On Economic Myth #3- US Incomes Are Static

This post is the third in a short series on economic myths prevalent among liberals in the US political scene. The prior two related posts concerning middle class job creation and tax-records-based income inequality, may be found here and here.

Last month, in the November 13th edition of the Wall Street Journal, the paper's lead editorial, entitled "Movin' On Up," provided detailed analysis the mobility of Americans with respect to incomes over time. The piece begins with the passage,

"If you've been listening to Mike Huckabee or John Edwards on the Presidential trail, you may have heard that the U.S. is becoming a nation of rising inequality and shrinking opportunity. We'd refer those campaigns to a new study of income mobility by the Treasury Department that exposes those claims as so much populist hokum."

The Journal article then begins to present data from that Treasury study,

"Much as they always have, Americans on the bottom rungs of the economic ladder continue to climb into the middle and sometimes upper classes in remarkably short periods of time.

The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.

Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.

The Treasury study found that those tax filers who were in the poorest income quintile in 1996 saw a near doubling of their incomes (90.5%) over the subsequent decade. Those in the highest quintile, on the other hand, saw only modest income gains (10%). The nearby table tells the story, which is that the poorer an individual or household was in 1996 the greater the percentage income gain after 10 years.

At this point, we see that, even if there were as much static income equality as is alleged by liberals, contrary to the information provided in the Journal editorial by Alan Reynolds, the subject of the second linked post, the migration of US income earners up the scale from low to higher levels would make that a benefit, not a drawback. For, if one cannot improve one's income over time, and reach a more disparate level of income from one's prior one, where is the motivation for economic self-betterment?

And, not only does this work for those earning less, but, those earning the highest incomes actually experienced a decline in theirs,

"Only one income group experienced an absolute decline in real income -- the richest 1% in 1996. Those households lost 25.8% of their income. Moreover, more than half (57.4%) of the richest 1% in 1996 had dropped to a lower income group by 2005. Some of these people might have been "rich" merely for one year, or perhaps for several, as they hit their peak earning years or had some capital gains windfall. Others may simply have not been able to keep up with new entrepreneurs and wealth creators."

As the study notes, there is substantial dynamism among Americans with respect to their ability move up or down the ladder of relative incomes. Thus, all of the poorest Americans do not stay poor. Over half of the poorest, by incomes, had moved into a higher quintile of income distribution by the end of the ten-year period. In particular, it states,

"The key point is that the study shows that income mobility in the U.S. works down as well as up -- another sign that opportunity and merit continue to drive American success, not accidents of birth. The "rich" are not the same people over time."

On the subject of inequality of incomes and income mobility, the article notes,

"The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s. Some journalists and academics have cited selective evidence to claim that income mobility has declined in recent years.

The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn't remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation."

The Journal editorial notes, based upon the recent Treasury study, that not only is static analysis of alleged income inequality a red herring, but mobility of Americans up and down the incomes scale remains similar to what it has been for over twenty years.

The US is not experiencing increased stratification of incomes, nor greater income inequality over time. Rather, our country's economic system remains attractive because of its characteristic of allowing those in the lower ranks of income earners to have a realistic probability of becoming much higher earners over time.