Free Enterprise and Social Mobility

At the risk of understatement, our friends on the left are fixated on equality.

If they were talking about equality of opportunity, or equality before the law, that would be great.

Unfortunately, they want equality of outcomes. Which means supporting bigger government, higher taxes, and other policies that are likely to shrink the economic pie.

In a just and sensible society, the goal should instead be upward mobility so that everyone can get richer.

That means enacting policies that expand the economic pie.

And what are those policies? We can answer that question by looking at a new study by Professors Justin Callais, Vincent Geloso, and Alicia Plemmons. Published by the Archbridge Institute, it investigates whether there is a link between limited government and social mobility.

…an increasing share of debates in economics have centered on the study of inequality… Intricately tied to these debates is the topic of social mobility. …Using the recent data of Chetty et al…on social capital and intergenerational income mobility in the United States at the subnational-level, we…ask…whether a) economic freedom does improve intergenerational mobility in a meaningful way when using higher quality data and; b) whether economic freedom complements or substitutes the different types of social capital.

Here’s what they found.

…we find that a) economic freedom (both in aggregate form and its components) is tied to greater absolute and relative mobility; b) we find that it has no association with the racial gap in mobility; c) we find that the effect of economic freedom generally outweighs that of inequality; d) the effect of economic freedom matches those of “bridging” social capital and overpowers that of other forms of social capital. …Table 2 regresses the four economic freedom measures against absolute, relative, and gap mobility. Note, each cell within the table represents a separate regression of one measure of economic freedom against one measure of economic mobility, which results in twelve separate regressions. …we find that (low levels) of government spending and high values of labor market freedom are highly correlated with increases in both absolute and relative mobility.

Here is the aforementioned Table 2 for data geeks.

Looking at the conclusion of the study, here are some key takeaways.

While the literature is already clear on the fact that economic freedom increases incomes, this study is the first within the United States to show that the effect of economic freedom helps those at the bottom more relative to those at the top. …Policymakers should seriously consider laxer government regulations in the labor market, as well as lowering taxes and government spending as a way to positively impact those who wish to move up the income ladder.

Sounds like a familiar recipe.

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Economic Freedom and “Positive Liberty”

Back in May, as part of a discussion about the tradeoff between free markets (efficiency) and redistribution (equity), I put together a chart to show how poor people are better off in the long run if policy makers focus on the former rather than the latter.

I made sure to assume that pro-market policies would generate only a small increase in growth.

However, thanks to “the miracle of compounding growth,” even that tiny increase results in the poor being better off when compared to a world with less growth and more redistribution.

But I was just providing a theoretical example, and it would be easy to change some assumptions to show that the poor would have better lives (as measured by consumption levels) with bigger government.

Fortunately, there’s a new study, authored by Justin Callais of Texas Tech University and Vincent Geloso of George Mason University, that looks at hard data to see which approach is best for poor people.

Here’s a description of their methodological approach, which uses the positive liberty vs negative liberty construct.

While it is true that economic freedom speaks directly to negative liberty, it also speaks indirectly to positive liberty because of its well–documented effects on economic growth, health outcomes and education. …We build on these works by using a rich dataset of estimates of income mobility of people born in the 1980s. …the dataset employed includes a larger number of poor and rich countries. Combining these data with those of the Fraser Institute’s Economic Freedom of the World (henceforth EFW) index, we try to measure its indirect effect (through growth and income levels) on intergenerational income mobility in a horse race with income inequality.

For all intents and purposes, they want to see which effect dominates in this flowchart.

And here’s the way they describe the chart.

…the true effect of economic freedom on intergenerational mobility is 𝛽1 + 𝛼1𝛽2. As long as 𝛽1 + 𝛼1𝛽2 > β3, economic freedom’s effects outweigh those of income inequality on positive liberty (as intergenerational income mobility is a stand–in for positive liberty).

So what did they find?

We find that economic freedom has both a direct and indirect effect on intergenerational income mobility. More importantly, those effects are more important than those of income inequality. We argue that our results militate for the claim that good institutions matter more to securing positive liberty than income redistribution does. …we find that the lifetime institutional environment is a strong predictor of incomes today. The indirect effect of economic freedom (through income levels) on mobility is again strong and negatively correlated (indicated greater income mobility). …economic freedom has both a direct and indirect effect on intergenerational income mobility. …Economic freedom provides the legal right to engage in commerce, but through economic freedom’s impact on income, the institutional environment speaks to increasing the practical and realistic choice sets of people to better their situation.

