Economic Mobility Means American Dream Lives

(Ron Knecht) – With Nevada’s Congressional delegates facing votes on President Joe Biden’s proposed income tax increases, questions of wealth and income distribution, tax fairness, economic growth and economic mobility have become central in public debate.

This column focuses on literature and empirical studies on economic mobility, showing there is still substantial economic mobility from generation to generation and within almost all individuals’ lives.  It is not true, as so often claimed, that the rich reap all the gains from economic growth and the poor get left in the mud.

Three recent columns posted on the web site of the Nevada Policy Research Institute (NPRI; NevadaPolicy.org) address tax fairness and income and wealth distribution in the U.S.  They show inequality has not increased over recent decades and American income taxes have become ever more progressive in this century, including with the 2017 Trump tax reforms.

Together with a forthcoming column on the impacts of income tax increases on economic growth and a final synthesis of the five columns, these articles provide a sound economic and policy basis for deciding on the proposed tax increases.  In short, America will build back better by rejecting them.

Daniel J. Mitchell is an economist specializing in fiscal policy, particularly tax reform and the burden of government spending.  November 26, 2018, he summarized the mobility literature in “Income Mobility Data Show America Still Very Much the Land of Opportunity,” published by the Foundation for Economic Education.

He begins, “I generally don’t write much about the distribution of income …, largely because that feeds the false notion that the economy is a fixed pie and that politicians should have the power to re-slice it if they think incomes aren’t sufficiently equal.  I think growth is far more important, especially for poor people …”

Economist Robert J. Samuelson wrote “The myth of stagnant incomes” in the Washington Post November 18, 2018.  He cited research by the Congressional Budget Office (CBO) that he called “arguably the most comprehensive tabulation of Americans’ incomes.”  It showed, “most Americans had experienced clear-cut income gains since the early 1980s.”

He noted the CBO study showed the lowest- and highest-income fifths of Americans enjoyed real income gains of about 80 percent in 1979-2015.  The other three-fifths experienced 50 percent income gains.  These gains, especially for the poor, occurred after the turn of the century, as well as before it.  The CBO data include after-tax incomes, government transfer payments (such as Medicare, food stamps, etc.), and employer-paid health insurance, as is correct.

An October 23, 2017 Economic Letter from the Federal Reserve Board of San Francisco, “Missing the Growth from Creative Destruction,” explains a systemic problem in most inequality studies also noted in two of the three papers posted at NPRI.  Namely, they rely on “cross-section,” not “panel” data.  Thus, they compare the experiences of different groups of people at the beginning and end years, instead of the actual differences for a single group of real people over the period.

Even studies by famed economist Raj Chetty are subject to this weakness.  When this methodological error is corrected, income and wealth disparities and alleged trends of increases in disparities over time disappear.

In the October 23, 2018 paper “Do the Rich Get All the Gains from Economic Growth?” Professor Russ Roberts makes the same point about panel studies reflecting the actual experience of real people versus disparate groups at different times.

Data from Professor Mark Rank in an April 18, 2014 New York Times column showed 12 percent of people found themselves in the top income one percent at least once in 35 years.  Likewise, 39 percent in at least one year in the top five percent; 56 percent in the top ten percent at least one year; and 73 percent in the top 20 percent at least one year.

U.S. economic mobility is great and America is indeed the land of opportunity.