ECONOBLOG
Minding the Gap: Who's getting ahead, who's falling behind, and why?
March 8, 2006
They are questions that grip us in fits and starts. Author Douglas Coupland worried in his 1991 novel "Generation X" about "Brazilification," or the widening gulf between rich and poor and the disappearance of the middle class, but much of that anxiety faded by the late 1990s as workers benefited from a long-running expansion. Then the tech bubble burst, and by 2004 Democrat John Edwards was able to campaign for president on the argument that there are "two Americas" -- one for the ultrarich, and one for everyone else.
To what extent should we be worried about the distribution of economic gains? The Wall Street Journal Online asked economists Heather Boushey of the Center for Economic and Policy Research and Russell Roberts of George Mason University to debate to what degree inequality exists, and just how much it matters for the economy and society.
ABOUT THE PARTICIPANTS
Heather Boushey is an economist at the Center for Economic and Policy Research3 in Washington, D.C. Her work focuses on the U.S. labor market, social policy, and work and family issues. She is a co-author of "The State of Working America 2002-3" and "Hardships in America: The Real Story of Working Families." She is a research affiliate with the National Poverty Center at the Gerald R. Ford School of Public Policy and on the editorial review board of WorkingUSA and the Journal of Poverty. She received her doctorate in economics from the New School for Social Research and her bachelor's from Hampshire College.
Russell Roberts is professor of economics at George Mason University and the J. Fish and Lillian F. Smith Distinguished Scholar at the university's Mercatus Center. He is the features editor at the Library of Economics and Liberty4 and a research fellow at Stanford University's Hoover Institution. Roberts blogs regularly with colleague Don Boudreaux at Cafe Hayek5. His latest book is a novel, "The Invisible Heart: An Economic Romance" (see Invisibleheart.com6), and he is working on a new book that will look at how the economic cooperation emerges and persists without centralized coordination. He received a doctorate in economics from the University of Chicago.
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Heather Boushey writes: The persistent growth in income inequality in the U.S. is a significant problem, one that policy makers would be wise to focus on. Over the past 30 years, we have seen inequality rise along all three dimensions -- wages, incomes and wealth -- and it shows no signs of slowing. As a result, income and wealth is becoming increasingly concentrated in the hands of a relatively small, elite group. Recent research by Ian Dew-Becker and Robert Gordon of Northwestern University2 has found that income in the top one percent (the 99th percentile) grew by 87% between 1972 and 2001, but grew by 497% in the top one hundredth of a percent (the 99.99th percentile).
Wage inequality has grown because productivity gains aren't being distributed to workers on the shop floor or even technical and professional workers. Productivity gains are being garnered almost exclusively by management and distributions to stock owners. In the decades just after World War II, productivity gains were shared more evenly, so that workers benefited when the company's performance improved. Not anymore.
While many believe that increasing inequality is bad based on values of fairness and equity, we can also make a purely economic argument for why growing inequality is, on net, negative.
Rising inequality threatens economic growth, especially since it has meant declining or stagnant income growth for lower- and middle-income families. Consumption comprises the overwhelming share of economic demand. If the vast middle doesn't see income gains, they can't purchase the goods and services that keep our economy moving. Right now, American families are continuing to consume by going deeper into debt. The debt service relative to households' disposable income reached 13.8% in the third quarter of 2005, the highest level on record. This cannot continue indefinitely, and when interest rates rise it will be harder for income-strapped families to borrow for their consumption.
Even Alan Greenspan agrees7 that growing inequality poses significant problems for the U.S. economy. In February 2005, Mr. Greenspan said, "In a democratic society, a stark bifurcation of wealth and income trends among large segments of the population can fuel resentment and political polarization. These social developments can lead to political clashes and misguided economic policies that work to the detriment of the economy and society as a whole."
A democracy can't survive in the face of such rising inequality. People who feel left out of the economic system and whose elected officials ignore their needs will find outlets for their anger. This could be radical political parties (think of recent events Venezuela, Brazil, or Argentina), or mass protest movements. Either way, this won't be good for economic growth.
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Russell Roberts writes: Is inequality a serious social problem? Everyone seems to think so. Heather, you conjure up the same frightening image that is constantly referenced in media accounts of government data -- an elite slice at the top getting all the gains while the rest of us get crumbs. The middle class is being hollowed out; we're becoming a nation of haves and have-nots.
But the data you cite (and the data cited relentlessly by those who would use inequality as an engine for social change) mask what is really going on.
First, consider the level of inequality that we can actually perceive in our daily lives, as opposed to the level of inequality that we might know from reading government statistics. I've had dinner with a few billionaires at various charity events. As Hemingway pointed out long ago, the rich are different from us, they have more money. But as my colleague Don Boudreaux has pointed out to me more recently, it's striking how difficult it is to perceive the differences between us and the super-rich in the absence of reading their tax returns.
The super-rich guy at that charity dinner may have flown on a private jet, but I can afford to fly by jet, too, albeit in a coach seat. The super-rich guy may have been chauffeured to the dinner in a luxury car, but my Honda Accord is pretty quiet and comfortable. The rich guy wears a custom-made suit that may have cost over $1000. But my Lands' End suit is 100% wool and looks pretty good. I'd have to finger the fabric of his jacket to feel inferior. Yes, his watch is more expensive. But mine probably keeps better time. Unless I stop by his house for a visit, I'm unlikely to feel the pinch of my lower income status. Compare that to 50 or 100 years ago, when the qualitative aspects of the lives of the wealthy were much more noticeable to the average person.
