Economic mobility

Beyond income inequality, another common criticism leveled at the US economy is its alleged lack of economic mobility -- basically the ability to move between economic classes. Writing in today's New York Times, reporter Jason DeParle (author of an excellent book on welfare reform) notes that economic mobility in the US is actually less than that of many other developed countries: 

Benjamin Franklin did it. Henry Ford did it. And American life is built on the faith that others can do it, too: rise from humble origins to economic heights. “Movin’ on up,” George Jefferson-style, is not only a sitcom song but a civil religion.

But many researchers have reached a conclusion that turns conventional wisdom on its head: Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. The mobility gap has been widely discussed in academic circles, but a sour season of mass unemployment and street protests has moved the discussion toward center stage.

...“It’s becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries,” said Isabel V. Sawhill, an economist at the Brookings Institution. “I don’t think you’ll find too many people who will argue with that.”

...John Bridgeland, a former aide to President George W. Bush who helped start Opportunity Nation, an effort to seek policy solutions, said he was “shocked” by the international comparisons. “Republicans will not feel compelled to talk about income inequality,” Mr. Bridgeland said. “But they will feel a need to talk about a lack of mobility — a lack of access to the American Dream.”

So is the ideal of lifting oneself out of poverty by the bootstraps every bit as fictional as the characters in Horatio Alger's books? Is the American dream actually be found in Belgium? Not really. Upon closer scrutiny the economic mobility argument is revealed as another example of lies, damned lies and statistics. 

Consider the example of a village with five inhabitants. One makes $50,000 per year, another makes $50,001, another $50,002, another $50,003 and the last $50,004. They are neatly divided into quintiles, call them poor, lower middle class, middle middle class, upper middle class and rich. With a mere $5 raise, the person making $50,000 leapfrogs his neighbors into the ranks of the rich -- amazing economic mobility! What's more, the person making $50,001 has been knocked down a peg and is now the poor man in town, even though he has suffered no decline in income. 

This is, of course, an extreme example meant to illustrate a point: the closer the rungs of the economic ladder are together, the more easy it is to achieve mobility. Now imagine this principle applied to the US. If one believes the US is truly the land of opportunity, with the sky the limit as to what someone can achieve if they work hard and make full use of their talents, then it should also follow that to enter the ranks of the rich will not require $50,005 as in our example, but considerably more. If someone can literally become a billionaire such as Steve Jobs or Bill Gates, that will necessarily make entering the upper crust a far more difficult proposition than in our village. 

Imagine a second example, with another village in which the five inhabitants have incomes of $50,000, $60,000, $70,000, $80,000 and $90,000. Let us suppose that the person making $50,000 receives a raise of not $5, but $5,000. Not only is he not rich after the raise, he's still on the bottom rung with zero economic mobility! Is this such a bad thing? Which village is really better off?

This problem with the economic mobility argument is only identified more than halfway through the article:

The income compression in rival countries may also make them seem more mobile. Reihan Salam, a writer for The Daily and National Review Online, has calculated that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000.

With those two sentences the alleged problem of US income mobility vis-à-vis its foreign counterparts is pretty much blown out of the water. Just as with income inequality, the problem with economic mobility is that it is a relative rather than absolute measurement.

The article also notes this:

A Pew study found that 81 percent of Americans have higher incomes than their parents (after accounting for family size). There is no comparable data on other countries.

This, not the relative measurements of income inequality or economic mobility, is what truly matters. And it seems that a good majority of us are doing alright.