Income inequality and economic mobility: the rest of the story

(Denver) In a major speech last December President Obama stated that “a dangerous and growing inequality and lack of upward mobility is the defining challenge of our time”. It is a theme to which he has frequently returned most notably in his State of the Union Address.

Republicans have essentially accepted these assumptions regarding income inequality and economic mobility and have chosen to attack the President’s policies for making the situation worse. It’s likely that argumentation over these issues will be central to campaign rhetoric from here to the mid-term elections and beyond.

However we are now seeing the emergence of highly credible new research findings that strongly suggest both political parties may be on the wrong track.

The most compelling study was recently released by the National Bureau of Economic Research (NBER). Done by distinguished researchers from Harvard, Berkeley, and the Treasury Department; the report- “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility”- is extraordinary for its huge size and superior methodology. It examines data from over 50 million people born since 1971 and utilized anonymous income data which enabled them to track economic mobility across successive generations.

The strong conclusion of the study is that economic mobility in recent decades is essentially unchanged thus flatly contradicting the assertions of both political parties that it has been declining.

Beyond showing that a child born in 1986 into the lowest economic 20% has the same chance (9.0%) of rising to the top 20% as a child born in 1971 (8.4%) the study demonstrates that economic ascent is a much broader phenomena. For example fully 70% of those in the bottom quintile rise above that level, and over half of those reach the middle 20% or higher.

The data also demolishes the received notion that the “rich” are rich forever by demonstrating that those in the top 20% fall down the economic ladder in proportions similar to movement in other quintiles.

The NBER report is no outlier as other major studies at Columbia, UCLA, and the Congressional Budget Office point in a similar direction.

If “declining economic mobility” is now shown to be a myth, it is also possible to look at the conventional wisdom on “growing income inequality” and find yet another highly misleading narrative.

As demonstrated by UCLA economists Lee Ohanian and Kip Hagopian in their seminal paper “The Mismeasure of Inequality” the culprit in this misperception is that Census Bureau methodology uses “money income” as its’ sole measure while excluding from its calculation taxes, “transfer payments” such as Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and expensive employee benefits like health insurance.

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