Without the government data that is so widely reported, how would I ever know that I'm falling behind or that the super rich or even the mere rich are racing ahead? What I really care about is whether I'm moving forward.
And this is where the government data are particularly misleading. They usually compare two snapshots at different times, and so they mask the progress the average person makes over time in well-being.
The average poor person has a washing machine, a dryer and central air conditioning. Almost two-thirds of the poor own or have access to a car8. The poor's access to what once were luxuries has improved dramatically over the last 15 years despite pessimistic claims to the contrary. On many dimensions, even access to health care, the average poor person lives better than the wealthy of the past.
Immigrants risk death for the chance to be poor here and live among people much wealthier than they are. They still think of America as the land of opportunity. I think they're right.
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Heather writes: Russell, you argue that we should look at anecdotes to measure inequality, relying on our own experiences rather than on government data. However, this is simply not feasible. We live in a nation that will soon have 300,000,000 people and data reveals trends about the millions that we do not personally know. Data is especially critical since we live in communities that are increasingly economically segregated. The example you gives actually highlights the need for representative sampling, since the median family with an income of less than $50,000 per year is not regularly flying to charity dinners and hob-nobbing with billionaires. Having said that, if there is little difference in the quality of life between the super rich and the rest of us, why should we not tax them to create greater income equality?
Basing policy decisions on anecdote, without reference to government data, is especially dangerous. Most policy makers are not from the lower end of the economic spectrum, but from the high end, and their staff earn relatively high salaries, compared to the median earner. If we rely on their experiences, then we might think that everyone in the U.S. has a college degree and many of those have law degrees, when in fact, only about a third of Americans have a college degree. Relying on anecdote limits our understanding of those not like us.
Your second point is that what you really care about is whether people are moving ahead. Here, data tell us that Americans are less likely to move up the ladder today than they were a generation ago. The economy we once had, where a poor boy could grow up to be the CEO or the president, is fast fading. Sons from the bottom three-quarters of the socioeconomic scale were less likely to move up in the 1990s9 than in the 1960s. By 1998, only 10% of sons of fathers in the bottom quarter (defined by income, education and occupation) had moved into the top quarter, whereas by comparison, by 1973, 23% of lower-class sons had moved up to the top. Thus, there is a smaller chance that a low-income family will move up the income ladder over time.
It is true that more poor people in the U.S. now have access to consumer goods. It is also true that the inflation-adjusted cost of consumer goods has dropped dramatically, especially when we quality-adjust them. Today, one can go to Wal-Mart and pay only $35 for a DVD player, and most families have one. However, the costs of getting a college education and health care have risen faster than inflation, putting them out of reach of many families. Less than half (46%) of low-wage workers had employer-provided health insurance from any employer, their own or a family members', compared with 82% of high-wage workers.
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Russell writes: My example of the billionaire wasn't to refute the existence of inequality. It was to address your claim that we stand on the verge of a social crisis. In America, the differences between the average family and the upper crust are less palpable and less important than they are in South America or Africa or the Middle East, where the elites often do oppress the rest of society.
Are the differences that remain in America a social crisis? To answer that question, you need some idea of what causes inequality.
Starting in the early 1970s, the divorce rate exploded in America, creating an enormous increase in households headed by women and an increase in the percentage of women in the workplace. Though the gap has decreased over time, women earn less than men. So more women working means more measured inequality. Should we have made divorce more difficult or made it harder for women to work? Both would have reduced measured inequality.
Since the 1980s, immigration has increased greatly. Immigrants, when they first arrive, earn less than the Americans already here, bringing down measured average wages and increasing measured inequality. Should we ban immigration to reduce inequality measured within the borders of the U.S.?
Immigration to America is thriving because people come here poor but do not stay poor. Those people who come want a better life and they find it here. They are less concerned than you are about how much better others are doing.
I want people to get ahead. You seem concerned about people getting ahead of others. But by definition, not everyone can move ahead of everyone else into higher percentiles. That's like everyone being above average.
In recent decades, the lives of both the rich and the poor have improved. But if the rich get richer, fewer poor people can move into the upper quintiles. Do you want to keep people from getting rich in order to reduce measured inequality?
Statistics that cite how few people move from the bottom quintile into the top quintile mask the improvements in the lives of the poor I mentioned in my first post. Yes, as you point out, college is more expensive, but college enrollment is at an all-time high, reaching 38% among the college-age population in 2004. Yes, health care is more expensive, but life expectancy is at an all-time high as well. Poor people are less likely to be insured than rich people, but my guess is that poor people receive dramatically better health care today than they did 30 years ago.
The real social problems in America are barriers to getting ahead that need not be there. The biggest handicap the poor face in America is a government-run school system that does an atrocious job educating their children.
Finishing high school and better yet, finishing college are still remarkably good investments. If we want to help the poor in America, we would do well to get the government out of providing education where it has done such an abysmal job. Improving education in America by allowing more competition would go a long way toward improving the lives of the poor.
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Heather writes: Your arguments aren't based on fact and analysis of the economy, but rather on anecdote and presupposition. The causes of inequality are now well documented and are not simply about demographic changes, as you hypothesize without pointing to any research.
Let's look at what we know about the U.S. economy, based on available research and analysis.
If wage and income inequality were counterbalanced by the potential for economic mobility, then greater inequality would not require that some stay at the bottom (or at the top). This would be especially true if inequality was the result of immigration as new immigrants enter at the bottom and then move up. However, this is not the case. Federal Reserve Bank of Boston economists Katherine Bradbury and Jane Katz found10 that in the 1970s, 50.7% of families who began the decade in the bottom quintile and 49.1% of families who began the decade in the second-lowest quintile moved into a higher quintile over the decade. However, in the 1990s, only 46.8% of families who began the decade in the bottom quintile and 37.9% of families who began the decade in the second-lowest quintile moved into a higher quintile. In the U.S., economic class in our society has become increasingly calcified.
