Friday, December 2, 2011

This is How They Lie to You: Paul Ryan Edition Pt. 4

First, thing I'd like to mention is that I skipped substantial parts of page three of Ryan's report that I think are deceptive. This is because it is addressed more fully under the section "The Impact of Government Policy on Inequality." Rather than addressing the same facts twice I will address it all at once.

The second thing I want to bring up before moving forward are some of the implications of the change of age distribution on inequality. As I had said before, this is largely irrelevant to the inequality discussion since there should be a more or less constant number of households at various points in the income distribution meaning that the movement up or down of individual households is irrelevant to aggregate changes in income inequality (meaning that we should expect roughly proportional numbers of people to be at each stage of the life cycle during any given snapshot so increases/decreases in inequality indicate that something is happening aside from normal life cycle changes since we expect the distribution of individuals at each stage of the life cycle to be roughly constant). Now, since these proportions are not precisely similar over time, largely due to the boomers, some portion of the increase in inequality is due to this (it needs to be noted however, that the demographic shift has been larger in most other countries so the relative portion of change in inequality due to demographic shifts should be lower than the US than in other developed nations, though non-zero).

Think about this for a minute, however. The argument is that a larger portion of individuals in the US is at a later stage of the life cycle and thus wealthier. As people age, they have higher assets and income making comparisons between the top and bottom quintiles more uneven since a greater portion of the top quintile will be older (this says nothing about the 1% however, far more than 1% of the population has always been in their top earning years so this segment shouldn't change). Fair enough, but shouldn't this also mean that the median income earner should be older and closer to their peak income years?

Here's an implication of Ryan's suggestion that is not properly put into context. He addresses the fact that part of the explanation for increased income inequality is age, however, this argument necessarily implies that part of the growth in median incomes is due to age since the median income earner is closer to their peak income years. I couldn't find data for the years in questions with a quick search, this particular data I've never needed before, but what I did find with a quick look is that between 1990 and 2000 median age increased from 32.9 years to 35.3 and to 36.9 years today. The already dismal growth rate in median income for the period from 1979 to 2007 appears even worse when you take into account that, just as the increase in income inequality is in some small part due to shifting demographics, the growth of median income is in some small part due to shifting demographics as well.*

So, to pick up where I left off on page 4. A substantial part of Ryan's report is based on how government has exacerbated the situation, so lets take a brief look at: "Canada, Finland, Sweden, Norway, and possibly Germany"

First of all, I'll point you to page 6 of Blanden, Gregg, and Machin.  They provide a summary chart, for the countries mentioned above, the intergenerational partial correlation (basically a number expressing how strongly an individual's income is correlated with their parent's income, a 1 would be perfect immobility and a 0 no relation) shows these countries as varying between .139 for Norway and .171 for Germany.  Britain scores a .271 and the US .289 (to provide full context, this is a study centered on Britain and they claim that part of the discrepancy in the US is due to the increased returns to education in the US relative to Britain while Britain has more disparate education outcomes than the US based on income).

It should also be noted that Beller and Hout find the US to be at the median in terms of economic opportunity according to new research (which does not give quite the same set as what I mentioned last post, I will not attempt to make a call on whether the newest research is superior, especially since the results are only marginally different).  They find Sweden, Canada, and Norway to have higher mobility and West Germany, Ireland, and Portugal to be more rigid.  Ryan makes much of the government role and the need to reduce taxes and expenditure, a brief look at the data indicates there doesn't seem to be a strong pattern.  It is notable however, that all of the more mobile countries are relatively big spenders, with the immobile ones tending to be small spenders and taxers (Portugal eventually has higher spending, but for most years it is relatively low, it stands to reason that the impacts of expenditure on mobility take time and have long lags so this may not indicate much of anything, I may post a chart later to illustrate this, for now, you can create your own chart easily enough by searching for OECD national accounts at a glance and selecting the relevant countries, years, and statistics, in this case government revenue and expenditure).

In addition to these international comparisons Beller and Hout also find that in the United States 45% of those born into the poorest quintile stay there, 55% of those in the top quintile stay there.  I don't have much to compare this with, but Blanden, Gregg, and Machin find that for Britain, 37% of the poorest quartile stay there and 40% of the highest quartile stay there.  It should be noted that Britain and the US have similar overall mobilities, it may be that the compression into quartiles alters this data but it adds some context to realize there are some indications of particular immobility at the top and bottom in the US.

So now that we have some context on the international data, lets see what Ryan has to say:

However, in a recent article for National Review, the Brookings Institution’s Scott Winship – a former research manager for the Economic Mobility Project – explained that the problem illustrated by these studies is not a lack of mobility between middle- and upper-income groups in America. Rather, it is mobility from the very bottom up – especially for young men – where the United States lags behind. A variety of factors associated with entrenched poverty reduce mobility for this income group. Winship writes that children of unwed mothers, for example, are less likely to escape from the bottom of the income distribution than other children. Winship’s analysis details the tragedy of broken families and minority groups that are disproportionately remaining at the bottom of national income distribution. “Simply put, two-thirds of black children experience a level of neighborhood poverty growing up that just 6 percent of white children will ever see,” Winship writes.

This analysis shines light on a particularly vexing problem for those policymakers who wish to improve upward mobility in the United States. But it also highlights another limitation in the CBO’s study – by failing to distinguish between mobility and inequality, policies aimed at the latter can impair the former. Redistributive welfare programs can impede upward mobility by creating dependency, yet welfare reforms that reduce dependency and promote work appear in the CBO’s analysis as zero-sum deductions from government efforts to reduce income inequality (see “Welfare reform” below). Omitting the incentives to work that were built into the successful welfare reforms of the 1990s results in an analysis that fails to capture how such reforms actually affected mobility.