The bottom line is that the poor are better off with economic freedom (i.e., negative liberty). Free markets lead to more upward mobility and higher living standards.

So if you want less poverty, push for more capitalism.

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Economic Freedom and Income Mobility

Writing last week about the new edition of Economic Freedom of the World, I largely focused on the jurisdictions that got high scores (Hong Kong, Singapore, and New Zealand) and countries that got low scores (Venezuela in last place, of course).

But I also included a chart showing that higher levels of economic liberty are correlated with higher levels of income.

That’s hardly a surprise for anyone who’s compared North Korea and South Korea. Or West Germany and East Germany.

But what about income mobility? Do free markets give low-income people an opportunity to climb the economic ladder?

Some new research from Vincent Geloso of George Mason University and James Dean of West Virginia University answers that question.

Here’s the abstract from their study.

Economic freedom is robustly associated with income growth, but does this association extend to the poorest in a society? In this paper, we employ Canada’s longitudinal cohorts of income mobility between 1982 and 2018 to answer this question. We find that economic freedom, as measured by the Fraser Institute’s Economic Freedom of North America (EFNA) index, is positively associated with multiple measures of income mobility for people in the lowest income deciles, including a) absolute income gain; b) the percentage of people with rising income; and c) average decile mobility. For the overall population, economic freedom has weaker effects.

And here’s the part of the study that I found most interesting.

We learn that labor market freedom is most important.

When focusing on the bottom decile’s average decile mobility (see table 5), we must note this variable only measures upward decile mobility, as those in the poorest decile cannot move down a decile and the upper decile can only move down or stay put. As a result, the effect of economic freedom is likely somewhat understated because of these mathematical boundaries. Nevertheless, we see that greater economic freedom increases the lowest decile’s upward decile mobility. In essence, higher amounts of economic freedom improve the relative gains of those at the bottom of the distribution, allowing them to move to higher deciles. Here, again, we see that the labor market freedom component is key for the nation’s poorest, such that an additional point of labor market freedom allows those beginning in the poorest decile to move up an additional 0.145 deciles… To put that number into perspective, using the differences in economic freedom between Quebec and Alberta (i.e. the lowest and highest economic freedom units in our data) is again useful. The greater labor market freedom of Alberta entails that the poorest Albertans have 0.44 extra deciles of mobility on average than the poorest Quebeckers.

Wonky readers may enjoy the aforementioned Table 5.

The bottom line is that free markets and limited government are the recipe to help poor people climb the economic ladder, not class warfare and redistribution (as I explained here, here, here, and here).

It’s much better to focus on how to make poor people rich rather than trying to make rich people poor.

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Americans Are Getting Richer, but the Relevant Question is “How Quickly?”

Our friends on the left believe (or at least claim to believe) that the United States is an unfair nation because the rich get richer and the poor get poorer.

More specifically, they assert that the economy is a fixed pie and that when people like Bill Gates and Jeff Bezos become rich, then there is less prosperity for everyone else.

This is grotesquely inaccurate, as I explained earlier this year.

We have a great opportunity to revisit this issue because the Census Bureau just released its annual report on Income and Poverty in the United States. I went to Table A2 and created this chart to show how inflation-adjusted income has increased over time for the average household.

In other words, families are earning more, no matter how we measure the average (“median” is the household in the middle and “mean” is the average of all households).

By the way, when you break down the data by quintiles, as I did back in 2018, you find that a big overlap in the economic well-being of all income groups.

Simply stated, we rise and fall together based on the health of the overall economy. That’s true for the poor, true for the rich, and true for the middle class.

Which is why growth is so important, especially for the least fortunate.

But it’s not simply about growth. It’s also about people’s decisions.

Mark Perry, an invaluable scholar at the American Enterprise Institute, crunched the data from the Census Bureau’s report and here are some of his key findings.

On average, there are five times more income earners per household in the top income quintile households (2.0) than earners per household in the lowest-income households (0.40). …the average number of earners per household increases for each higher income quintile, demonstrating that one of the main factors in explaining differences in income among US households is the number of earners per household. …More than six out of every ten American households (64.7%) in the bottom fifth of households by income had no earners in 2020. …more evidence of the strong relationship between average household income and income earners per household. …the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g., staying in school and graduating from high school and college, getting and staying married, working full-time, etc.), which means that individuals and households are not destined to remain in a single-member, low-income quintile forever.