Russell, your examples point to demographic reasons why inequality has risen in the U.S. Yet, here again, while they might make interesting fodder for cocktail conversation, these arguments aren't grounded in empirical reality. The demographic story is more complex than the one that you paint. On the one hand, more single mothers leads to greater inequality across families, yet working wives have been critical to economic mobility. Families where wives had high and rising employment rates, work hours, and pay were more likely to move up the income ladder or maintain their position11, rather than fall down the ladder.
Higher immigration, which might lead to temporary increases in measured inequality at a point in time for reasons you outline, shouldn't, however, lead to lower mobility because, as you point out, we hypothesize that immigrants "come here poor but do not stay poor." Unfortunately, rising inequality has coincided with declining mobility.
To take it a step further, the basic presupposition of all demographic arguments is that inequality has been increasing across groups, rather than within groups. Yet, this is not true: Within demographic categories, inequality has increased. When we look across particular demographic groups, inequality has increased. Even within the category of white, college-educated men, inequality has increased.
The problem is that the social institutions that had mediated economic inequality in the immediate post-World War II period have been torn down, to the advantage of the very wealthy at the expense of the rest of us. These institutions not only generated widespread economic gains but also facilitated economic growth superior to what we've experienced since inequality began to rise in the early 1970s.
I'll agree that finishing college is the best route to greater earnings; yet, college prices have far outpaced inflation and students today graduate with debt loads unheard in their parents' day. Privatizing the public school system would undoubtedly only lead to greater inequality in access to education, not less. If the same kind of educational opportunities were provided to every student, then one could imagine economic inequality increasing, but economic mobility also increasing -- the rich getting richer, but one's chances of becoming rich improving because the skills and advantages necessary to get rich were evenly distributed, not skewed toward children in high-income families.
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Russell writes: Heather, you write: "If wage and income inequality were counterbalanced by the potential for economic mobility, then greater inequality would not require that some stay at the bottom (or at the top)." You then quote the Bradbury and Katz study.
But the Bradbury and Katz study is about relative income mobility among quintiles. So there always have to be 20% of the families in the bottom quintile. True, it doesn't have to be the same families, but that was my point about the rich getting richer. If the rich get richer, it's harder to pass them and have them fall into the lower quintiles. But it doesn't mean that the poor aren't doing better.
To say it more simply -- if everyone's income doubles, there will be no relative mobility. Everyone will be stuck in the same quintiles. But everyone will be twice as well off as before.
There has been very little work on the question of absolute mobility. When you follow the same families, rather than looking at averages marred by changes in the composition of the work force over time, do families, especially poor families, do better or worse over time?
The one careful example I know is by Peter Gottschalk of Boston College and Sheldon Danziger of the University of Michigan12. They look at families' incomes between 1969 and 1990. First, they look at relative mobility like everyone else. They find that 46% of the families in the bottom quintile in 1969 move into a higher quintile by 1990. They find that 52% of the families in the second lowest quintile move into a higher quintile. But only 1% of the families at the bottom make it into the top over those 20 years. Only 8% of the people in the second quintile make it to the top.
Is that a high or a low level of relative mobility? Is the glass half full or half empty? The picture is clouded by the fact that if a lot of people are doing well, it gets harder to move ahead in relative terms.
So what about absolute mobility? By 1990, it takes more income to reach the higher quintiles than it did in 1969 -- not simply because of inflation, but because people are doing better. So Gottschalk and Danziger look at absolute mobility as well -- would some families have moved ahead if the income cutoffs in 1990 had been the same as in 1969, corrected for inflation? Essentially, they are asking whether families are doing better in absolute terms.
By 1990, 69% of the families in the poorest quintile achieved a standard of living that would have put them in a higher quintile if the income cutoffs had not increased. By 1990, 75% of the families in the second quintile would have moved up if the cutoffs had not changed.
In other words, more than two-thirds of the poorest families in 1969 would have moved into a higher quintile 20 years later if everyone else had not gotten richer, too. More than 11% of the poorest families in 1969 had by 1990, reached a standard of living equal to the highest quintile in the earlier period. Over 42% of the families in the second-lowest quintile did the same.
A rising tide doesn't lift all boats. But it sure lifts a lot of them. The results would be even more dramatic with more recent data from the 1990s.
Heather, you write: "the social institutions that had mediated economic inequality in the immediate post-World War II period have been torn down, to the advantage of the very wealthy at the expense of the rest of us."
Which institutions do you have in mind? What are the sinister strategies the wealthiest Americans have used to hold the rest of us back?
Spending on education dwarfs spending of past decades. Yet the outcomes are still disappointing. You think that privatizing education would increase inequality. I think parents could spend that money more wisely than bureaucrats. The result would be less inequality and more education.
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Heather writes: This is the question we've been debating: Does relative income matter?
As I see it, the fundamental question you're posing, Russell, is that if everyone becomes absolutely richer, how can anyone be worse off? This is a compelling question.
First, to put this in perspective, while it is true that even as inequality has risen, workers have seen increases in their living standards, the gains have been small and far below the gains made during the decades after World War II up until the early 1970s. During that period, the median family saw income gains of about 2.5% per year; since then, it's averaged less than 1% per year. On top of this, we must take into account that the cost of basics, most importantly health care and education, have far outpaced inflation, putting the squeeze on family budgets, even if these families are making a bit more by pure income measures than a few years ago.
