See Part 1 here
It was probably not distressing to many of you money grubbing young capitalist monkeys at WSO (and I mean that as a complement) to hear on the evening news a few weeks ago that the share of aggregate real (inflation adjusted) after tax income going to the top 1% of American households had doubled between 1979 and 2007, reaching 23.5%.
Of course many people were highly distressed by this widely publicized statistic emanating from the CBO report issued upon request of liberal Senators Chuck Grassley and Max Baucus. But not you monkeys. You probably cheered. After all, most of you intend to be in that 1% someday,and are working hard to get there.
Therein lays a tale revealing the misleading, if not dishonest, character of
studies of the income quintile distribution, and/or changes in the distribution
of total income shares, or of average incomes in each quintile, over time.
They convey the misimpression that the people in each quintile are the
same people year after year, like serfs and lords with lifetime status settled
at birth in a medieval system.
Most of the public outrage generated by hearing about how much more
the top quintile families earn (or the top 5%, or 1%) in comparison to
the bottom quintile families, stems from that misimpression. That false
impression is seldom corrected by those who make or propagate such
studies. CBO didn’t, and neither Grassley nor Baucus will.
Reality is quite different. The typical experience of a person born in the
U.S.A. is this: most are born to a family somewhere in the middle quintiles.
When we roll off that high-school assembly line, move out of our parent’s
home, and either go to college or start dipping our toes in the job market,
we become relatively poor.
Quite frankly, with little knowledge, skill, or experience, we aren’t worth
much to employers at first. Besides, we shift employments rather
frequently, looking for our ‘niche’. Eventually, though, we find one. We
also get married and start building a family.
Over time we complete our formal education, get on-the-job training, gain
experience, skill at our jobs, and seniority, taking more responsibility. We
become more productive and valuable to our employers so our incomes
rise over time.
Typically, then, we start out relatively poor (after high school) and rise over
time through the income quintiles. Eventually we reach our peak earning
years, at income levels that, even after adjusting for inflation and taxation,
are large multiples of what we started with.
Later in our lives, of course, we retire and our income falls somewhat.
Most of us are comparatively asset rich, however, having paid off our
mortgage, accumulated an investment/retirement portfolio, a couple of
cars, a boat or motor home in the back yard, etc. Note that
none of this normal experience is reflected at all in a typical pure quintile income
distribution study.
How much harder would it be to spark outrage by people in the lower
quintiles, and gain support from them for raising marginal tax rates on
those in the higher quintiles, if they understood that they are quite likely to
end up in one of those higher quintiles paying those extortionate tax rates?
How much harder would it be to engender guilt on the part of people in the
upper quintiles, thereby suppressing their resistance to a raise in marginal
tax rates to fund income redistribution, if they knew that it is typical even of people in the bottom quintile families to end up much better off in life over
time (and that this is particularly likely when marginal tax rates are low)?
A few years back (see The Journal of Private Enterprise 14 no. 1, 1998)
an economist named Don Mathews showed just how devoid of real
information the quintile income distribution is. He designed an imaginary
economy in which everyone began work at age 21, got a 6% raise at the
end of each year, and retired at age 65. Each year a new cohort of 21
year-olds was added and one just turning 65 was deleted. The lifetime
incomes of all citizens were therefore identical.
At any point in time, however, each population cohort was at a different
stage in life, with a different income from the others. Mathews then ranked
everyone in this imaginary economy by income, divided them into quintiles,
and calculated the share of total income each quintile obtained. It was
5.4% for the poorest quintile, 9.1% for the second, 15.4% for the third, 26%
for the forth, and 44% for the richest quintile.
Amazingly, that quintile distribution was extremely similar to the actual
American quintile distribution at the time. Clearly a quintile distribution
study (such as the CBO study) providing no data on mobility of the actual
persons, families or households included in the study between the quintiles
reveals virtually nothing about inequality itself!
Of course in the real world lifetime incomes are not identical, the way they
were in Mathews’ thought experiment. But there is a great deal of mobility
of persons through the quintiles. How much? Hang on for part 3.
I don't have a lot of time right now, but this contention is very misleading.
There is almost no mobility in the upper and lower quintiles (the rich stay rich and the poor stay poor), and the only mobility within the middle quintiles is from lower to upper middle and back. I'll go into more detail if you wish when I have more time, but this is something I've studied at length because economic mobility has been a lifelong fascination of mine.
This sounds like a very wordy way of saying "billionaires shouldn't pay taxes NOW because I you want to be one yourself....someday, maybe".
Simple fact is that a graduated system worked fine for a long time, and was rooted in the idea of a well functioning civilization. People rephrased the conceptual end from civilizational maintainance to class war, and that's about the time that the federal deficit started going up. You're the chart/stats guy, look it up for yourself.
