Thursday, December 1, 2011

This is How They Lie to You: Paul Ryan Edition Pt. 3

Sorry about the long delay getting this post up.  The holidays took up more time than I expected and I had some projects that needed to get done that were somewhat higher priority than the blog.  Hopefully I'll be able to push through the analysis of this report over the next few days so I can move onto other topics.  Even though I'm now discussing a report that has sunk beneath the headlines for more than a week, I still believe a detailed analysis of it is useful, perhaps even necessary.

To continue from where I left off,
In attempting to draw conclusions from the CBO study, particularly in terms of how it might inform policy prescriptions, it is useful to contextualize the analysis, acknowledging the limitations that the CBO placed on the scope of its study, as well as alternative interpretations of similar data. Recent commentary on this issue 0ften draws sharply divergent conclusions based upon legitimate differences regarding how to frame the challenge. Proper context can help advance a more informed debate on how society can best secure the natural rights of all citizens to freely pursue their happiness.
 Love the sentiments, however, I feel that Ryan obscures the context rather than casts light on it.  This sham reasonableness is a characteristic of some of the most reactionary writing of our time, such as the widely discredited Losing Ground and The Bell Curve by Charles Murray.  It's easy to convince people of good intention by stating it, repeatedly, even if the data presented shows extremely biased analysis.  That's the problem with technical language, it strips away the verbal cues we usually use to assess the honesty/dishonesty of an argument making us suckers for charts, graphs, and arguments presented reasonably, even when the argument being made is far from reasonable.

So let me explain why this argument is unreasonable.

The CBO took static snapshots of the income distribution at two different points in time, in this case 1979 and 2007. In examining these snapshots, it is clear that real income has grown significantly more for those at the upper end of the distribution than for those at the lower end over the past 30 years.

Yet the CBO concedes that the dynamism of the American economy is not properly captured by this analytical approach. It is not the case that individual households remained fixed in the income distribution over this period. The CBO readily points this out: The study “does not reflect the experience of particular households. Individual households may have moved up or down the income scale if their income rose or fell more than the average for their initial group.”

This is an important distinction, as considerable empirical evidence has made clear that there is a significant amount of movement across income quintiles over time – in other words, there is a lot of income mobility in the U.S. economy. A person working his or her way through college in a relatively low-paying job in year one, for instance, may have climbed into a much higher earnings level by year five. Comparing the low-income point in year one with that same low-income point in year five does not speak to this particular individual’s experience, because the individual has moved up over that time. As the Federal Reserve Bank of St. Louis puts it, since “incomes are not constant over time, the same households do not necessarily remain in the same income quintiles. Thus, comparing income quintiles from different years is a proverbial apples-to-oranges comparison because the households compared are at different stages in their earnings profile.”2
This point doesn't deserve much discussion.  It's obvious that a poor college kid at one point in time might be a rich hedge-fund employee five years later.  The way this is presented it sounds really useless, the snapshot doesn't capture any dynamism because a poor household one year might be next year's rich household.

But, while there is a grain of truth here I'll get to in a bit, this is ultimately deceptive.  While an individual household may progress that's largely irrelevant, this year's college graduate is replaced by a next year's freshman.  While individual households will move, they have always done so.  If every poor person were a college Freshman, I would agree there is no problem.  But this simply isn't the case, there are a lot of poor 30 somethings as well, more than there are college Freshman that are going to be bankers after they graduate.

Of course, there is a grain of truth.  The age distribution has shifted and this has contributed to income inequality to some degree.  This portion we shouldn't worry about, but it's not that big a piece of the puzzle.  Here is an animation of changes in the age distribution since 1950 (this is from Calculated Risk and goes out till 2050 since it was created for a completely different purpose, but since health care is the usual reason people make these graphs it's too time consuming to find one made specifically for my purpose here that wouldn't include the extra years).  What is deceptive here is that the Commission makes a big deal out of this factor while it's a small contributor.  Also, it needs to be noted that other countries have faced far greater changes in their age distribution than the US (Japan comes to mind) without comparable increases in inequality.  While a legitimate piece of the puzzle, it's a really small one not worth the wordcount given to it in the Commission's report.

While household income mobility is high in the United States, other studies have attempted to gauge economic mobility by looking at a different measurement. Rather than looking at the movement of individuals or households over time, these studies measure the likelihood that a child will do better than his or her parents and then compare these statistics among developed countries. According to one such study by the Economic Mobility Project, by this measurement, economic mobility is higher in other developed nations than it is in the United States.
Lets look at what a more academic paper has to say on this (Beller and Hout 2006)*:

Although the United States occupies a middle ground in international comparisons of occupational mobility, its ranking in terms of income mobility is lower. Both the United States and Great Britain have significantly less economic mobility than Canada, Finland, Sweden, Norway, and possibly Germany; and the United States may be a less economically mobile society than Great Britain. Much of the higher intergenerational elasticity in the United States is due to greater income immobility at the top and bottom of the earnings distribution; the mobility of middle earners looks more similar to that in the other countries.

Eh, I'm out of time to work on this today.  Will pick this topic up tomorrow.

*Beller, Emily and Hout, Michael. Intergenerational Social Mobility: The United States in Comparative Perspective.   The Future of Children. Vol. 16. No.2 2006.

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