As inequality has grown, the social institutions that provided insulation from risk have withered. There has been a decline in social insurance: The majority of low-wage workers face the risk and uncertainty of not having employer-provided health insurance, unemployment insurance covers fewer of the unemployed than it did a generation ago and fewer workers have pensions. Deregulation and the decline in union coverage have made it easier for firms to keep wages low. Trade agreements that favor capital mobility over labor mobility have increased American workers' vulnerability to global competition, and the threat of offshoring is often enough to quell requests for raises.
Is the glass half empty or half full? For many it appears to be half empty. Median family income is lower today than it was in 1999 (in inflation-adjusted terms) and millions of American families have coped with limited income growth through taking on debt. The numbers are staggering. Debt levels are now at 121% of disposable income13 and the ratio of debt service to disposable income14 is 13.8%. Both of these indicators are at record highs. This indicates that families are having trouble financing the lifestyle they want on their income alone.
Further, there appear to be links between mortality and higher inequality15, as well as connections between a community's level of social capital and social cohesion16 and the degree of economic inequality. If inequality makes people ill or creates barriers to social cohesion, how can the glass be half full?
Increased debt and mortality and less social cohesion are all indicators that growing inequality is, on net, bad for our society and our economy. Even if people are taking on more debt simply to "keep up with the Joneses," as interest rates rise and more families go into bankruptcy (which are already at high and record levels), this will be a drain on the overall economy, which is bad for all of us.
Social cohesion is a value critical to an effective democracy. If a few in the U.S can increasingly purchase their rights (as we've seen in far too many campaign and influence-peddling scandals in recent years), while the vast majority are left without access to the political system, then we need to ask what this will mean for our democracy.
There is an analytic distinction between relative and absolute economic mobility, but since the gains to low- and middle-income families have been so limited over the past few decades, in reality, there may be very little difference between the two.
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Russell writes: Heather, we disagree fundamentally on the significance of inequality, a phenomenon that arises from the individual decisions of millions of people. The level of inequality is an emergent phenomenon17 rather than something controlled by politicians or a wealthy elite.
In America, the level of inequality is the result of differences in skills, differences in family structure over time, differences in immigration patterns, educational choices of young people, entrepreneurial opportunities and a thousand other factors caused by each of us going about our lives as workers, managers, family members and consumers. Attempts to alter the level of inequality as if it were the temperature in the house that can be adjusted by a thermostat are unlikely to result in the intended result of a more just society.
But we also disagree about how to interpret the data on incomes and wages.
In your latest post, you mention the mediocre growth in median family income over the last 30 years. You say that low- and middle-income families have made only limited economic progress. You worry that a disproportionate portion of the gains from economic growth accrue to a rich elite and that somehow the rich have somehow rigged the rules to keep all the goodies for themselves leaving the rest of us with the crumbs.
I'm skeptical of the quality of the data that leads to this pessimistic outlook. Measures of real income growth systematically understate that growth because of a failure to correctly measure inflation due to changes in product quality over time18.
But even ignoring this problem, the data you use are the wrong data. The fact that median family income has grown very little over the last 30 years does not imply, as you claim, that families are having a tougher times making ends meet. It does not imply that families have made little economic progress over the last 30 years. (And for a different interpretation of the bankruptcy data you cite, see Todd Zywicki's work19.)
The simplest reason the data are misleading is that a snapshot of median family income in 1975 and a snapshot of median family income in 2005 have very different people in each picture.
Since 1975, there have been dramatic changes in family size, family structure and immigration. So you can't compare the means or medians between the two pictures to draw conclusions about upward mobility in the American economy.
If the median age in the U.S. declined between 1975 and 2005, you wouldn't conclude that America had somehow figured out a way to reverse the aging process and that Americans were getting younger rather than older every year. The average age can fall even though the average person from 1975 has continued to get older. Similarly, median family income can fall between 1975 and 2005 even though the median family from 1975 has experienced income growth over the same period.
As I pointed out in my previous post, when you actually follow the same families over time, there is impressive growth in economic well-being over time for even the poorest Americans. So yes, the rich are getting richer. But so is everyone else.
I am much more optimistic than you are about the economic future. Since 1975, the period that is allegedly a time of growing inequality and stagnant incomes, over 20 million immigrants have come to the U.S. Some of them risked death to come here. Many of them arrived with imperfect English at best. All of them found themselves part of a culture different from the one they were born into. Yet they came anyway.
Many of them -- perhaps most of them -- came here to be part of the lower classes whose future worries you so much and whose relative status you decry. Yet they came anyway.
Their arrival tells us something that the income data cannot tell us. They expect their lives and the lives of their children to improve. They are less worried about income inequality than either of us.