The bottom line is that income is correlated with work, which is hardly a surprise.

But it also is correlated with other choices such as marriage and graduation, as the great Walter Williams sagely observed.

Let’s wrap up looking at some additional data from Mark Perry.

Our left-leaning friends routinely assert that the middle class is shrinking.

It turns out that they’re right, but not because people are becoming poor.

Instead, more and more households are earning above $100,000.

The moral of the story is that free enterprise delivers great results, assuming that politicians don’t smother it with excessive taxes, spending, regulation, and intervention.

And if we want faster growth, we need smaller government.

P.S. We can learn a very important lesson about the effect of big government by comparing living standards in the United States and other developed nations.

P.P.S. For those who want to learn more about income mobility, I strongly recommend this video from Russ Roberts.

P.P.P.S. This data on global income also shows that the economy is not a fixed pie.

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Does Trump Deserve Credit for Strong 2019 Economic Data?

Regular readers know that I give Trump mixed grades on economic policy.

He gets good marks on issues such as taxes and regulation, but bad marks in other areas, most notably spending and trade.

Which is why I’ve sometimes asserted that there has been only a small improvement in the economy’s performance under Trump compared to Obama.

But I may have to revisit that viewpoint. The Census Bureau released its annual report yesterday on Income and Poverty in the United States. The numbers for 2019 were spectacularly good, with the White House taking a big victory lap.

Here are the three charts that merit special attention.

First, we have the numbers on inflation-adjusted median household income. You can see big jumps for all demographic groups.

Next, here’s a look at whether Americans are getting richer or poorer over time.

As you can from this chart, an ever-larger share are earning high incomes (a point I made last month, but this new data is even better).

Last but not least, here’s the data on the poverty rate.

Once again, remarkably good numbers, with all demographic groups enjoying big improvements.

We’ll see some bad news, of course, when the 2020 data is released at this point next year. But that’s the result of coronavirus.

So let’s focus on whether Trump deserves credit for 2019, especially since I got several emails yesterday from Trump supporters asking whether I’m willing to reassess my views on his policies.

At the risk of sounding petulant, my answer is no. I don’t care how good the data looks in any particular year. Excessive government spending is never a good idea, and it’s also never a good idea to throw sand in the gears of global trade.

But perhaps we should rethink whether the positive effects of some policies are stronger and more immediate while the negative effects of other policies are weaker and more gradual.

I’ll close with two cautionary notes about “sugar high” economics.

• First, Trump’s fiscal policy of tax cuts and more spending could be viewed as textbook Keynesianism. I definitely don’t think that approach creates more long-run growth, but it can lead to some illusory short-term prosperity as an economy consumes more than it produces.
• Second, I worry that some of last year’s good economic data may have been the result of the Federal Reserve’s easy-money policies. As I’ve previously noted, bubbles always feel good when they’re expanding. They don’t feel so good when they pop.

For what it’s worth, we’re not going to resolve this debate because coronavirus has been a huge, exogenous economic shock.

Though if (or when) the United States ever gets to a tipping point of too much debt, there may be some retroactive regret that Trump (along with Obama and Bush) viewed the federal budget as a party fund.

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The Truth about Income Mobility

In 2018, I shared a video from Professor Russ Roberts (a.k.a., @econtalker) on the economic status of the middle class, followed by a video last year on whether the rich are the only ones earning more income.

Today, we’ll look at his video on household income and mobility.

All of his videos are models of clarity, but nonetheless they require close attention because they are filled with so much useful information.

You’ll learn that some people manipulate numbers to paint a grim picture about economic mobility in America. But when you do honest apples-to-apples comparisons, you’ll see that capitalism is capable of delivering big benefits to ordinary people so long as it has enough breathing room to function.

In other words, we’re getting richer – as I wrote last year.

And, as I pointed out in an interview on CNBC, we should care about growth and opportunity instead of fretting whether some people get richer faster than other people get richer.

I’m writing on this topic today because there’s a new report from the Brookings Institution, authored by Stephen Rose, that looks at income trends. And it’s methodologically sound because it follows the same people over time, thus allowing the all-important apples-to-apples comparisons.

