Friday, April 08, 2011

Income Mobility Update

As I've written:
Liberals often claim that only the rich are getting richer--that is, that wealth increasingly is concentrated among the top 1 percent of earners. This is wrong, for several reasons: it presumes income is a zero-sum game, it ignores data on consumption, it compares "bounded" with "unbounded" brackets, it confuses persons with statistical categories and -- relatedly -- ignores income mobility.
That same post cited data showing that only about half the "millionaires" remained so for more than a year.

Atlantic business editor Megan McArdle says it simply: "The Rich Really Are Different: Their Incomes Fluctuate More". She points to Robert Frank's Wall Street Journal piece on the budget woes of states that soaked the rich:
Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes--their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them.

Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."

New York, New Jersey, Connecticut and Illinois--states that are the most heavily reliant on the taxes of the wealthy--are now among those with the biggest budget holes. A large population of rich residents was a blessing during the boom, showering states with billions in tax revenue. But it became a curse as their incomes collapsed with financial markets.

Arriving at a time of greatly increased public spending, this reversal highlights the dependence of the states on the outsize incomes of the wealthy. The result for state finances and budgets has been extreme volatility.
McArdle concludes that this is a reason "we can't fix all our budget problems with higher taxes on the rich--if we do that, revenues are going to collapse dangerously every time there's a recession." It's also evidence against the conventional wisdom that the rich are forever getting richer. Indeed, the United States already has the most progressive tax system of any OECD country--the wealthy here pay a larger portion of their income in taxes than any comparable country.

As econ prof Mark Perry shows, even tracking the same people over time (which many analysts ignore), there's significant income mobility over relatively short periods. Plus, as reported recently by the Census Bureau, almost 42 percent of those considered poor in 2004 had moved up from poverty by 2006.

So in America, neither rich nor poor is permanent. And, for the most part, both are better off in America.


Assistant Village Idiot said...

I agree that this is the main disconnect in in our class-warfare discussions nationally. The assumption of a static category of "rich" who make oodles of the ready, year over year, probably unethically, is the murky but anchoring image in the liberal mind. No further information can get in, because their sense of justice is so inflamed by this myth that they cannot move on.

I will note, however, that there is a more permanent category of poor, perhaps approaching 5% of the population, who remain in the bottom quintile for much of their lives.

We might as a nation, feel obligated as a nation to do something about that simply because it is sad, and it would be nice for people to be happy. I don't think that's enough to have government compel people to fix it, but I do understand that. But at a deeper level I think we have to address it for social comity and general peace.

As giving people a living makes them less grateful, not more (that is human nature), I don't know what we do about that 5%, short of making up jobs and tricking them into thinking they're important.

To steal a Douglas Adams idea, maybe that's already happened, which is how we got so many liberals to begin with.

Carl said...

AVI: Agreed. But you over-estimate the size of the chronic poverty class: it's under three percent according to page 8 of the Census Bureau report linked above. That being said, I agree that America is rich enough to help them. Of course we already do: the poor pay no income tax and are better off than ever before.

Warren said...

The Rich Aren’t Getting Richer

By Kevin D. Williamson at National Review