Income Mobility

INCOME MOBILITY….There is little question that income inequality has increased in the United States over the past few decades. In fact, the increase has been so dramatic that conservatives no longer even try to deny the basic facts, but instead suggest that, really, things aren’t all that bad if you’re just willing to look below the surface a bit.

Their favorite archeological dig along these lines ? it’s practically a mantra on the Wall Street Journal editorial page ? is that what really matters is not income inequality but income mobility. Sure, inequality has gotten worse, but who cares when America is a land of opportunity where the poor so often become rich?

This has always been a bit dishonest, since “poor” often refers to college students and other young people who naturally become better off as they grow older. But it turns out that even taken on its own terms, it’s a bogus argument because income mobility is also decreasing in America. The rich are getting richer, they are staying richer, and the poor are increasingly stuck being poor.

The charts on the right are from an article by Katherine Bradbury and Jane Katz published a few months ago in the Boston Fed’s Regional Review. The top chart shows the familiar increase in income inequality: the richest quintile has grown far faster than any of the others. The bottom chart shows the surprise: fewer people are moving up, fewer people are moving down, and more people are staying put.

So here’s what’s happening:

  • We live in an era in which highly skilled people are increasingly valuable and unskilled workers are worth less and less. In other words, left on its own, income inequality will naturally increase.

  • Our tax policies are increasingly geared not to ameliorating this trend, but to making it worse. Tax rates on the rich are decreasing, while tax rates on the poor and middle class are increasing.

  • At the same time, income mobility is going down. If you’re at the bottom, that’s probably where you’re going to stay.

It’s possible to justify these policies if the result of lower taxes and higher inequality is higher economic growth. After all, why fret that the rich are getting richer if their hard work is driving a fast growing economy that benefits everyone, while all those poor schlubs in Europe are stagnating thanks to their misguided egalitarian instincts? Unfortunately, there’s little evidence to back this up. There doesn’t appear to be any correlation at all between high inequality, low tax rates, and economic growth.

This is fundamentally unhealthy in a democratic society. When the rich absorb more and more of the economic growth of the nation, and the poor begin to lose hope of economic advancement, you have a potentially toxic combination. George Bush and the policies of the Republican party are making this ever worse, and someday soon the poor and middle class are going to figure out what’s going on. How about 2004?