Posts Tagged ‘mobility’

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My students are worried—many of them obsessed by the possibility—they’re not going to be better off than their parents.

As it turns out, they’re right.

According to new research by Raj Chetty et al. (pdf), the rates of “absolute income mobility” (the fraction of children who earn more than their parents) have fallen from approximately 90 percent for children born in 1940 to 50 percent for children born in the 1980s. And the likelihood is, that rate is going to fall even more for the next generations. That’s because rising inequality—not slower economic growth—is the major factor contributing to declining income mobility.

In his 1931 book, The Epic of America, writer and historian James Truslow Adams defined the American Dream as the “dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” Such a dream has been central to the legitimacy of capitalism—with each generation supposed to be better off than the previous one. Growing inequality, especially from the mid-1970s onward, took a big chip out of that dream, since it challenged the idea of “just deserts.” But at least there was mobility—that children could still have a life that was “better and richer and fuller” than that of their parents.

Now, it seems that part of the American Dream is quickly disappearing, precisely because of growing inequality.

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For each succeeding generation—those born in 1940, 1950, 1960, 1970, and 1980—the chance of making more money than their parents has fallen—from 92 percent (for those born in 1940) to 50 percent (for 1980). That’s an enormous decrease, which is the key statistical conclusion of the study.

But the authors also consider two counterfactual scenarios: “higher GDP growth” (which asks, what would have happened to absolute mobility for the 1980 cohort if the economy had grown as quickly during their lifetimes as it did in the mid-twentieth century, but with GDP distributed across households as it is today?) and “more broadly shared growth” (which asks, what if total GDP grew at the rate observed in recent decades, but GDP was allocated across households as it was for the 1940 birth cohort?). What they find is that less equality is more significant than higher growth:

Under the higher growth counterfactual, the mean rate of absolute mobility is 62%. This rate is 12 percentage points higher than the empirically observed value of 50% in 1980, but closes only 29% of the decline relative to the 92% rate of absolute mobility in the 1940 cohort. The increase in absolute mobility is especially modest given the magnitude of the change in the aggregate economy: a growth rate of 2.5% per working-age family from 1980 to 2010 would have led to GDP of $20 trillion in 2010, $5 trillion (35%) higher than the actual level.

The more broadly shared growth scenario increases the average rate of absolute mobility to 80%, closing 71% of the gap in absolute mobility between the 1940 and 1980 cohorts. The broadly shared growth counterfactual has larger effects on absolute mobility at the bottom of the income distribution, whereas the higher growth counterfactual has larger effects at higher income levels. Since income shares of GDP are larger for high-income individuals, higher growth rates benefit those with higher incomes the most, while a more equal distribution benefits those at the bottom the most.

As we know, neither presidential candidate made inequality a focus of their campaign. President-elect Donald Trump, however, did point out the economy is rigged—and he appealed directly to the anxieties of workers who feel the economy is not delivering for them in the same way it did for their parents. As it turns out, Chetty et al. highlight several sources of those anxieties in the Trump coalition.

They find barely two in five men born in the mid-80s grew up to earn as much, at age 30, as their fathers did at the same age. They show average rates of mobility falling particularly fast in Rust Belt states, especially Michigan and Indiana. And they find a much steeper drop in absolute mobility for the middle-class than for the poor.

Maybe Trump’s victory signals, like George Carlin’s warning a decade earlier, it’s time we stop dreaming and wake up to the end of the American Dream.

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Americans may not know the exact numbers (e.g., about wealth inequality or the CEO-to-worker pay gap). But, as it turns out, they’re very clear that their country is characterized by declining opportunity and growing inequality.

According to a new survey by the Public Religion Research Institute,

Americans across the political spectrum and from all walks of life are deeply concerned that the American economic system is not fair. What’s more, concerns about the fairness of the economic system have increased significantly over the past year.

