Economics

The dirty little secret of income inequality alarmists

Today isn’t the same as tomorrow, particularly as it concerns economic mobility. This, from the St. Louis Federal Reserve bank:

For most people, income increases over time as they move from a usually low-paying first job to better-paying jobs later in life. Some others, however, may lose income over time due to business cycle contractions, demotions, career changes, retirement, and so on. Because incomes are not constant over time, the same households do not necessarily remain in the same income quintiles. Thus, comparing income quintiles from different years is a proverbial apples-to-oranges comparison because the households compared are at different stages in their earnings profile.

First take a look at this graphic:

 Here’s what it means:

A recent study examined income mobility in the United States from 1996 to 2005.3 Using data from individual tax returns, the study documented household movement along the distribution of real income over the 10-year period.

As shown in the upper panel of the chart, nearly 58 percent of the households in the lowest income quintile (lowest 20 percent) in 1996 moved to a higher income quintile by 2005. Similarly, nearly 50 percent of the households in the second-lowest quintile in 1996 moved to a higher income quintile by 2005. Even a significant number of households in the third and fourth income quintiles in 1996 moved to a higher quintile by 2005.

The study also documented declines in household income. Of particular note are the findings regarding the wealthiest households. As shown in the lower panel of the chart, more than 57 percent of the wealthiest 1 percent of households in 1996 fell out of that category by 2005. Similarly, more than 45 percent of the wealthiest 5 percent of households in 1996 fell out of that category by 2005.

Turns out that the Tax Foundation has also looked at the economic mobility issue. Using IRS data, it found that about 60 percent of households that were in the lowest income quintile in 1999 were in a higher quintile in 2007. About 40 percent of households in the top quintile moved to a lower quintile over this 9-year period.

The Tax Foundation has also done some fantastic work looking at how long millionaires remain millionaires. (Not too long. Creative destruction, and all that – though maybe pro athletes are overrepresented.)

 

 

4 thoughts on “The dirty little secret of income inequality alarmists

  1. I think this data misses the point. Of movements of the collective, rather than movement of an individual.
    Compared to 1990, wealth and income is much more concentrated in the top 0.1%. This means fewer people have more power. If that movement continues, we will end up with one entity with all the power, and this power will likely crush any attempts to reign it in (i e, it will be anti-competitive).
    That is the danger pointed out by the critics of wealth concentration.

  2. Bad investments, or indulging in funding a run for political office or buying a sports team. There are lots of ways to lose big money.

  3. Jon W-

    Your logic is faulty. It is not obvious that, based on the recent historical increases in wealth among fewer individuals will lead to a single entity holding the majority of the wealth. We have no idea what this relationship actually looks like; you do not have enough evidence to make the conclusion you want to make. Of course, your conclusion needn’t be as strong as you’ve written: even an increase in wealth among few is perhaps a reason for concern, though the relationship between wealth and power (you should carefully define what you mean by power) isn’t clear either. [It'd perhaps be clearer once you offer a consistent definition of 'power.'] You’d also need to be sure that those in the top 0.1% actually stay there, and that doesn’t seem to be supported by empirical evidence, as fuzzily suggested by the article.

    • Columbia, your response assumes there is a static amount of wealth to distribute, which is patently false. wealth is not a zero sum game, anyone can create wealth.

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