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URL for this article:
http://online.wsj.com/article/SB114182443308492484.html
Hyperlinks in this Article:
(1) http://discussions.wsj.com/n/mb/message.asp?webtag=wsjvoices&nav=messages&msg=3831
(2) http://www.brookings.edu/es/commentary/journals/bpea_macro/forum/200509bpea_gordon.pdf
(3) http://www.cepr.net/
(4) http://www.econlib.org
(5) http://cafehayek.typepad.com/hayek/
(6) http://invisibleheart.com
(7) http://www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm
(8) http://www.heritage.org/Research/Welfare/bg1713.cfm
(9) http://www.iuk.edu/~koocm/jan03/wysong.html
(10) http://www.bos.frb.org/economic/nerr/rr2002/q4/issues.pdf
(11) http://www.bos.frb.org/economic/ppdp/2004/ppdp0403.pdf
(12) http://www.psc.isr.umich.edu/pubs/abs.html?ID=1132
(13) http://www.americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=1297099
(14) http://www.federalreserve.gov/releases/housedebt/
(15) http://www.thenewpress.com/books/index.php?option=com_catalog&task=author&author_id=P18380
(16) http://www.bowlingalone.com/index.php3
(17) http://www.econlib.org/library/Columns/y2005/Robertsmarkets.html
(18) http://papers.nber.org/papers/w10606
(19) http://mason.gmu.edu/~tzywick2/Bankruptcy Crisis Final.pdf
(20) http://discussions.wsj.com/n/mb/message.asp?webtag=wsjvoices&nav=messages&msg=3831
Minding the Gap: Who's getting ahead, who's falling behind, and why?
March 8, 2006
They are questions that grip us in fits and starts. Author Douglas Coupland worried in his 1991 novel "Generation X" about "Brazilification," or the widening gulf between rich and poor and the disappearance of the middle class, but much of that anxiety faded by the late 1990s as workers benefited from a long-running expansion. Then the tech bubble burst, and by 2004 Democrat John Edwards was able to campaign for president on the argument that there are "two Americas" -- one for the ultrarich, and one for everyone else.
To what extent should we be worried about the distribution of economic gains? The Wall Street Journal Online asked economists Heather Boushey of the Center for Economic and Policy Research and Russell Roberts of George Mason University to debate to what degree inequality exists, and just how much it matters for the economy and society.
ABOUT THE PARTICIPANTS
Heather Boushey is an economist at the Center for Economic and Policy Research3 in Washington, D.C. Her work focuses on the U.S. labor market, social policy, and work and family issues. She is a co-author of "The State of Working America 2002-3" and "Hardships in America: The Real Story of Working Families." She is a research affiliate with the National Poverty Center at the Gerald R. Ford School of Public Policy and on the editorial review board of WorkingUSA and the Journal of Poverty. She received her doctorate in economics from the New School for Social Research and her bachelor's from Hampshire College.
Russell Roberts is professor of economics at George Mason University and the J. Fish and Lillian F. Smith Distinguished Scholar at the university's Mercatus Center. He is the features editor at the Library of Economics and Liberty4 and a research fellow at Stanford University's Hoover Institution. Roberts blogs regularly with colleague Don Boudreaux at Cafe Hayek5. His latest book is a novel, "The Invisible Heart: An Economic Romance" (see Invisibleheart.com6), and he is working on a new book that will look at how the economic cooperation emerges and persists without centralized coordination. He received a doctorate in economics from the University of Chicago.
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Heather Boushey writes: The persistent growth in income inequality in the U.S. is a significant problem, one that policy makers would be wise to focus on. Over the past 30 years, we have seen inequality rise along all three dimensions -- wages, incomes and wealth -- and it shows no signs of slowing. As a result, income and wealth is becoming increasingly concentrated in the hands of a relatively small, elite group. Recent research by Ian Dew-Becker and Robert Gordon of Northwestern University2 has found that income in the top one percent (the 99th percentile) grew by 87% between 1972 and 2001, but grew by 497% in the top one hundredth of a percent (the 99.99th percentile).
Wage inequality has grown because productivity gains aren't being distributed to workers on the shop floor or even technical and professional workers. Productivity gains are being garnered almost exclusively by management and distributions to stock owners. In the decades just after World War II, productivity gains were shared more evenly, so that workers benefited when the company's performance improved. Not anymore.
While many believe that increasing inequality is bad based on values of fairness and equity, we can also make a purely economic argument for why growing inequality is, on net, negative.
Rising inequality threatens economic growth, especially since it has meant declining or stagnant income growth for lower- and middle-income families. Consumption comprises the overwhelming share of economic demand. If the vast middle doesn't see income gains, they can't purchase the goods and services that keep our economy moving. Right now, American families are continuing to consume by going deeper into debt. The debt service relative to households' disposable income reached 13.8% in the third quarter of 2005, the highest level on record. This cannot continue indefinitely, and when interest rates rise it will be harder for income-strapped families to borrow for their consumption.
Even Alan Greenspan agrees7 that growing inequality poses significant problems for the U.S. economy. In February 2005, Mr. Greenspan said, "In a democratic society, a stark bifurcation of wealth and income trends among large segments of the population can fuel resentment and political polarization. These social developments can lead to political clashes and misguided economic policies that work to the detriment of the economy and society as a whole."
A democracy can't survive in the face of such rising inequality. People who feel left out of the economic system and whose elected officials ignore their needs will find outlets for their anger. This could be radical political parties (think of recent events Venezuela, Brazil, or Argentina), or mass protest movements. Either way, this won't be good for economic growth.
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Russell Roberts writes: Is inequality a serious social problem? Everyone seems to think so. Heather, you conjure up the same frightening image that is constantly referenced in media accounts of government data -- an elite slice at the top getting all the gains while the rest of us get crumbs. The middle class is being hollowed out; we're becoming a nation of haves and have-nots.
But the data you cite (and the data cited relentlessly by those who would use inequality as an engine for social change) mask what is really going on.
First, consider the level of inequality that we can actually perceive in our daily lives, as opposed to the level of inequality that we might know from reading government statistics. I've had dinner with a few billionaires at various charity events. As Hemingway pointed out long ago, the rich are different from us, they have more money. But as my colleague Don Boudreaux has pointed out to me more recently, it's striking how difficult it is to perceive the differences between us and the super-rich in the absence of reading their tax returns.
