The Income Distribution Hoax, part 3

Chaos2Order's picture
Rank: Baboon | 103

See parts 1 & 2 here

Our use of language often confuses us and misconstrues reality. We speak of the rich, the poor, and the middle class in a market economy as if people were born into these relative positions and stayed there their whole lives, when in fact most do not. Position in the income distribution at a point in time is a mere classification by income, but not necessarily a class, since for most persons that classification status is transitory.

The study recently released by the supposedly non-partisan CBO is a particularly good (or rather bad) example. The CBO reports that from 1979 to 2007 the higher quintiles made progressively larger real income gains, so that the income distribution widened. The New York Times and others predictably said that the majority of the real income gains over the period went to "the rich".

The CBO did not bother to tell anyone that many of those in the top quintile in 2007 may have been persons who were in the bottom or middle quintiles in 1979, or that many who were in the top quintile or even 1% in 1979 may have fallen into lower quintiles by 2007.

Fortunately we have data from studies of mobility covering parts of the 1979-2007 period. In 1993 the Joint Economic Committee of Congress reported the results of a Treasury Department study that had tracked 14, 351 families for the decade from 1979 to 1988. The inter-quintile movements of those families are shown in the matrix below. Each row in the matrix shows, for one of income quintiles in the sample, the distribution of the families that began that decade in that quintile, across all the quintiles a decade later.

The first row shows, for example that, of those families beginning in the
1st (poorest) quintile in 1979, only 14.2% were still there a decade later.
20.7% of them had moved up to the 2nd quintile, 25% had moved to the 3rd
quintile, 25.3% to the 4th, and 14.7% had made it to the top (richest)
quintile. Assuming that the Treasury department1s sample was representative
of the larger U.S. population, then, a person living in the poorest
quintile in 1979 actually had a smaller probability of still being there in 1988 than
he/she did of having reached the top income quintile.

Note also that in all of the middle three quintiles, there were more people
who either stayed in that quintile or moved up than there were that dropped
into a lower quintile. In other words, there is more upward than downward
mobility. As for those who began in the top quintile, over that decade
35.6% had dropped down one or more quintiles, leaving 64.4% still there.

In a similar study the Urban Institute followed their large sample of
families for the decade from 1977 to 1986 and found that those actual
families beginning in the bottom quintile increased their real (inflation
adjusted) incomes by 77% on average, while those families beginning in the
richest quintile only experienced a 5% average real income gain over that
period. In percentage terms, then, the poor got richer by much more
over time than the rich got richer.

The Institute for Social Research at the University of Michigan of tracked a
huge sample of families for 16 years, from 1975 to 1991, and found even
greater vertical mobility than the ten-year studies found. For the first
quintile of families in 1975, for example, by 1991 only 5.1% of them were
still in the bottom income quintile, while an astonishing 29% had risen
clear to the fifth quintile.

Comparing the real income gains of 1975 1st and 5th quintile families, the
U. of M. found that by 1991 the initially poor families had on average
increased their real income by $25,322 in 1993 dollars, while the richest
quintile families experienced an average real income increase of only $3,974
in 1993 dollars.

This is astonishing. Nothing better illustrates the misleading character of
pure income quintile studies of a growing economy than to discover that,
if you follow actual initially rich and poor persons, it turns out that the
poor get richer over time by much more than the rich get richer, not
vice-versa.

Look around, you WSO monkeys. Look at the European and American federal and
state debt crises. What we are seeing is incipient death of welfare states
everywhere. And what is it that has driven the expanding redistribution if
not constant complaints about the gap between the rich and poor? And what
has been used to support those claims more than income quintile studies that
have the crucial facts wrong?

Of course, despite the misleading character of the quintile distribution, it
still may be an interesting question why it has widened since the 1970s. So
here is my theory. It1s the baby boomers.

The Baby Boom population cohort, which started about 1946 when the boys came
home from WWII, was both preceded and followed by smaller population
cohorts. As the boomers aged they distorted many statistics. When they
started to drive in the 1960s, auto accident rates rose (younger drivers are
less safe). About the same time industrial accidental death rates stopped
falling. Also, crime rates started rising (crime is a young man1s game). As
the boomers continued aging those phenomena reversed.

It is no accident that the income quintile distribution started widening in
1976 just as the boomers were starting to prosper. They are now distorting
the income distribution by constituting a large cohort in their late prime
earning years, with a large number of people doing very well financially.
When they retire this will reverse, and the shares of both the top 1% and
the upper quintile will start falling. Indeed, the CBO data itself shows
that already starting to happen.

