Questions About Income Mobility

Questions about income mobility and inequality are much in the news. I'm pretty dissatisfied with what I'm seeing so far, so I thought I'd try to start getting straight on how to think about it.

(1) What is income mobility?

Income mobility is generally measured in terms of jumping quintiles, i.e., changing relative position in the income distribution.

(2) Why should we care?

Suppose, starting next year, that everyone's real income would double every January forever. Suppose, however, that it turns out that nobody ever changes quintiles ever again. There's no force keeping anyone from jumping quintiles, but it just never happens. Income mobility, change in relative position, has ground to a halt. But everyone now making $10,000 a year will be making over a million in eight years. Do you care that there is no income mobility? I don't.

We do in fact care about mobility because we want to know that our system of institutions facilitates opportunity and rewards initiative and enterprise. A decent number of people changing relative position shows us that our system is amenable to upward aspirations.

(3) Is income mobility A LOT less important than high levels of economic growth that increase everyone's absolute wealth.

Yes.

(4) Should we expect less bottom to top, number one with a bullet, mobility as an economy grows wealthier overall?

Yes. People are constantly confused by the growing gap between the rich and poor. This is good thing, not a bad thing. If the bottom is fixed, at zero income, and the top keeps going higher, you've got a bigger gap. But lots of people are better off and nobody is worse off. Similarly, if the lowest quintile is anchored by a fixed bottom, and the top is untethered and rising, the distance from the bottom to the top will increase. The distance from the bottom to the middle will increase. So it will take longer to get there. If today's middle is equivalent in real terms to yesteryear's top, people who are going from the bottom to the middle are doing no worse than people of yore who went from the bottom to the top (even if we assume, counterfactually, that there has been no change in quality of life for people at the bottom.)

We should be AIMING at a system where the middle of the middle is, say $500,000 per annum, and so the trip from the bottom of the bottom to the top of the bottom, much less to the middle of middle, is a VERY BIG trip indeed.

This is a priori theorizing. So perhaps a real economist will pipe up.

(4) What don't studies about income mobility tell you?

Among other things, they don't tell you how many people really TRIED to improve their relative economic position but couldn't. The relevant normative question about a system of institutions here is how easy it is to do well if one really TRIES to acquire human capital, takes initiative, exerts effort, etc.

We might assume that everyone tries equally hard across cultures, but I think this would be mistaken. I think it would also be mistaken to take widespread cultural beliefs about income mobility to predict effort. Salient cultural figures like pop stars and athletes often have rags-to-riches stories, and probably reinforce the sense that rags-to-riches is in principle possible, even if one has no athletic or musical ability, and does not believe in one's particular case that effort is going to be very worthwhile.

And if you're looking at things in terms of quintiles, you won't be seeing significant movement within the quintile. As the economy grows, the range of each fifth should widen, and movement from the bottom to the top of a fifth becomes more significant. At a certain point, dividing things into fifths is going to mask a lot of dramatic income mobilitty, and so it becomes more useful to look at things at a finer grain of division. But this is trivially easy to do.

(4) Does the New York Times have an irrational fetish for ominous tales about relative position?

Yes.

[Update: Ron Bailey has some good thoughts on the NYT series.]

"Reality-Based"

OK. I'm officially sick of it. The very moment folks started calling themselves “members of the reality-based community,” it made me want to wretch on my Pumas. Why not be honest and call yourself a proud member of the “you're either stupid or evil if you don't agree with me community?” I understand the supposed contrast with “faith-based” and the ironic embrace of its derisively intended non-opposite. But come on, really. I think we all understand and appreciate what a hard-headed empiricist you are by not attending Sunday school. Your epistemic virtue bowls us over. But just maybe it's time for new blog slogans, people. Why not try something along “my scat smells like honey-based” or “self-congatulation-based” lines?

The Humbling Kindness of Strangers

My housemates are kind souls stirred by the best within the otherwise hard human heart. Do they reach out with a hand full of nutritious grain to starving children? No. Do they seek to ease the suffering of those dispossessed by tsunamis or earthquakes? No. Do they help grant one last wish to tiny unfortunates suffering from excruciating cancer of the puppy. No. Through a veritable inferno of human goodness, through altruism superlative beyond adjectives, they have extended their kindness to she among us who is in the direst need: Lindsay Lohan.

The 2009 Shortfall

I don't often have occasion to say that Charles Krauthammer's latest column is excellent. It's about Social Security.

As I have been writing for years with stupefying redundancy — and obvious lack of success — this idea is a hoax. There is no trust fund. The past Social Security surpluses were spent the year they were created. The idea that in 2017, when the surpluses disappear, we will be able to go to a box in West Virginia to retrieve the money we need to make up the shortfall (between what Social Security takes in and what it pays out that year) is a deception. There is no money there. It will have to be borrowed or garnered from new taxes.

But things are worse than that. The fiscal problem starts to kick in not in 2017 but in 2009. The Social Security surplus, which Congress happily spends every year, peaks in 2008. Which means that starting in four years (and for every year thereafter) a budgetary squeeze begins, requiring new taxation or new borrowing.

If in 2010 tax revenue and spending remain exactly the same as in 2009, the Treasury will not end up with the same size deficit. It will end up with a larger deficit, because the amount of money it was receiving free and “borrowed” from the Social Security surplus will have shrunk.

That surplus shrinks from its peak in 2008 to zero in 2017 and goes negative after that. That is a very serious fiscal problem that starts not in 50 years, not even in 12 years, but in four.