The super-rich guy at that charity dinner may have flown on a private jet, but I can afford to fly by jet, too, albeit in a coach seat. The super-rich guy may have been chauffeured to the dinner in a luxury car, but my Honda Accord is pretty quiet and comfortable. The rich guy wears a custom-made suit that may have cost over $1000. But my Lands' End suit is 100% wool and looks pretty good. I'd have to finger the fabric of his jacket to feel inferior. Yes, his watch is more expensive. But mine probably keeps better time. Unless I stop by his house for a visit, I'm unlikely to feel the pinch of my lower income status. Compare that to 50 or 100 years ago, when the qualitative aspects of the lives of the wealthy were much more noticeable to the average person.
Without the government data that is so widely reported, how would I ever know that I'm falling behind or that the super rich or even the mere rich are racing ahead? What I really care about is whether I'm moving forward.
And this is where the government data are particularly misleading. They usually compare two snapshots at different times, and so they mask the progress the average person makes over time in well-being.
The average poor person has a washing machine, a dryer and central air conditioning. Almost two-thirds of the poor own or have access to a car8. The poor's access to what once were luxuries has improved dramatically over the last 15 years despite pessimistic claims to the contrary. On many dimensions, even access to health care, the average poor person lives better than the wealthy of the past.
Immigrants risk death for the chance to be poor here and live among people much wealthier than they are. They still think of America as the land of opportunity. I think they're right.
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Heather writes: Russell, you argue that we should look at anecdotes to measure inequality, relying on our own experiences rather than on government data. However, this is simply not feasible. We live in a nation that will soon have 300,000,000 people and data reveals trends about the millions that we do not personally know. Data is especially critical since we live in communities that are increasingly economically segregated. The example you gives actually highlights the need for representative sampling, since the median family with an income of less than $50,000 per year is not regularly flying to charity dinners and hob-nobbing with billionaires. Having said that, if there is little difference in the quality of life between the super rich and the rest of us, why should we not tax them to create greater income equality?
Basing policy decisions on anecdote, without reference to government data, is especially dangerous. Most policy makers are not from the lower end of the economic spectrum, but from the high end, and their staff earn relatively high salaries, compared to the median earner. If we rely on their experiences, then we might think that everyone in the U.S. has a college degree and many of those have law degrees, when in fact, only about a third of Americans have a college degree. Relying on anecdote limits our understanding of those not like us.
Your second point is that what you really care about is whether people are moving ahead. Here, data tell us that Americans are less likely to move up the ladder today than they were a generation ago. The economy we once had, where a poor boy could grow up to be the CEO or the president, is fast fading. Sons from the bottom three-quarters of the socioeconomic scale were less likely to move up in the 1990s9 than in the 1960s. By 1998, only 10% of sons of fathers in the bottom quarter (defined by income, education and occupation) had moved into the top quarter, whereas by comparison, by 1973, 23% of lower-class sons had moved up to the top. Thus, there is a smaller chance that a low-income family will move up the income ladder over time.
It is true that more poor people in the U.S. now have access to consumer goods. It is also true that the inflation-adjusted cost of consumer goods has dropped dramatically, especially when we quality-adjust them. Today, one can go to Wal-Mart and pay only $35 for a DVD player, and most families have one. However, the costs of getting a college education and health care have risen faster than inflation, putting them out of reach of many families. Less than half (46%) of low-wage workers had employer-provided health insurance from any employer, their own or a family members', compared with 82% of high-wage workers.
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Russell writes: My example of the billionaire wasn't to refute the existence of inequality. It was to address your claim that we stand on the verge of a social crisis. In America, the differences between the average family and the upper crust are less palpable and less important than they are in South America or Africa or the Middle East, where the elites often do oppress the rest of society.
Are the differences that remain in America a social crisis? To answer that question, you need some idea of what causes inequality.
Starting in the early 1970s, the divorce rate exploded in America, creating an enormous increase in households headed by women and an increase in the percentage of women in the workplace. Though the gap has decreased over time, women earn less than men. So more women working means more measured inequality. Should we have made divorce more difficult or made it harder for women to work? Both would have reduced measured inequality.
Since the 1980s, immigration has increased greatly. Immigrants, when they first arrive, earn less than the Americans already here, bringing down measured average wages and increasing measured inequality. Should we ban immigration to reduce inequality measured within the borders of the U.S.?
Immigration to America is thriving because people come here poor but do not stay poor. Those people who come want a better life and they find it here. They are less concerned than you are about how much better others are doing.
I want people to get ahead. You seem concerned about people getting ahead of others. But by definition, not everyone can move ahead of everyone else into higher percentiles. That's like everyone being above average.
In recent decades, the lives of both the rich and the poor have improved. But if the rich get richer, fewer poor people can move into the upper quintiles. Do you want to keep people from getting rich in order to reduce measured inequality?
Statistics that cite how few people move from the bottom quintile into the top quintile mask the improvements in the lives of the poor I mentioned in my first post. Yes, as you point out, college is more expensive, but college enrollment is at an all-time high, reaching 38% among the college-age population in 2004. Yes, health care is more expensive, but life expectancy is at an all-time high as well. Poor people are less likely to be insured than rich people, but my guess is that poor people receive dramatically better health care today than they did 30 years ago.
The real social problems in America are barriers to getting ahead that need not be there. The biggest handicap the poor face in America is a government-run school system that does an atrocious job educating their children.
Finishing high school and better yet, finishing college are still remarkably good investments. If we want to help the poor in America, we would do well to get the government out of providing education where it has done such an abysmal job. Improving education in America by allowing more competition would go a long way toward improving the lives of the poor.
