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A sad picture of America, but important for us to understand

3 November 2008

Looking in the mirror is the first step to growth and reform for an individual and a nation. 

Look at this graph.  Compared to other nations we have both a high degree of income inequality AND low social mobility (fathers’ and sons’ incomes are highly correlated).  This has many consequences, none of them good.  Esp given our high rate of immigration; this suggests that we are building an underclass.

 

From “Growing Unequal? Income Distribution and Poverty in OECD Countries“, OECD, October 2008 — Figure 8.2, page 213.  The little button to the right of the “Add to Basket” button allows a free download of the report.  This image of the graph is from “Pain all round, please“, The Economist, 23 October 2008 — “The importance of fairness in an economic downturn”

This ugly graph tells a story contrary to a core American belief, immortalized in the books by Horatio Alger.  Social mobility probably was high in the past, when there was a frontier and far great rates of growth.  But the data shows today’s America has a low level of social mobility.  I did not know this until Oldskeptic corrected me (in comments here and here). 

Restoring a high degree of social mobility may be essential to reclaiming America’s soul, revitalizing its spirit.  The alternative are income and wealth redistributionist policies like Europe’s.  I doubt a society can remain stable and free if it has both a high degree of income inequality and low mobility. 

The means to fix this both obvious and at hand, if we but have the will to use them.

For more information from the FM site

How did America get to our present situation?  What can we do to reform it?  This series poses question and provides few (if any answers).  The discussion in the comments are often far longer — and more interesting — than the posts themselves.  Often heated, the different views clash discordently. 

To read other articles about these things, see the FM reference page on the right side menu bar.  Including About the FM website page. Of esp relevance to this topic:

Here are a few posts from this series,  about the American spirit and the American soul:

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

Also — you can now subscribe, receiving posts by email — see the box on the upper right.

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15 Comments leave one →
  1. 3 November 2008 10:50 am

    I’m enraged by overpaid finance folk who took private gains on their risky bets, but now want taxpayers to bail them out and pay for their gambling/ investment losses.

    I’d support quite high clawback taxes on prior finance bonuses — those who allowed the top bozos of Fannie Mae & Freddie Mac to get $15 mil should be fired. (I doubt that Obama would do so, but while McCain is more likely to, it’s still quite unlikely under him, too.)

    I don’t quite see the reduced social mobility yet — most US billionaires did not get millions from their fathers (unlike Howard Hughes, who did.) Maybe at the millionaire level of lawyers its most clear. In VC and tech, there’s still a lot of mobility.
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    Fabius Maximus replies: This is long-term data, having nothing to do with the financial crisis. As hsould be obvious since the measure of mobility is correlation of father and son income.

    This just replicates the results of many other studies done over the past decade (perhaps longer).

    Like

  2. 3 November 2008 10:55 am

    Also, as long as the USA has the highest PPP median income, I don’t see how you can honestly claim it’s a sad picture of America. I have read that behavior economics is showing how many people are willing to burn themselves a little in order to make the top guys suffer more. When there’s no injustice, I’m against this — but when there IS injustice, it’s a more healthy thing.

    Had Bush’s 2003 regulations of Fannie Mae reduced their problems, and thus the overbuilding of houses, and thus had a smaller crisis now, we would still have much of the excess debt crisis.
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    Fabius Maximus replies: Get out and travel more widely. The US is developing an underclass, which has been obvious for several decades. Chronological studies like the one cited here show these measures are growing worse, from their already worrisome levels.

    To give just one small example: In the 1940′s and 1950′s an inner city area like Harlem was a major social area for the entire city, not a ghetto in which only the only outsiders were heavily-armed police.

    Like

  3. Rune Kramer permalink
    3 November 2008 12:34 pm

    Tom Grey, I’m not a big fan of PPP comparisons. It can’t stand along as a measure of economic prosperity. Take my own country of Denmark. We have substantial sales taxes (25% on virtually everything) plus high special taxes on select items (250% on cars), that quite naturally results in a lower PPP number but on the other hand. Various Danish governments have been running a budget surplus for the last decade or so (0,5 – 5 % of GDP)and paying of debt. (Down from ca 60% of GDP in 1997 to 15% in 2007). see Chart 2.1.1

    Can you say the same for the US? And how would the PPP numbers look if the US federal or state governments were levying enough taxes to balance their budgets?