Comments (5)

Jun 7, 2012

I think people fail to consider just how few truly "rich" people there are. The top 20% of households starts at around $97k. That is not a ton of money. Fresh engineering and finance hires make that much, as does anyone with a few years experience at a F500. Many public servants make that much, especially if you include benefits.

If you define "upper middle class" as top 20%, it is in the reach of almost anybody. You can delve in the psychological and social issues that keep people in the bottom quintile, but the transition is theoretically very doable.

Mechanics can clear 97. So can electricians. And medical technicians. I have met plumbers who cleared 97...3 times over.

When people cite wealth entrechment, they generally point to the upper, upper crust. The 1% (or higher). But as Eddie said in the last thread, many of those people are just passing through...selling a business or realizing unusual profits in 1 year.

When you start looking at the income distribution in a F500, the highly paid individuals are so few in number that they do not impoverish the whole. In a company of over 100k employees, dramatically slashing executive comp might mean a few hundred dollars per employee. And this is assuming the executives do not add any value to warrant their pay.

    • 1
Jun 7, 2012

To SenseOfUrgency: Glad you liked the series. See Javier Diaz-Gimenez, Jose-Victor Rios-Rull, and Andy Glover, "Facts on the Distributions of Earnings, Income, and Wealth in the United States: 2007 Update," Federal Reserve Bank of Minneapolis Quarterly Review, 34 no. 1 (February 2011): 2-33. That is the latest that I know of. It only covers six years, and part of that is recession. But it shows mobility matrixes for not just income, but also for earnings and wealth.

To West Coast Rainmaker: You are right about how few truly rich people there are. I think in terms of income being normally distributed (with a skew) with a mean and a variance, and the truly rich being way out in the right tale of the distribution. You are also right that it is not all that hard to make it into the top quintile. Plumbers do so frequently.

I think the following experiment would be interesting. Find a publication that regularly lists the top 100 richest people (or better, the top 100 richest Americans). Look at that list in, say, 1990, then compare that list with the same list for 2000 and see how many there in 1990 were not there in 2000, then compare the 1990 list with the 2010 list and see how many were absent. You might want to adjust for deaths, and just look for mobility among the still living. If you can find such a publication with such a list, Mr. Rainmaker, let me know what that turnover turns out to be.

Chaos2Order = JRE, Ph.D.

View my WSO Blog

Jun 8, 2012
Chaos2Order:

To SenseOfUrgency: Glad you liked the series. See Javier Diaz-Gimenez, Jose-Victor Rios-Rull, and Andy Glover, "Facts on the Distributions of Earnings, Income, and Wealth in the United States: 2007 Update," Federal Reserve Bank of Minneapolis Quarterly Review, 34 no. 1 (February 2011): 2-33. That is the latest that I know of. It only covers six years, and part of that is recession. But it shows mobility matrixes for not just income, but also for earnings and wealth.

To West Coast Rainmaker: You are right about how few truly rich people there are. I think in terms of income being normally distributed (with a skew) with a mean and a variance, and the truly rich being way out in the right tale of the distribution. You are also right that it is not all that hard to make it into the top quintile. Plumbers do so frequently.

I think the following experiment would be interesting. Find a publication that regularly lists the top 100 richest people (or better, the top 100 richest Americans). Look at that list in, say, 1990, then compare that list with the same list for 2000 and see how many there in 1990 were not there in 2000, then compare the 1990 list with the 2010 list and see how many were absent. You might want to adjust for deaths, and just look for mobility among the still living. If you can find such a publication with such a list, Mr. Rainmaker, let me know what that turnover turns out to be.

I gathered up this data and put it in a spreadsheet. I could only find a list of billionaires in 1990, but it still gives you 57 names for that year. Enjoy the data. Its a spreadsheet, so the formatting looks awful if you view it on scribd. Just download.

http://www.scribd.com/doc/96431920/Richest-List.

Jun 8, 2012

Re: "In other words, there is more upward than downward mobility" -- by definition, these must be equal when speaking in terms of proportions of a population, when we are considering positional attributes. As an illustrative example, I'd be quite startled to discover that more than half of a population ranked above the population median for any given attribute.

It'd be fine to make that particular claim with values considered strictly non-positionally (e.g. as you do with the average increase in family income later in the post), but it makes zero sense when applied to quintile position.

Echoing WCr above, when the general public rails against the rich, I doubt they're envisioning the guy making $200k/yr living in NYC, but rather the handful at the very top who taken together would constitute the wealth of the rest of the top 20%. I think using quintiles here obscures what people actually mean when they talk about the rich (e.g. "We are the 99%", not "We are the 80%").

Jun 8, 2012
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Chaos2Order = JRE, Ph.D.

View my WSO Blog

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