Thursday, December 5, 2013

Inequality, upward mobility, and fairy tales

Yesterday, the President spoke at length on the subject of the economy in general, and on income inequality and upward mobility in particular. He told some stories about U.S. history, detailed how the federal government had saved people time and again from the robber barons of the past, from the evils of the world, from themselves even. He bragged again on how successful his administration has been at creating jobs, at creating economic growth, and went on and one about the issue of education and the various initiatives on the table in that regard. Oh, and he also repeated his cock-and-bull defense of Obamacare, how it's a "market based" solution to the problem of healthcare (even though it's not actually about healthcare, at all).

All in all, President Obama provided a great deal of meat in this speech that one--like me--might take issue with, might endeavor to expose as the nonsense that it is. But I'd like to focus on one passage of the remarks, a portion about the idea of social mobility and how--supposedly--we have a problem in this regard:
The problem is that alongside increased inequality, we’ve seen diminished levels of upward mobility in recent years. A child born in the top 20 percent has about a 2-in-3 chance of staying at or near the top. A child born into the bottom 20 percent has a less than 1-in-20 shot at making it to the top. He’s 10 times likelier to stay where he is. In fact, statistics show not only that our levels of income inequality rank near countries like Jamaica and Argentina, but that it is harder today for a child born here in America to improve her station in life than it is for children in most of our wealthy allies -- countries like Canada or Germany or France. They have greater mobility than we do, not less.
I don't know where Obama got these figures, I don't know if they are accurate, but let's just assume that they are. Because guess what? They're not all that surprising or unusual. And despite Obama's claims, there's no evidence that the above numbers represent a drastic change from the past, at all.

Why, one might ask, are these numbers not surprising, why are they not unusual? Well, to understand the realities here, one must first set aside politics and ideology and think about what is really being measured and observed: change over time from the bottom 20% of the "income ladder" as opposed to the top 20%. And one must also understand the assumptions built in here: that the goal in life--for everyone, apparently--is to either stay in the top 20% or work one's way into it.

It's at this point that reality provides a smackdown. Note that the "bottom 20%" and the "top 20%" will always exist in full. No matter what the government does, no matter what we--as individuals or communities--do, there will never be, there can never be absolute equality of income (or of wealth). Lines can always be drawn, establishing the different quintiles (a quintile is 20% of the whole; there are always five in total). Thus, some 20% of the population will be the bottom 20%, while some other 20% will be the top 20%, with respect to income, at any given moment in time. Why am I harping on this? Because understand that for every person or household moving out of the bottom 20%, another person or household must move into it to maintain the ratios. If all of the members (or children of the members) of the current bottom 20% were to somehow increase their incomes and jump up to a higher quintile, there would still be a bottom 20%, an entirely new group in such a case, but a bottom 20%, regardless.

This is no less true of the top 20%. For every person or household that moves into it, another person or household must drop out of it. Thus, the issue of social mobility is very much a two-way street: one cannot go up without someone else going down (and vice-versa). Politicians, pundits, and academics talk about social mobility as if it were exactly what it is not, as if greater social mobility could somehow increase the size of the upper quintiles, while decreasing the size of the lower ones. 'Tis nonsense, utter nonsense. Yet, this view serves as a basis for policy, for a world-view wherein income inequality can somehow be abolished or at least severely curtailed.

Obama cites other nations who have more social mobility than the United States and takes it as a given that such a situation is automatically a good thing. But is it? Here is a study from the Economic Mobility Project (that may very well be the source of Obama's claims). It does indeed show that in the Unites States (and in the UK, by the way) "the relationship between parental socioeconomic advantage and child outcomes is the strongest." But what it doesn't show, what it doesn't even begin to account for are the differences in demographics in these various nations. Social mobility, looked at as an ebb and flow across time, is heavily dependent on life stages, on the breakdown of age groups within society, and on birthrates, as well. Moreover, the business cycle also has a necessary and not easily accounted for impact.