    The key point is not how the US PPP compares to other countries but rather why the income of fathers & sons are so closely correlated.

    Like

  4. 3 November 2008 1:54 pm

    A substantial increase in the living wages of workers is an important policy initiative a new administration could take. Investing in workers though higher wages may also be a practical way out of our current financial crisis, since it would better enable workers to pay their bills. Our economics should emphasize civilization rather than mere money.

    Like

  5. DBake permalink
    3 November 2008 2:24 pm

    My own guess would be that health-care reform is the first thing to do, then wait a while to see if the social-mobility numbers improve. The high cost of health care in this country keeps salaries from increasing, makes starting a new business much harder than it should be, and sets up a situation where the lower classes are constantly in danger of having their assets wiped out by a medical problem.
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    Fabius Maximus replies: Just a tweak to your comment. It is easy to forget how concentrated wealth and income is in America.

    The “lower classes” — the bottom 1/3 of income and wealth — have no almost no “assets to be wiped out by medical expenses.” Most of the lowest 20% qualify for some form of government medical care. Most of the next quintile have a net worth either negative or near zero, and quickly qualify for government care — or just cannot pay, and the medical providers take a loss.

    Among the sad stories are those in the 3rd and 4th quintiles, who have assets but often medical plans whose “co-pay” provisions result in bankruptcy following severe or chronic care. Some of these are older people who scrimped and saved their entire lives for retirement, only to be wiped out by accident or illness — in a hospital bed next to someone who never saved a dime during his or her entire life. (sometimes thru misfortune, sometime thru imprudence)

    Like

  6. seneca permalink
    3 November 2008 5:49 pm

    Affordable health-care and a living wage are practical steps to reduce income/wealth inequality. Top of the list, though, for me, would be a thorough discrediting of the trickle-down theory of wealth creation, and the social Darwinian philosophy which underlies it. The real-world manifestation of this would be a restoration of the progressive income tax, which is an acknowledgement that society is not a war of all against all, but a state of mutual cooperation, in which those who benefit the most from the common wealth should bear a proportionate share of its costs.

    Like

  7. FxConde permalink
    3 November 2008 7:25 pm

    It’s amazing how this seems to correspond to the large increase in legal and especially illegal immigration. This would explain the non-existant income growth of the lower 1/3.

    This whole subject matter has me breaking out G.K. Chesterson and David McCord Wright.
    More govenment power is not the answer but at this point the citizens have not been allowed an alternative other than the either/or of Corporate capitalism or Liberalism/Socialism. There are effective alternatives.

    G.K. Chesterson quotes;

    “Men invent new ideals because they dare not attempt old ideals. They look forward with enthusiasm, because they are afraid to look back.” – What’s Wrong With The World, 1910

    “Big Business and State Socialism are very much alike, especially Big Business.” – G.K.’s Weekly, 4/10/26

    “A citizen can hardly distinguish between a tax and a fine, except that the fine is generally much lighter.” – ILN, 5/25/31

    “Too much capitalism does not mean too many capitalists, but too few capitalists.” – The Uses of Diversity, 1921

    Like

  8. 3 November 2008 9:23 pm

    This discussion brings to mind a 1994 article by Peter Drucker (obit) in The Atlantic Monthly entitled The Age of Social Transformation.

    In his article, Drucker sketches the emergence of the knowledge-based society, and he posits a requirement for a third sector – the social sector – in addition to the customarily accepted public and private sectors. Education and health care are two examples of activity that fit in the social sector. Have we cultivated a social sector robust enough to meet our community needs?

    Like

  9. OldSkeptic permalink
    4 November 2008 12:29 pm

    It is scary, in several senses:

    (1) A permanent underclass means social ‘friction’ at least, at worst it is the building block for an internal 4GW.

    (2) The waste of human talent is criminal. Every society needs a turnover of people to keep the high skilled ones at the top, doesn’t mean their offspring will be there, but it does mean that the best are there at any one time. As soon as the mobility stops then genetic drones dominate the decision making process, then the children of the drones … and so on (they may wear nice clothes but ability?).

