will find the link to the original article here as well)

     
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