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Heather writes: Your arguments aren't based on fact and analysis of the economy, but rather on anecdote and presupposition. The causes of inequality are now well documented and are not simply about demographic changes, as you hypothesize without pointing to any research.
Let's look at what we know about the U.S. economy, based on available research and analysis.
If wage and income inequality were counterbalanced by the potential for economic mobility, then greater inequality would not require that some stay at the bottom (or at the top). This would be especially true if inequality was the result of immigration as new immigrants enter at the bottom and then move up. However, this is not the case. Federal Reserve Bank of Boston economists Katherine Bradbury and Jane Katz found10 that in the 1970s, 50.7% of families who began the decade in the bottom quintile and 49.1% of families who began the decade in the second-lowest quintile moved into a higher quintile over the decade. However, in the 1990s, only 46.8% of families who began the decade in the bottom quintile and 37.9% of families who began the decade in the second-lowest quintile moved into a higher quintile. In the U.S., economic class in our society has become increasingly calcified.
Russell, your examples point to demographic reasons why inequality has risen in the U.S. Yet, here again, while they might make interesting fodder for cocktail conversation, these arguments aren't grounded in empirical reality. The demographic story is more complex than the one that you paint. On the one hand, more single mothers leads to greater inequality across families, yet working wives have been critical to economic mobility. Families where wives had high and rising employment rates, work hours, and pay were more likely to move up the income ladder or maintain their position11, rather than fall down the ladder.
Higher immigration, which might lead to temporary increases in measured inequality at a point in time for reasons you outline, shouldn't, however, lead to lower mobility because, as you point out, we hypothesize that immigrants "come here poor but do not stay poor." Unfortunately, rising inequality has coincided with declining mobility.
To take it a step further, the basic presupposition of all demographic arguments is that inequality has been increasing across groups, rather than within groups. Yet, this is not true: Within demographic categories, inequality has increased. When we look across particular demographic groups, inequality has increased. Even within the category of white, college-educated men, inequality has increased.
The problem is that the social institutions that had mediated economic inequality in the immediate post-World War II period have been torn down, to the advantage of the very wealthy at the expense of the rest of us. These institutions not only generated widespread economic gains but also facilitated economic growth superior to what we've experienced since inequality began to rise in the early 1970s.
I'll agree that finishing college is the best route to greater earnings; yet, college prices have far outpaced inflation and students today graduate with debt loads unheard in their parents' day. Privatizing the public school system would undoubtedly only lead to greater inequality in access to education, not less. If the same kind of educational opportunities were provided to every student, then one could imagine economic inequality increasing, but economic mobility also increasing -- the rich getting richer, but one's chances of becoming rich improving because the skills and advantages necessary to get rich were evenly distributed, not skewed toward children in high-income families.
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Russell writes: Heather, you write: "If wage and income inequality were counterbalanced by the potential for economic mobility, then greater inequality would not require that some stay at the bottom (or at the top)." You then quote the Bradbury and Katz study.
But the Bradbury and Katz study is about relative income mobility among quintiles. So there always have to be 20% of the families in the bottom quintile. True, it doesn't have to be the same families, but that was my point about the rich getting richer. If the rich get richer, it's harder to pass them and have them fall into the lower quintiles. But it doesn't mean that the poor aren't doing better.
To say it more simply -- if everyone's income doubles, there will be no relative mobility. Everyone will be stuck in the same quintiles. But everyone will be twice as well off as before.
There has been very little work on the question of absolute mobility. When you follow the same families, rather than looking at averages marred by changes in the composition of the work force over time, do families, especially poor families, do better or worse over time?
The one careful example I know is by Peter Gottschalk of Boston College and Sheldon Danziger of the University of Michigan12. They look at families' incomes between 1969 and 1990. First, they look at relative mobility like everyone else. They find that 46% of the families in the bottom quintile in 1969 move into a higher quintile by 1990. They find that 52% of the families in the second lowest quintile move into a higher quintile. But only 1% of the families at the bottom make it into the top over those 20 years. Only 8% of the people in the second quintile make it to the top.
Is that a high or a low level of relative mobility? Is the glass half full or half empty? The picture is clouded by the fact that if a lot of people are doing well, it gets harder to move ahead in relative terms.
So what about absolute mobility? By 1990, it takes more income to reach the higher quintiles than it did in 1969 -- not simply because of inflation, but because people are doing better. So Gottschalk and Danziger look at absolute mobility as well -- would some families have moved ahead if the income cutoffs in 1990 had been the same as in 1969, corrected for inflation? Essentially, they are asking whether families are doing better in absolute terms.
By 1990, 69% of the families in the poorest quintile achieved a standard of living that would have put them in a higher quintile if the income cutoffs had not increased. By 1990, 75% of the families in the second quintile would have moved up if the cutoffs had not changed.
In other words, more than two-thirds of the poorest families in 1969 would have moved into a higher quintile 20 years later if everyone else had not gotten richer, too. More than 11% of the poorest families in 1969 had by 1990, reached a standard of living equal to the highest quintile in the earlier period. Over 42% of the families in the second-lowest quintile did the same.
A rising tide doesn't lift all boats. But it sure lifts a lot of them. The results would be even more dramatic with more recent data from the 1990s.
Heather, you write: "the social institutions that had mediated economic inequality in the immediate post-World War II period have been torn down, to the advantage of the very wealthy at the expense of the rest of us."
Which institutions do you have in mind? What are the sinister strategies the wealthiest Americans have used to hold the rest of us back?