    A very practical exmaple of why drones beget drones:
    I have had long talks with a friend of mine about it, why do we hire good staff and nurture them when others dont. Frankly because we are pretty good at what we do and are not frightened by young smart people wherever they come from (actually we like the stimulation and prefer to be surrounded by the best we can find). But those who got there by birth advantages or connections or even sheer sociopathy are. They are frightened by the talented and will ignore, put down or even oppress them … perfect example: the USSR.

    Good people promote good people, poor performers promote poor performers (a varient of bad money chases out good money).

    So the rot sets in, using a military metaphor: The General’s son gets promoted because he is the General’s son. But he is not as good as the General. He promotes people not as good as him, who promote people not as good as them .. and so on. Eventually even the NCOs’ are idiots and so then are the troopers. The good either get the boot or hide themselves by pretending to be as bad as everyone else. Eventually you get the British Army in the 30′s, with ‘pukka’ people and the son’s of the upper class leading everything .. and you get thumped for 3 whole years by the Germans, until you finally put someone good, but not acceptable, in charge (ie Monty). As a great quote about him was ” the Gentlemen are out (ie the born into it crowd), the Players (ie the talented professionals from every race and class) are in”.

    That in a nutshell is how it happens. Add in that the boys at the top pull the ladders up behind them, e.g. appentiships, free education, etc, then those at the bottom have nowhere to go.

    Stafford Beer (look him up, in his own way he contributed as much as Boyd) said “you can be acceptable or competent, but not both”. People born with the silver spoon are (nearly) always acceptable, but competent?

    Like

  10. Erasmus permalink
    6 November 2008 8:09 pm

    A letter signed by many, many economists and others to the world leaders gathering soon for the financial conference. Personally I think that until monetary reform of some sort is undertaken, the problems discussed in this post (and many others here) will be impossible to address in any substantive fashion. It is unlikely that anything will come from this conference, but not impossible. This sort of thing only happens every few decades so with any luck they will put something real and durable together.

    We simply cannot keep running a world economy based on the debt-financed unipolar US Federal Reserve model. The lives of millions are literally at stake.

    Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy“, posted at Henry Liu’s website, 10 November 2008.
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    Fabius Maximus replies: As usual with Liu, this should be taken with quite a bit of salt. Perhaps better described as “a statement signed by economists and assorted academics.” This stuff is barely worth reading, IMO. As William Buckley once said (the quote has many versions), I’d rather be governed by the first 100 people in the Cambridge phone book than the Harvard faculty.

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  11. Erasmus permalink
    7 November 2008 3:42 am

    Well, you are entitled to your opinion of Liu, unsubstantiated as it is. But his articles forecast the ongoing meltdown in some detail quite a while before it happened. If you look at some of the articles from 2005-7 on his site you will see this is an accurate appraisal.
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    Fabius Maximus replies: I did not say he was usually wrong, just that some skepticism is warrented iwhen reading analysis by him.

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  12. thick permalink
    7 November 2008 7:37 pm

    The only reason for the generational comonality is one of work ethic and the American system of reward. Responsiblity passed from generation to generation can be simple put as “if my dad worked hard and passed on a strong work ethic to me I will be successful. If dad was a welfare bum then i may be a welfare bum and if dad was a union line worker who didnt want the overtime or thought it was wrong to aspire to management where i could achieve greater earnings and mobility i probably passed on that work ethic as well.

    Lets face it no one working for a union on the line is ever going to be wealthy. it’s those who take risk that get the reward and justly so. From the risk comes inovation, inovation leads to creative distruction and so on.

    By the way it wasn’t wall steet that brought down the system it was congress forcing financial instutitons to give loans to people who couldnt afford them. It all started with CRA and moved from there just ask Barnie Frank Chris Dodd and the rest of the socialists in congress.
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    Fabius Maximus replies: Your explanation does not explain why the US ranks so low on social mobility.

    The myth that the Community Reinvestment Act (passed in 1977) had any significant role in the US debt supercycle was thoroughly debunked in this thread. A dozen studies were cited in rebuttal; the theory’s proponents cited nothing but assertions in support of it.