All of the academic BS and theoretical math in the world can't obscure that.
I make a multiple of what my family did growing up. Literally from welfare to Wall Street through hard work, in 1 generation.
Mobility exists if you are willing to work hard enough, and, more importantly, do not fuck up. If I had knocked up a girl, gotten convicted for a crime, or slacked off, I would likely be an unemployed high school graduate, if not drop out.
A sociologist would say that this means nothing, but every individual makes choices. It is hard to imagine a case where you are doomed to poverty from birth. You might have to work harder than other guys. But a middle class existence is within the grasp of every young person.
Eddie is right in a societal sense. The rich do tend to stay rich, and the poor tend to stay poor.
In my experience, poor people usually stay poor because they make terrible decisions. If your life sucks, I can see why drugs might appeal to you. You also lack the knowledge to dig yourself out of poverty.
I saw a few of my friends get great aid packages to great colleges. Then they studied something in the arts, didn't do internships, and ended up little better off. This is almost painful to me- they got so close to making a good living, then they decided to study anthropology.
Rich people stay rich. Money tends to beget money, and rich people operate on good information. Even if your heir is a total fuckup, you can put your assets in a trust so that he doesn't waste it on hookers and blow. But, generally, the children of rich people tend to be educated and responsible. If you see your dad working hard, you probably want to follow his example.
Interesting... i'm not American so this question might seem redundant to many of you... how many of you guys can afford to live properly by the time you're 24/25? i mean, afford to have your own apartment (not "bro-ing" it with roommates), having discretionary income and the time to spend it and being able to save a little bit? Maybe being financially able to start a family should you choose.
By that measure are you guys better off than your parents at that age?
What about circumstances? Things like falling ill, or loss of a parent, etc... As I understand it, the poor have less ability to cope with these kinds of shocks from a financial point of view in the USA due to lack of universal healthcare and such.Yea, this happens. If you are lower-middle income, and you lose a parent without a large life insurance policy, your family is in deep trouble. Divorce has the same effect. The same amount of income supports the same number of people, but now supports 2 residences.
I refer to things like getting a girl pregnant, getting a drug conviction, or not finishing High School. It is entirely possible to fuck yourself before turning 18. Then there are things like racking up credit card debt, getting hit with overdraft fees because you are not aware of your balance, and spending money on alcohol/tobacco.
I am not saying I blame people for this. They never learned better. But, mobility is possible if you act in your own long term interests.
Shit begets shit. If parents are shit then offspring will likely be shit. I have zero sympathy.
@West Coast I came from similar circumstances. I managed to spend ~14 months of my life as a legitimate One Percenter, and that was after being born in a London orphanage and being raised in a lower-middle class family. So it CAN be done, and probably more easily in America than anywhere else.
Unfortunately, we are remote exceptions to the rule. And even more unfortunately today in America, where you start out in life is a larger determining factor of where you'll end up than ever before.
I have sympathy for kids who are born into a poor home/shit environment. They simply dont have the same opportunities as more fortunate kids. I don't have sympathy for kids who use that as an excuse to make dumbass decisions and end up continuing the cycle of being broke and trashy. They may not become filthy rich in 1 generation, but they have a legitimate chance of becoming middle class and giving their kids the opportunities they didn't have
I agree with WCRM and EB. The whole "boot straps" defense is myopic IMHO. Negativity breeds negativity. I had a friend who did Teach for America, and she definitely shaped my view on the matter.
Chuck Grassley? Liberal?
Like many of you on this board I think this post is very misleading. The American public doesn't vacillate through tax brackets as seemingly as you make it seem. But what this post is really devoid of is an understanding of how social capital really separates economic classes and constrains upward mobility.
If I take a person who just graduated from an Ivy league school and match them against against someone from a near bye public school both will fall into relatively the same tax brackets for some time. But social capital means that certain people are provided with the skills, resources, tool, etc. to navigate the "money making" world.
Is a kid who graduates from princeton and makes 70K as an analyst the same as a kid who makes 55k from a public school as an insurance salesman? Maybe. Thats what the numbers would have you think. And then later in life when that kid from princeton is making 200k and the kid from the state school is making 80k, its easy to stand there and say..."its because the other kid worked harder and made the right choices. But the truth is, a lot of successful people that I have been around didn't always make the right/best decisions. They were boozing and partying during college. They knocked up a girl or had to pay for an abortion. Girls getting sent to rehab. Many times....Many times they have someone behind them to make sure that they get back on their feet in a quick amount of time.
Yes there are exceptions to the rule, but everyone on this board knows that success is far more than just hard work. Its luck at times. Or being introduced to the right person. Or being mentored in the right way.