…the PSID panel data follow the experiences of the same respondents year after year. Even from one year to the next, many individuals’ incomes change significantly. This is particularly true at the tails of the distribution: nearly one-third of individuals in the bottom and top income quintiles are there temporarily because of an unexpected positive or negative event (Rose 1994). Multiyear incomes are therefore more equal than single-year incomes. …Piketty and Saez…argue that middle-class incomes have been stagnating. But their cross-sectional approach does not reflect individual experiences because they are comparing “similarly-situated people” and not looking at the experiences of the same individuals over time.

And what does Professor Rose find?

He points out that there are now a lot more “upper middle class” people in America (his data are adjusted for inflation, which is another way of ensuring apples-to-apples comparisons).

…the higher income classes expanded significantly during the first period. Between 1967 and 1981, the upper middle class tripled in size (from 6% to 18%) and the MMC grew by 3 percentage points (from 47% to 50%). Offsetting these gains were a corresponding shrinkage of the lower middle class (LMC) from 31% to 20% and the poor/near-poor (PNP) from 16% to 11%. In the later period (2002 to 2016), the changes were in the same direction, but more modest. The upper middle class (UMC) grew by 4 percentage points, the size of the MMC declined by 3 points, while the shares of the LMC and PNP were largely unchanged. In previous work, I argued that the differences between the UMC and those with lower incomes were the key driver of rising inequality.

Since Brookings is a left-of-center think tank, it’s not a surprise that Rose has a somewhat negative interpretation (“rising inequality”) of this data.

But he’s actually giving us good news.

Robert Samuelson, in his column for the Washington Post, wrote about Professor Rose’s new study and put together a table based on his data.

And I’ve augmented the table with some arrows to call attention to what’s happened in the 50 years between 1967 and 2016. The bottom line that America now has fewer lower-income and middle-income people and a lot more upper-income people.

Perhaps it is true that we have more inequality today than we did in 1967, but only very twisted people (such as those who work for the IMF) would want to erase all the gains we’ve enjoyed since that time.

To be sure, all income groups could do even better with pro-growth policies such as tax reform and spending restraint. And we also could adopt policies that are especially beneficial for the less fortunate, such as school choice and licensing reform.

Sadly, the politicians who rant and rave about inequality are more interested in punishing the rich rather than helping the poor.

P.S. Margaret Thatcher debunked the left’s view of inequality in her farewell remarks to Parliament.

P.P.S. With apologies to Jonathan Swift, here’s David Azerrad’s “modest proposal” to end inequality.

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To Help the Poor, Focus on Poverty Reduction Rather than Inequality

Here’s a simple quiz to determine whether you should support a candidate like Bernie Sanders or Elizabeth Warren: Would you embrace a policy that increased income for poor Americans by 10 percent if it also happened to increase income for rich Americans by 15 percent?

Normal people automatically say yes. After all, they don’t resent rich people and they want lower-income people to enjoy better living standards.

Some of our left-leaning friends (including at the IMF!), however, are so fixated on inequality that they are willing to deprive the poor so long as higher-income people have even larger losses (Margaret Thatcher nailed them on this issue).

Let’s look at some analysis of this issue.

The Wall Street Journal has an editorial that starts by highlighting some good economic news.

…low- and middle-income folks are reaping more economic benefits than during the Obama years. …Worker earnings increased by 3.4% while the poverty rate declined 0.5 percentage points to 11.8%, the lowest level since 2001. Benefit rolls are shrinking as low-income workers earn more. …the number of full-time, year-round workers increased by 2.3 million in 2018, and employment gains were biggest among minority female-led households. The share of workers in female-led households who worked full-time year-round increased by 4.2 percentage points among blacks and 3.6 percentage points among Hispanics. …The jobless rate for black women last month fell to a historic low of 4.4% and neared a nadir for Hispanic women at 4.2%. …The share of households making less than $35,000 in inflation-adjusted dollars has fallen 1.2 percentage points since 2016 while those earning between $50,000 and $150,000 and more than $200,000 have both increased by 0.8 percentage points.

It then makes to all-important point that policy makers should fixate on growth rather than inequality if the goal is to help he less fortunate.

Democrats focus on income inequality… What really matters for a healthy democratic society, however, are economic opportunity and income mobility. …The Obama policy mix, which Democrats want to return to only more so, put a priority on reducing inequality rather than increasing economic growth. But higher taxes, hyper-regulation and income redistribution resulted in slower growth and more inequality during the Obama Presidency. …This is a lesson for the left and those on the big-government right who want to use tax policy and subsidies to redistribute income to reduce inequality. Policies that hurt growth hurt lower-income workers the most.