    The causes of this crisis are described in these three posts:

    * “A picture of the post-WWII debt supercycle” — Four graphs tell the story.

    * “Death of the post-WWII geopolitical regime – death by debt” — The dynamics of our fall.

    * “We have been warned. Death of the post-WWII geopolitical regime” — Some of the many many warnings we received along the way from major institutions and major experts.

    Like

  13. senor tomas permalink
    12 November 2008 8:16 pm

    “Social mobility probably was high in the past, when there was a frontier and far great rates of growth.”

    Yes, indeed. The descendants of the European invaders still had plenty of the native tribes’ land to steal. A resource no longer available.
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    Fabius Maximus replies: We have a winner for “Best comment of this thread”!

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  14. 29 January 2009 3:43 pm

    Um, you got numbers to tell you that income mobility across generations sucks in America compared with Denmark and Germany and *gasp* Spain? Ok, I know this is cold but I don’t believe it.

    Unless you want to factor in that people immigrate to the USA from poor countries (we’re talking spanish-speaking folks here) and it takes at least 3 generations for them to overcome the reservoir of ignorance they bring with them from their country (like, Mexico).

    But among a line of American generations? Sorry, but I’m not buying what you’re peddling. And, yes I know … an economist can build a graph that will show the sun rising in the west.
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    Fabius Maximus replies: Um, do you understand how to “click” on the links? It will take you to the OECD report, which is (as stated above) the source of this data. If not, find a 12-year old child, who will show you how.

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  15. boqueronman permalink
    29 January 2009 5:01 pm

    OK. Now that I have calmed down after reading this blog post, I can enter my comment. This is version 2.0. Version 1.0 used much more colorful language.

    First, one truly noteworthy statement above: that this “study” apparently shows that “fathers’ and sons’ incomes are highly correlated” in the U.S. Please explain. All these yeomen farmers, blacksmiths, cobblers and household servants just can’t break out of the rigid U.S. class system inflicted on the poor and downtrodden? Or what?

    Here is the summary posted by the Dept. of Treasury in their 10 year study of U.S. social mobility published for 1996-2005 in 2007:

    “The study showed that, just as in the previous 10-year period, a majority of American taxpayers move from one income group to another over time. The study also recognizes that the dynamism of the U.S. economy significantly contributes to income mobility.

    The key findings of the study included:

    - Income mobility of individuals was considerable in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years.
    - About 55 percent of taxpayers moved to a different income quintile within 10 years.
    - Among those with the very highest incomes in 1996–the top 1/100 of one percent–only 25 percent remained in the group in 2005. Moreover, the median real income of these taxpayers declined over the study period.
    - The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
    - Economic growth resulted in rising incomes for most taxpayers over the study period:
    - Median real incomes of all taxpayers increased by 24 percent after adjusting for inflation;
    - Real incomes of two-thirds of all taxpayers increased over this period; and
    - Median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the high income groups.”

    I don’t have the figures at hand but this, or a similar study, showed that during this 10 year period income levels in all quintiles EXCEPT the top 20% rose significantly, most especially in the bottom quintile, while the richest quintile average declined.

    We would appreciate a refutation of the above study, which tracked the SAME individuals over time. After all, mobiity involves real people, not the phantom creature known as “medians” and “Ginis.” Thus, please compare apples with apples, not apples with river rocks.
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    Fabius Maximus replies: Thank you for posting this! However, you do not understand how this site works. From the About page: “Here we seek a perspective from which to better see events and trends — things on the edge of our available information, on the edge of known theory.”

    This site posts experts’ work, often on both sides of important debates. Sometimes material with which I disagree. Sometimes I comment on the material, and more rarely give my own analysis — on the few areas where I have sufficient background — or at least hope I do.

    Knowing zip about this debate, I will just watch and post material of interest.

    The OECD study (yes, it is a real study, even if you do not share these experts’ conclusions) disagrees with the US Treasury study (please provide a link, a normal courtesy on this site). That’s typical for cutting edge research. Eventually we will learn which postion is more accurate.

    Like

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