All 23 year-olds liven with their buddies are not the same. You're not poor if you know you are taken care of.
Yes you may have been taught how to manage your money better. This is absolutely the truth. You may have got that big internship on your own merit which set you on the right path. But this idea that you can go from the poor house to the pent house is so wrong. Its the big "American Dream" hoax that poor people ride their dreams on and rich people cover their asses with.
"I did it and so can you"
Becoming rich is not the same as not being poor. It's hard to become rich. It's easy to be 'not poor'.
4 simple steps in being not poor: 1) Don't do drugs. 2) Don't commit crimes. 3) Don't have kids you can't afford. 4) Graduate high school.
The vast, vast majority of poor people are poor because they did one of these. And I don't give a shit about them.
And how would you propose to correct the issues our of parasitic underclass?
If you doubt this, compare the America Revolution to the French Revolution. One was a development towards a greater overall civilization, the other was a wonton bloodletting. I'm really big on discipline, and I think that social programs here are sorely lacking in structure and guidance aside from the losing option of imprisonment, but I'm still in favor of a charitable attitude when dealing with the less fortunate.
The most applicable comparison would be the black riots in urban centers over time. The people most affected were blacks - and some sorry saps that were in the wrong place at the wrong time.
To Edmundo Braverman: you say that there is almost no mobility in the upper and lower quintiles. The major studies of which I am aware show exactly the opposite. See part 3. Later, in your response to West Coast, you say that you spent 14 months in the 1 percent. Only 14 months? Doesn't that sound like a rather high vertical mobility, both upward and downward?
To UF0 Insider I must simply respond that we had no income tax in this country before the 16th Amendment in 1913. We had no welfare state until the Great Depression. Yet we not only prospered in the sense that real income per person rose at rates that were a large multiple of anything seen before in human history, but there was a great deal of vertical economic mobility, upward and downward, around that rising per capita average.
To West Coast Rainmaker, I congratulate him on his success, illustrating one of my essential points. Otherwise I have little to say to him simply because I agree with almost everything he says (particularly about personal choices and decisions). Almost. His statement that people stay rich needs quantification. It is partly true and partly false. There is a lot of stability in the upper quintile, but more downward mobility than you might think. See part 3.
To WSO Will, I too have sympathy for persons born into poverty. They have a rough row to how. And you are right, they do have opportunities in a free society, and there is no justification for using their initial conditions as an excuse for not making efforts. However, in fact they may very well make it to the top in one generation. See part 3.
To thatguy12345, who says the idea that you can go from the poor house to the pent house is so wrong, see part 3. And consider the following: Suppose you are born and raised poor in the U.S., want to not be poor, and are reasonably healthy. For just one of many simple solutions, how about joining the army when you turn 18, putting in your 20 and retiring with full pension at age 38-39, far from being old. Nothing easier and I guarantee you will not be poor. You can then start another career and add income if you wish, use military benefits to go to school, or whatever. Choose not to do that and remain poor? Exactly. Your choice.
I apologize if my 14 months among the One Percent isn't sufficiently impressive. Since I live and worked in the real world, I can attest that the One Percent is made up primarily (~90%) of entrenched generational wealth. The remaining 10% is highly transitory, myself among them. Getting there and staying there is the realm of outliers like Bill Gates, Larry Ellison, and Steve Jobs (though Jobs came and went like the 1% was a revolving door).
However, my brief time in the 1% set up a location-independent upper-middle class lifestyle for my family and I, which is more than most people in this world enjoy, so I'll take it. I was born at or near the bottom 1% (no parents, no inheritance, no home) and managed to spend a little time in the rarefied air of the richest 1% of the human population in my lifetime, so I'm gonna go ahead and call that a win.
That I spent the majority of my life (~25 years) in the lower-middle class and the bulk of the rest in the upper-middle class, despite my brief foray into the upper echelons of wealth, only speaks to the fact that there's not a lot of mobility among the quintiles. Again, my original point that the rich remain rich and the poor remain poor - and that the middle class basically rises and falls among their economic peers - has been proven over and over again in my own life.
The foundation of my point still stands in my opinion. Upward mobility is very contingent on handwork, luck, and resources. Downward mobility is predicated on the same. IMO, two young people can start off at the same point after college in theory or pure statistics, but will need very different proportions of the aforementioned 3 to get to the same place. Looking at statistics and saying, "hey, when anyone gets out of college they are broke...they get older and paid better...then they get too old again and become broke" is way too simplistic.
There's nothing wrong with going from the poor house to the pent house. Its the american dream. My issue is with people who make it seem as if there are 5 easy steps to getting to the upper middle class (or even rich) rung of society.