For example, nearly two-thirds (65 percent) of Americans believe that “one of the big problems in this country is that we don’t give everyone an equal chance in life,” while fewer than three in ten (28 percent) believe that “it is not really that big a problem if some people have more of a chance in life than others.” Concerns about the lack of equal opportunity have increased considerably since 2010, when 53 percent said that one of the big problems in the United States was the lack of equal opportunities for all.

Here are some of the other findings in the survey:

There is widespread agreement that the current economic system is heavily tilted in favor of the wealthy. Nearly eight in ten (79%) Americans agree that the economic system unfairly favors the wealthy, compared to roughly one in five (21%) who disagree. Current views represent an increase of 13 percentage points from 2012, when 66% of Americans agreed.

negative feelings toward large business corporations in the U.S. have also increased in recent years. Eighty-four percent of Americans agree that business corporations do not share enough of their success with their employees, compared to 15% who disagree. These negative views are up 15 percentage points from the previous year, when 69% of the public agreed that American businesses were not sharing enough of their profits with their workers. There is broad agreement with this assessment across a range of demographic groups.

The public today remains less confident that hard work is the key to economic success. Nearly two-thirds (64%) of Americans agree that hard work is no guarantee of success, while more than one-third (35%) disagree. Current sentiments represent a 10-point increase since 2013, when 54% of Americans agreed with this statement.

More than three-quarters (76%) of the public supports raising the minimum wage from $7.25 to $10.10 per hour. Support has ticked up slightly since last year, when 69% of Americans expressed support for raising the minimum wage to $10.10 per hour.

Americans overwhelmingly support requiring companies to provide all full-time employees with paid sick days if they or an immediate family member gets sick, and requiring companies to provide all full-time employees with paid leave for the birth or adoption of a child. Eighty-five percent of Americans favor paid sick leave and 82% support paid parental leave.

Americans correctly understand that both declining opportunity and increasing inequality are significant problems in their country.

The question now is, what are they going to do about it?

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Stuart M. Butler thinks we’re being distracted by the Great Gatsby curve (which, remember, posits a positive relationship between income inequality and income immobility).

I agree—but for very different reasons.

Butler’s argument is that we’re focusing too much on inequality instead of mobility, that is, finding ways to move people at the bottom (characterized by “high school dropouts, pitiful savings rates, and the problem of children parenting children”) up the income ladder.

The problem, of course, is, even if some individuals succeed (within or between generations) in moving up the ladder, the existence of the ladder and the growing gap between rungs on the ladder mean we’re still faced with the fundamental problem of grotesque levels of inequality. The only change (if upward and, with it, downward mobility increase) is different people occupy those highly unequal positions, that is, a highly unequal society remains.

It’s a bit like the problem with Paul Samuelson’s famous statement (in “Wages and interest: a modern dissection of Marxian economics,” American Economic Review 47 [1957], 894): “Remember that in a perfectly competitive market, it really does not matter who hires whom; so have labor hire capital.”

The fact is, if labor and capital changed sides, and labor hired capital, it would still be the case that capital and labor occupy different positions in capitalist production: labor receives wages in exchange for their ability to work, while capital gets the profits produced by the laborers.

So, we can either focus on who occupies which rung in the distribution of income (or who hires whom in the capital-labor relationship) or we can focus instead on the obscenely and increasingly unequal distribution of income (and the fact that, in the existing capital-labor relationship, the capital share is growing while the labor share is declining).

If we don’t focus on the real problems of inequality and class, we’ll just continue to be distracted by the Great Gatsby curve.

 

In a now-famous study (and video-gone-viral presentation by Colin Gordon), Dan Ariely and Michael I. Norton showed both that Americans underestimate the current level of wealth inequality in the United States and that they prefer a much more equal distribution than exists right now.