José Ponce, in a column for FEE, sagely observes that “Gini” numbers can be very misleading because they tell us nothing about a society’s overall prosperity.

…inequality on its own is insufficient for any means of understanding. By definition, it measures the level of income or wealth that a group of people receive or own relative to another group of people within a society. The key word here is relative. That means it provides no information in regards to whether the bottom quintile has a low or high level of income or about the quality of life… For instance, Cuba, with a Gini index of 0.38 and Liberia with 0.32 have much less inequality than the highly-developed Singapore and Hong Kong, with Gini coefficients of 0.45 and 0.53, respectively. Citizens in a poor country with low inequality are equitably poor. …Elaborating on this point, rising inequality may not necessarily be a negative outcome just as declining inequality may not necessarily be positive. A developing society where both the rich and the poor have growing incomes, but the rich are rising faster than the poor, will experience a surge in inequality. However, since both the rich and the poor have increased incomes, everyone is better off than before.

Let’s close with a chart from Mark Perry showing that ever-greater numbers of Americans are climbing the income ladder.

P.S. This data from China is the most powerful and persuasive that I’ve seen on why growth matters far more than inequality.

P.P.S. This bit of satire also illustrates why inequality numbers are grossly misleading.

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The Middle Class in America Is Benefiting from “Almost Capitalism”

The candidates for the 2020 Democratic nomination are competing to offer the most statist agenda, with Crazy Bernie, Elizabeth Sanders, and Kamala Harris being obvious examples.

But let’s not overlook Mayor Pete Buttigieg. He has a moderate demeanor, but he’s been advocating hard-left policies.

And he justifies his class-warfare agenda by arguing against Reaganomics and claiming that incomes have been stagnant since the 1980s.

South Bend Mayor Pete Buttigieg, a 2020 Democratic presidential hopeful, said the governing philosophy of Republicans such as former President Ronald Reagan, who signed across-the-board tax rate cuts to grow the economy, should not be repeated in the future. “What we’ve seen is that the rising tide rose, right? GDP went up. Growth went up. Productivity went up — big numbers went up and most of our boats didn’t budge. For 90 percent of Americans, you start the clock right around the time I’m born. Income didn’t move at all — so lower to middle income, really, almost all of us,” Buttigieg said.

Is this true? Have Americans been on a treadmill?

We can easily answer that question because I was at “FEEcon” this past weekend, an annual conference organized by the Foundation for Economic Education.

There were plenty of great presentations (including, I hope, my remarks on the economics of protectionism).

I was most impressed, however, by Professor Antony Davies, who gave some upbeat remarks about living standards.

Here’s one of his slides, which shows some headlines that echo the pessimistic view of Mayor Pete.

But do those headlines reflect reality?

If we look at cash wages since 1979, it seems that there hasn’t been much growth.

But cash is only part of total compensation.

Professor Davies showed that total compensation is up by a significantly greater amount.

By the way, I don’t think this is unalloyed good news.

A big reason for the difference between cash income and total compensation is that we have an exclusion in the tax code that encourages the over-provision of fringe benefits (which, in turn, contributes to the third-party payer problem).

But I don’t want to digress too much. The key point is that workers have seen healthy increases in compensation, notwithstanding the fact that I wish it was more in the form of wages.

Now let’s look at some more headlines from Davies’ presentation.

According to many news sources, the middle class is in trouble.

Is that true?

Professor Davies goes back to 1970 and (after adjusting for inflation) shows the distribution of households in America by income.

And then he shares the same data for every five-year period since 1970 to show that the middle class has shrunk.

But it shrank because a greater share of the population became rich.

Let’s close with two more slides, both of which look at 100 years of data.

This chart shows take-home pay for three types of workers.

And, more importantly, here’s a chart showing how much those three workers could buy based on hours of work.

As you can see, even a minimum-wage worker is much better off today than an average worker 100 years ago (with the exception of movie tickets).

Since we just looked at long-run data, let’s close today’s column with some short-run numbers.

In a column for the U.K.-based Guardian, Michael Strain of the American Enterprise Institute explains that capitalism currently is delivering some very positive results for ordinary people.