All you have to do is not steal, don't get anyone pregnant , graduate from school, and work hard.
My point is that two kids making 45k at their first job are not always in the same boat. They can work just as hard, make just as many mistakes and have very different result. Very different result.
What if one kid works his/her butt off but has to contribute monetarily to their struggling family?
What if the other comes from a well-to-do household where their parents are financially stable and comfortable. They need no assistance and actually sometimes help out their child financially.
One kid has the freedom to take more risk..new job, new position, new location, while the other already has mental and monetary responsibilities.
This may seem long and drawn out, but its real life. Its not some kid who's and orphan compared to a hedge fund baby. Its just two kids who could live a matter of blocks away from each other in the real world.
Business schools recognize this, and it's part of the reason they want 'well rounded' people who do charity work. Sure there are freeloaders and communists in the world and America. But I don't think they really have a case when the people running things do the right thing: be successful and leave that door open for others to follow. Just lead by example...something I see very little of in the public conversation.
Edmundo: actually I am very impressed that you spent 14 months in the 1 percent, particularly since you started near or in the bottom 1 percent. I never managed that, and never will (though that doesn't bother me; at some point there are other things more important, at the margin, than additional income). That was not my point, which you do grasp as relating to mobility of persons through the top income classifications. I may agree with you also that there is some significant entrenchment of inherited wealth in the top, with a lot of mobility among other people who spend time in the upper income reaches. Still, I do not believe the entrenchment is as large as you do, particularly if you count persons instead of dollars.
Now pardon me for intruding on a side discussion between PetEng and UFOinsider. I agree with PetEng that avoiding certain behaviors maximizes one's chances for upward mobility, though I would argue a little differently than he does about the poor. I would bet it is mostly just those who stay poor for long periods that (nearly always) have those kind of problems and make those kind of bad choices. Plus, I actually agree with UFOinsider that the poor usually do work out their own problems. I think the problem is you two are talking about different groups among the poor (I lived in the bottom quintile when I was just getting started, and like me, most move up; see part 3).
I also agree with UFOinsider regarding the difference between the American and French revolutions. However, I don't know how to interpret his statement about having compassion for the poor. If he means personal compassion, and taking personal charitable actions, I agree. If he means instituting governmental redistributive social policies, I disagree. Helping the poor with money you take (or support the government in taking) from other people at the point of a gun is not charitable, or moral, or compassionate in the slightest, no matter how big your gang (majority) is. It is simply theft.
Update from my Public Policy class, example my professor just gave.
Two People: 1) Wealthy family, private high school. Gets pregnant/drug addicted and drops out of high school. This person's lifetime income that they are potentially giving up is extremely high. Given that this person has tremendous opportunities ahead of them. 2) Poor family, struggling inner city/rural high school. Gets pregnant/drug addicted and drops out of high school. this person's lifetime income (not including cost of pregnancy/treatment) they are potentially giving up is not nearly as high as the wealthy person. Given that this person has few opportunities ahead of them.
The disincentive for making bad decisions is substantially higher for the person in the wealthy family than in the poor family.
What you said has very little to do with the incentive problem above (how many high school drop outs do you know that own a Porsche 911?). I should have explained a little bit more rather than just posting quickly during class when I heard something relevant. I thought the problem of incentives would add to this discussion, since it hadn't been mentioned clearly.
There is much less of a disincentive to make a "bad decision" when the highest position you can ever see yourself attaining is fairly low. Before any "bad decision" is made, both persons see themselves attaining a lifestyle similar to their parents (their environment). Given that assumption, the disincentive for making a "bad decision" is substantially higher for person #1 than for #2.
The "bad decision" for person #1 could be the difference between a $100k/year college degree job, and a $30k/year hourly job. The "bad decision" for person #2 could be the difference between a $45k/year high-school diploma job, and a $30k/year hourly job.
How do you change peoples actions? Change the incentives that affect them. Every action is caused by something that happened before it.
People don't deserve to be poor, just as people don't deserve to be rich. The environment that you live in (your incentives) has a huge effect on your actions and course through life.
i see your point (opportunity costs matter), but someone from a wealthy family won't necessarily be locked into a $30k p.a. job. Even the most miserly of wealthy parents are still ok with funding schooling at a later stage if its for a white collar qualification and they'll generally have the networks to get you some interviews. You get 2nd chances when you have a solid and / or wealthy family to rely on... i.e. real options value.
the point i was making is that you should consider the marginal losses in the context of total wealth. going from a shitty to a shittier condition hurts more than going from an excellent condition to an ok condition. i.e. losing $10k hurts poor people more than wealthy people losing larger amounts.
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