In a more recent study, Shai Davidai and Thomas Gilovich [pdf] used a similar approach to assess perceptions of economic mobility within the United States. Their work is important because, as they explain, “a core tenet of the American ethos is that there is considerable economic mobility.” In other words, even as various forms of inequality have grown over time, Americans can still argue the situation is not so bad if people can move up the ladder, making the transition “from rags to riches.”*

However, what Davidai and Gilovich found is that (1) people believe there is more upward mobility than downward mobility, (2) people overestimate the amount of upward mobility and underestimate the amount of downward mobility, (3) poorer individuals believe there is more mobility than richer individuals, and (4) political affiliation influences perceptions of economic mobility, with conservatives believing that the economic system is more dynamic—with more people moving both up and down the income distribution—than liberals do.

Their findings are important because the belief that upward mobility is more prevalent that downward mobility serves to justify the existing economic system. It reinforces the idea that capitalism is fair, legitimate, and just—that is, one can “make it” with appropriate effort. If they can’t, then existing inequalities look even harsher and more unfair.

If, however, the actual story is rags to rags and riches to rags—that is, it’s highly unlikely to move from the bottom to the top, and also unlikely to be able to stay at the top—it becomes much more difficult to justify the growing disparities between the top and the bottom. To put it differently, if the rungs of the ladder have grown further and further apart and people understand their misperceptions of actual rates of upward and downward mobility, they’re going to be less prone to accept the empty promises of increased opportunity offered by academics and politicians. What that means is they may become more open to the possibility of imagining and creating alternative economic institutions, in which the ladder of inequality is rendered less important.

 

*Although, as I often explain to students, even if workers can become capitalists, it is still the case that, qua capitalists, they find themselves in the position of exploiting others who occupy the position of workers.

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According to a new World Bank report [ht: sm], on inequality in South Asia, among the United States, Bangladesh, India, and Vietnam, the probability of moving out of poverty within a generation (from 2005 to 2010) was highest in Vietnam.

Just to put a point on it: upward mobility from poverty was the same in the United States as in Bangladesh.

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The rags-to-riches, Horatio Alger story (which, lest we forget, actually represented the rise to middle-class respectability not through a Protestant ethic of hard work but, instead, an act that rescues a ragamuffin boy from his fate through contact with a wealthy elder gentleman who takes the boy in as his ward) is a myth that endures to this day—more than a hundred years after Andrew Carnegie. We persist with the myth—by focusing almost exclusively on education and other ways of increasing economic opportunity—even though we know that class mobility in the United States today and throughout the postwar period has been and continues to be extremely low.

As Andrew Surowiecki explains,

Increasing economic opportunity is a noble goal, and worth investing in. But we shouldn’t delude ourselves into thinking that more social mobility will cure what ails the U.S. economy. For a start, even societies that are held to have “high” mobility aren’t all that mobile. In San Jose, just thirteen per cent of people in the bottom quintile make it to the top. Sweden has one of the highest rates of social mobility in the world, but a 2012 study found that the top of the income spectrum is dominated by people whose parents were rich. A new book, “The Son Also Rises,” by the economic historian Gregory Clark, suggests that dramatic social mobility has always been the exception rather than the rule. Clark examines a host of societies over the past seven hundred years and finds that the makeup of a given country’s economic élite has remained surprisingly stable.

More important, in any capitalist society most people are bound to be part of the middle and working classes; public policy should focus on raising their standard of living, instead of raising their chances of getting rich. What made the U.S. economy so remarkable for most of the twentieth century was the fact that, even if working people never moved into a different class, over time they saw their standard of living rise sharply. Between the late nineteen-forties and the early nineteen-seventies, median household income in the U.S. doubled. That’s what has really changed in the past forty years. The economy is growing more slowly than it did in the postwar era, and average workers’ share of the pie has been shrinking. It’s no surprise that people in Washington prefer to talk about mobility rather than about this basic reality. Raising living standards for ordinary workers is hard: you need to either get wages growing or talk about things that scare politicians, like “redistribution” and “taxes.” But making it easier for some Americans to move up the economic ladder is no great triumph if most can barely hold on.

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