Spending on education dwarfs spending of past decades. Yet the outcomes are still disappointing. You think that privatizing education would increase inequality. I think parents could spend that money more wisely than bureaucrats. The result would be less inequality and more education.
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Heather writes: This is the question we've been debating: Does relative income matter?
As I see it, the fundamental question you're posing, Russell, is that if everyone becomes absolutely richer, how can anyone be worse off? This is a compelling question.
First, to put this in perspective, while it is true that even as inequality has risen, workers have seen increases in their living standards, the gains have been small and far below the gains made during the decades after World War II up until the early 1970s. During that period, the median family saw income gains of about 2.5% per year; since then, it's averaged less than 1% per year. On top of this, we must take into account that the cost of basics, most importantly health care and education, have far outpaced inflation, putting the squeeze on family budgets, even if these families are making a bit more by pure income measures than a few years ago.
As inequality has grown, the social institutions that provided insulation from risk have withered. There has been a decline in social insurance: The majority of low-wage workers face the risk and uncertainty of not having employer-provided health insurance, unemployment insurance covers fewer of the unemployed than it did a generation ago and fewer workers have pensions. Deregulation and the decline in union coverage have made it easier for firms to keep wages low. Trade agreements that favor capital mobility over labor mobility have increased American workers' vulnerability to global competition, and the threat of offshoring is often enough to quell requests for raises.
Is the glass half empty or half full? For many it appears to be half empty. Median family income is lower today than it was in 1999 (in inflation-adjusted terms) and millions of American families have coped with limited income growth through taking on debt. The numbers are staggering. Debt levels are now at 121% of disposable income13 and the ratio of debt service to disposable income14 is 13.8%. Both of these indicators are at record highs. This indicates that families are having trouble financing the lifestyle they want on their income alone.
Further, there appear to be links between mortality and higher inequality15, as well as connections between a community's level of social capital and social cohesion16 and the degree of economic inequality. If inequality makes people ill or creates barriers to social cohesion, how can the glass be half full?
Increased debt and mortality and less social cohesion are all indicators that growing inequality is, on net, bad for our society and our economy. Even if people are taking on more debt simply to "keep up with the Joneses," as interest rates rise and more families go into bankruptcy (which are already at high and record levels), this will be a drain on the overall economy, which is bad for all of us.
Social cohesion is a value critical to an effective democracy. If a few in the U.S can increasingly purchase their rights (as we've seen in far too many campaign and influence-peddling scandals in recent years), while the vast majority are left without access to the political system, then we need to ask what this will mean for our democracy.
There is an analytic distinction between relative and absolute economic mobility, but since the gains to low- and middle-income families have been so limited over the past few decades, in reality, there may be very little difference between the two.
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Russell writes: Heather, we disagree fundamentally on the significance of inequality, a phenomenon that arises from the individual decisions of millions of people. The level of inequality is an emergent phenomenon17 rather than something controlled by politicians or a wealthy elite.
In America, the level of inequality is the result of differences in skills, differences in family structure over time, differences in immigration patterns, educational choices of young people, entrepreneurial opportunities and a thousand other factors caused by each of us going about our lives as workers, managers, family members and consumers. Attempts to alter the level of inequality as if it were the temperature in the house that can be adjusted by a thermostat are unlikely to result in the intended result of a more just society.
But we also disagree about how to interpret the data on incomes and wages.
In your latest post, you mention the mediocre growth in median family income over the last 30 years. You say that low- and middle-income families have made only limited economic progress. You worry that a disproportionate portion of the gains from economic growth accrue to a rich elite and that somehow the rich have somehow rigged the rules to keep all the goodies for themselves leaving the rest of us with the crumbs.
I'm skeptical of the quality of the data that leads to this pessimistic outlook. Measures of real income growth systematically understate that growth because of a failure to correctly measure inflation due to changes in product quality over time18.
But even ignoring this problem, the data you use are the wrong data. The fact that median family income has grown very little over the last 30 years does not imply, as you claim, that families are having a tougher times making ends meet. It does not imply that families have made little economic progress over the last 30 years. (And for a different interpretation of the bankruptcy data you cite, see Todd Zywicki's work19.)
The simplest reason the data are misleading is that a snapshot of median family income in 1975 and a snapshot of median family income in 2005 have very different people in each picture.
Since 1975, there have been dramatic changes in family size, family structure and immigration. So you can't compare the means or medians between the two pictures to draw conclusions about upward mobility in the American economy.
If the median age in the U.S. declined between 1975 and 2005, you wouldn't conclude that America had somehow figured out a way to reverse the aging process and that Americans were getting younger rather than older every year. The average age can fall even though the average person from 1975 has continued to get older. Similarly, median family income can fall between 1975 and 2005 even though the median family from 1975 has experienced income growth over the same period.
As I pointed out in my previous post, when you actually follow the same families over time, there is impressive growth in economic well-being over time for even the poorest Americans. So yes, the rich are getting richer. But so is everyone else.
I am much more optimistic than you are about the economic future. Since 1975, the period that is allegedly a time of growing inequality and stagnant incomes, over 20 million immigrants have come to the U.S. Some of them risked death to come here. Many of them arrived with imperfect English at best. All of them found themselves part of a culture different from the one they were born into. Yet they came anyway.
Many of them -- perhaps most of them -- came here to be part of the lower classes whose future worries you so much and whose relative status you decry. Yet they came anyway.
Their arrival tells us something that the income data cannot tell us. They expect their lives and the lives of their children to improve. They are less worried about income inequality than either of us.
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