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
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.