Income mobility is important because it implies that longer-term income, or “lifetime income,” is more equal than what is observed in annual snapshots. Studies that rely on “snapshot income” and ignore income mobility can give an incomplete picture of trends in inequality.
 Lets start by looking at Winship's actual article.  First of all, Winship casts considerable doubts on the rosy picture created by Ryan regarding the mobility of households over time.  Winship states, regarding the poorest quintile "On first reflection, it may seem impressive that 60 percent of those starting out in the bottom make it out. But most of them do not make it far out. Only a third make it to the top three fifths."  Furthermore, he points out that a child in the lowest quintile has only a 17% chance of making it into the top two fifths of the distribution by the time they're 40, while a child born into the top two fifths has a 60% chance of staying there.

More to the point, Winship also states that "Increasing upward relative mobility from the bottom is also likely to foster growth-enhancing competition. The diminished threat of downward mobility among those born to advantage threatens to sow the seeds of complacency."  "But practices such as legacy admissions to Ivy League schools clearly allow some advantaged children to coast in ways that sap economic growth."  He then goes on to say, "Where to look to encourage more upward relative mobility? Begin with the fact that just 16 percent of those who start at the bottom but graduate from college remain stuck at the bottom, compared with 45 percent of those who fail to get a college degree."  In addition, he mentions the divorce rate, unplanned pregnancies, and the differences in ethnic experiences quoted by Ryan.

No where is there any mention of dependency created by government spending.  There is an excellent reason for this, there is no evidence whatsoever that government spending creates dependency.  It is of course true that some people are dependent on government benefits, it does not however follow that these people would work if not for government benefits.  I will address this more fully when Ryan sets out to analyze welfare, which I find to be one of the most deceptive parts of his supposed analysis.  It is a deceptive move by Ryan to attempt to distinguish between mobility and inequality in this context, inequality increases the impact that mobility has on life chances.

There is considerable support, though by no means consensus, that inequality becomes a self-fulfilling process the widening gulf between life-styles and opportunities presented to the poor and the wealthy makes both wealth and poverty more persistent reducing mobility and increasing inequality.  These two concepts, while distinguishable, are causally related to each other in a feedback loop.  While the CBO's study could be improved by analyzing the concepts more fully and exploring their relationship, Ryan's attempt to present them as fully distinguishable concepts is a rather transparent attempt to ignore a fairly large literature regarding this in order to make his favored policies look more viable.

It is also necessary to point out a piece of flawed logic.

Income mobility is important because it implies that longer-term income, or “lifetime income,” is more equal than what is observed in annual snapshots. Studies that rely on “snapshot income” and ignore income mobility can give an incomplete picture of trends in inequality.
 The italicized portion is true.  The bolded portion is false.

Think about it for a minute.  Trend is defined as: A general direction in which something is developing or changing.

Now think about it some more.  It is true that because even someone in the top decile is likely to have spent some time in a lower decile before moving up while relatively fewer individuals will have started in the top decile and moved down that snapshot inequality overstates lifetime inequality.  There is more upward than downward mobility over the lifecycle.

However, this does not explain changes (or trends) in inequality relative to other states except as a function of demographics (which as I pointed earlier reduces the magnitude of inequality while overstating real growth over the life cycle given the current US demographics).  For the population as a whole, there should be no trend as a result of life cycle changes, people moving from one category to another are matched by new entries/exits.  Since the overstatement in inequality would be the same in both periods if there was no change except for the life cycles changes there should be no trend.  However, we observe a very large trend that takes of starting in the 1980s (it's a real pity that the CBO didn't provide an analysis of a longer period).  Now, demographics could explain a portion of that trend, but why did inequality increase so much more in the US than elsewhere?  Particularly inequality regarding the top 1% of the distribution.

We can assume either incompetence or deliberate deception with this logic error.  I feel that Ryan is clearly trying to dismiss inequality concerns and is throwing everything he can at the wall in hope something sticks.  What he is not doing is providing real context or analysis, he is simply cherry picking data to make his point and isn't even being very careful to vet it.  More tomorrow.  Since I'm trying to provide real research and context this is taking some time, I could perhaps be more selective but I think it's worth drawing out just how flawed Ryan's critique is.

*It should also be noted that overall economic growth for the 80s, 90s, and first part of the 2000s is also attributable to changing demographics.  From Lindh, and Malmberg 1999:  "The growth patterns of GDP per worker in the OECD countries are to a large extent explained by age structure changes.  The 50-64 age group has a positive influence, and the group above 65 contributes negatively, while younger age groups have ambiguous effects."  This makes the relatively slow growth in median incomes in the US compared to Europe, and the skew of growth towards the top of the distribution, particularly troubling.  Europe is aging faster than we are, to the extent that income distribution should be skewed by aging they should be in advance of us.  Barring changes, this means things should get worse in income inequality matters.  It also indicates that growth in the US between the 80s and early 2000s is partially demographic driven, Ryan will later attempt to attribute US economic expansion to policy shifts without acknowledging that country specific demographic factors have been fairly conclusively shown to be a contributing factor (the fact that the expansion he alludes to is not particularly large will be addressed separately).

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

Blanden, Jo, Gregg, Paul, and Machin, Stephen.  "Intergenerational Mobility in Europe and North America." Centre for Economic Performance.  2005.

Lindh, Thomas and Malmberg, Bo.  "Age Structure Effects and Growth in the OECD, 1950 - 1990."  Journal of Population Economics.  Vol. 12. No. 3. 1999. pp. 431 - 449. (sorry no link)

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