Social Security, Now Less Than Ever

Does anyone have numbers on what United employees' retirement benefits would be worth if they had been in a defined contribution plan like a 401(k) all along rather than a broken defined benefit pension? That is what I'd like to know.

Alex Tabarrok has nailed the lesson of the failed United pension plan. Yglesias, on the other hand, is piling confusion atop confusion.

Alex Tabbarok takes the opposite view and holds that the moral of the increasing unviability of defined-benefit pensions is that we should eliminate our defined-benefit public sector pensions as well. Frankly, I think this is a bit silly. If one aspect of your finances is becoming riskier, that's a terrible moment to transform a different aspect of your finances into a riskier system as well. It's particularly foolish if the risks entailed are essentially the same. Under privatization, your Social Security benefits will be down at the exact same time your 401 (k) account is down, i.e., just when you need it most.

Frankly, I think Matt is being more than a little silly. Most personal account plans encourage annuitization of at least some of the assets in the plan upon retirement. (The Cato plan would require purchase of an annuity that provides a stream of checks at at least 120% of poverty. You can cash out the extra, buy a boat, send your granddaughter to college, or leave it in the market.) If the market goes down, your annuity pays the same as ever. It would be a good idea not to buy an annuity right after the market takes a dip. And, hey!, you don't have to. Matt pretends as if the market is a giant unpredictable roulette wheel that has not developed sophisticated financial instruments for managing the modest risks of investment. He also pretends that the personal account plans do not include some means-tested assistance to people whose personal retirement savings and investments leave them below a critical threshold. But they do. There is simply nothing left in his point once the actual features of the actual world relevant to the argument are fairly acknowledged.

Now what needs to be brought into the picture here is that the federal government is not like a big corporation. Governments don't go out of business. Governments don't experience unexpected new competition for their customers. Corporations can't just generate new revenues by taking a vote. And of course corporate managers are supposed to have a different attitude vis-à-vis their employees than elected representatives have vis-à-vis their constituents.

This makes no sense. Governments CONSTANTLY go out of business (while the state abides), and new governments bring new policy. See, sometimes there are differently constituted congresses with different policy preference profiles. And there are different Presidents with different policy preferences. Etc. Which is why people get so very excited about elections. And which is why there is a lot of policy volatility. I assume Matt voted for Kerry because he wanted him to implement different policies from Bush's. No?

And Matt would not be up in arms about the prospect that Social Security might fundamentally change in nature and structure if it was not the case that it could change fundamentally in nature and structure. If government, like Everest, is unmovable, then why all the high-toned rhetoric about saving the jewel in the crown of the New Deal, yadda yadda?

Matt also seems to entertain the fantasy that government can raise revenues simply by turning up the tax spigot. But government does not exist in a blissful parallel plane where economic logic does not apply. Even fairy folk respond to incentives. Surely he has heard of optimal tax policy.

Now, it is true that the government is not like a big corporation. It is less efficient, suffers from far more severe principal/agent problems, is more inclined to corruption, and is rather more like an extortion racket.

More Democracy & War

I think I now get what Justin's saying. The problem with Wilhelmine Germany he mentions–that the democratic body didn't have control over foreign policy–I think points to the kitten/wolverine problem. To say that a regime is a democracy is not to say much. Democracy, per se, is certainly not a very useful category for social scientific generalization. As I mentioned a couple posts down, there can be immense variation in institutional structure within democracies, and the specific structure probably does much more work than the generic type.

My guess is that democratic peace theory is a bit retarded because its too atheoretical and there is not sufficient attention to institutional dynamics. I'd like to see a good NIE/public choice comparative analytic narrative of an instance where democratic institutions seems to have prevented war and an instance where they seem not to have. (Dissertation topics are free here at the Fly Bottle.)

My totally uncoached guess about why democracies don't attack each other much is that (1) democracies in general make less agressive offensive warlike noises, (2) democracies recognize each other as having a kind of legitimacy.

I know next to nothing about this, but I won't let that stop me!

Preferring the Peace

Via Logan, this Brad Plumer post:

At any rate, I can't see any real reasons why democracies wouldn't go to war with each other. Presumably I've missed something. But if not, that means the question of why, historically, democracies haven't bloodied each other up is mostly due to the fact that democracies are a recent phenomenon, the bipolar structure of the Cold War made everything weird, and the ironclad law's just an aberration.

Weird. I always that the answer was that people, when not inflamed by propaganda, as they tend not to be in democratic nations with a free press, don't like war. It's expensive and nice boys get killed. So leaders of democratic nations, who don't like getting kicked out of office, generally avoid war. Is it really more complicated than that? Justin?

Barriers to Hedonic Trade

The obvious answer to Tyler's puzzle about why people don't have more sex is that the cost is not in fact low. It strikes me as bizarre on its face to think of sex as a low-cost activity. Most people don't want sex, per se, but want sex with a person with whom they want to have sex that wants to have sex with them. For many, then, supply is low, and search costs are high.

Even within the context of a relationship, there may be sticky emotional issues that raise the cost. There may be performance or aesthetic anxiety. I think many partners in effect trade for their preferred kind of sex, but the price needs to be right. A does X to B and B does Y to A. However, although A would love him some Y, he finds doing X boring, and B is craving a bit of X, but Y-ing A sounds like a big drag. And so sex happens only when A wants it enough to not mind doing X for it, and B wants also it enough to not mind doing Y for it. If A gains ten pounds, and B has been acting like a jerk lately, it just might not happen at all. And the expected cost of getting sex outside the relationship seems even higher. So we get investment in poor, low-cost replacements, like pulsating showerheads and streaming video.

[Update: And I should have mentioned religious guilt. That's a real cost for many, many people.]