Aside from all of this, note what the apparent ideal is here: maximum social mobility. What would that look like, exactly, a society with "full" social mobility, where every child born in the bottom 20% ends up in the top 20% as a matter of course? Think about it for a while. Try to imagine how such a pattern would play out.

While you do that, I'm going to address one other specific portion of the President's remarks. This portion (my boldface):
The top 10 percent no longer takes in one-third of our income -- it now takes half. Whereas in the past, the average CEO made about 20 to 30 times the income of the average worker, today’s CEO now makes 273 times more. And meanwhile, a family in the top 1 percent has a net worth 288 times higher than the typical family, which is a record for this country.
The part in bold is based on this study from the Economic Policy Institute (a left-leaning think tank). From the study:
Using the same measure of options-realized CEO pay, the CEO-to-worker compensation ratio was 20.1-to-1 in 1965 and 29.0-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 272.9-to-1 in 2012, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.
Note the caveat: options realized. This means that the numbers reflect the value of stocks when CEOs chose to take those options, not when those options were granted. If we look at the numbers from this latter perspective, there's a significant fall-off (because the whole point is for the CEO to increase the value of his options by increasing the value of the company):
Measured with options granted, CEOs earned 18.3 times more than typical workers in 1965 and 26.5 times more in 1978; the ratio grew to 136.8-to-1 in 1995 and peaked at 411.3-to-1 in 2000. In 2012, CEO pay was 202.3 times more than typical worker pay, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.
Instead of a ratio of 273 to 1, it is now 202 to 1, a decrease of  some 26%. But that's still not the whole story. Obama's remarks--and the above bullet points from the EPI--suggest that these numbers are reflective of all CEO's. They're not. The numbers are based only on the CEO pay of the top 350 firms, most of which are financial firms or are huge multi-national corporations. That's a comparison of the salaries of just 350 distinct people to the salaries of  143 million people. We're talking .0000024% of the population. How meaningful is that, really? Might as well just use the single highest paid CEO to make the case. The EPI study indicates this in the beginning, but immediately drops the caveat from then on:
Average CEO compensation was $14.1 million in 2012, using a measure of CEO pay that covers CEOs of the top 350 firms and includes the value of stock options exercised in a given year (“options realized”), up 12.7 percent since 2011 and 37.4 percent since 2009. This is our preferred measure.
I've gone through some of this bait and switch routine previously and explained why it's unfair. But for now, suffice it to say that Obama's statement is simply untrue. It's a bald-faced lie.

But back to the issue of social mobility. So, what would the utopian version of reality--the one with total social mobility--actually look like? Neither skill nor education nor access to money (parents' money) would serve to protect the upper 20%. If you are in that group, your children would not be allowed to remain, no matter what they did. Similarly, a lack of the above would in no way prevent children from the bottom 20% from moving into the top 20%. They'd get a free pass, regardless of skills, intelligence, or anything else.

Consider one profession that lives in the top 20%: surgeons. Right now, it is no easy road to become a surgeon (as hard as it is to become a medical doctor, it's even harder for this particular specialty). While children born to wealthy parents have a serious leg up here, that's not enough as a matter of course. Stupid people, lazy students, are just not going to become surgeons, regardless of their parents' wealth. Why? Because there are just two many impediments to overcome, impediments that can only be met with hard work, intelligence, and skill. Yet if the bottom 20% is guaranteed to move to the top 20% no matter what, what would that do to this profession (and many other similar ones, besides)?

The point is, full social mobility is not a Good Thing (and it could only happen via an absolutist government, regardless). But then, neither is no social mobility, because let's face it there are plenty of people born into the bottom 20% who possess the intelligence and work ethic to "make it big" in many, many fields. And frankly, they do. All of the time. So somewhere--between these two extremes--is an ideal. What that ideal is, we can never know in my opinion. All we can do is try to have a system that provides a fair amount of access to the tools needed to better one's life. Those with resources are always going to use them to benefit their children. That's human nature. So some people will always have an advantage in this respect.

Cheers, all.

1 comment:

  1. Every family in the top 20%! Every child above average on test scores! These are the goals we can achieve if only you'll turn over the reins of power to me.