This is a strange time to be debating whether capitalism is broken, at least in the United States. The economy has added jobs every month since October 2010 for a total of over 20m net new payroll jobs. The unemployment rate is below 4%, lower than it has been since 1969. Wage growth is finally accelerating, clocking in at a rate well above 3% a year for typical workers. The workforce participation rate for people ages 25 to 54 has increased by 1.6 percentage points since 2015, wiping out half a decade of decline. There are more job openings than unemployed workers in the US. …So much for a stagnant economy. …Since 2016, weekly earnings for the bottom 10% of full-time workers have grown more than 50% faster than for workers at the median. The unemployment rate for adults without a high school degree is further below its long-term average than the rate for college-educated workers.

By the way, I’m not trying to be a Pollyanna with rose-colored glasses.

We have numerous bad policies that are hindering prosperity. If we reduced the size and scope of Washington, we could enjoy even greater levels of prosperity.

But we shouldn’t make the perfect the enemy of the good. The United States is one of the world’s most market-oriented nations.

This tweet nicely captures the choice we face in the real world. We have “almost capitalism,” which has made the U.S. a rich nation.

Some politicians, such as Mayor Pete and Crazy Bernie, would prefer to move the nation toward “almost socialism.”

They don’t intend (I hope!) to go too far in that direction, but incremental moves in the wrong direction will cause incremental weakening of American prosperity.

And they’re dead wrong on the issue of income growth.

P.S. Many of the Democrats say we should copy the statist policies of various European nations. I wish a journalist would ask them why we should copy the policies of nations that have lower living standards.

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The Politics of Upward Mobility vs. Inequality Fixation

Looking at issues such as mobility, fairness, and inequality, I’ve recently shared excellent videos from Russ Roberts and John Stossel.

I also had an opportunity to discuss these issues yesterday on CNBC.

As you can see, I started with a political observation about the American people being naturally inclined to support growth and upward mobility, which suggests limited appeal for the spiteful agenda of Bernie Sanders, AOC, and the rest of the class-warfare crowd.

I hope I’m right about that, and a quick online search found this bit of somewhat-encouraging polling data from 2014.

Since I’m a bit of a bleeding-heart libertarian, I then took the opportunity to condemn various forms of cronyism (such as the corrupt TARP bailout) that transfer unearned money into the pockets of undeserving rich people.

I suggested that honest people from across the ideological spectrum could – and should – come together to curtail such nauseating policies. That’s the kind of fairness government should promote.

Though I’ll confess I’m not very hopeful. I concluded the discussion by observing that Senator Sanders recently chose to sacrifice the interests of poor children in order to curry favor with the union bosses at the National Education Association.

P.S. As indicated by his question about the desirability of millionaires, the host (Robert Frank) seemed sympathetic to good policy. He also was sufficiently well informed to know about how China’s partial liberalization has lifted hundreds of millions of people out of abject poverty.

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Rich, Poor, and Income Mobility

In the debate over “fairness,” my statist friends mistakenly see the economy as a fixed pie. This leads them to claim that rich people are rich because poor people are poor.

But there’s no data to support this position (other than in kleptocracies such as Venezuela where a ruling socialist elite steals wealth).

So some folks on the left will back down from that extreme claim and instead assert that the rich are the only ones enjoying more prosperity as time goes by.

For evidence, they cite data showing that incomes have been mostly flat over the past 30-40 years for poor people and middle-class people, particularly when compared to the rich.

But there’s a big problem with their data. They look at income levels in some past year and then they compare that data with income levels in a recent year.

But, as I wrote back in 2015, this means they are comparing apples and oranges.

There is considerable income mobility in the United States, which means today’s rich and today’s poor won’t necessarily be tomorrow’s rich and tomorrow’s poor.

I don’t necessarily expect people to automatically believe me. So if you’re one of the skeptics, watch this video from Russ Roberts. It is almost eight minutes and it is filled with rigor and data, but it’s worth watching since it masterfully demonstrates that lower-income and middle-class households actually enjoy larger gains than rich households.

As Russ says, you have to follow the same people over time if you want legitimate analysis.

And he shares lots of data showing that the rich actually have smaller-than-average gains in income over time.

It’s also worthwhile to investigate what happens with families over time. What we find is that children from poor households are more likely to exceed their parents’ income than children from rich households.

In other words, Russ’ conclusion was right. The American dream still exists. And if we can convince politicians to focus on growth, we can achieve better outcomes for people of all income levels.

P.S. The above video is a great addition to John Stossel’s recent video.

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How Nations Can Create (and Retain) Millionaires and Billionaires

Because they wrongly assume the economy is a fixed pie, some of my friends on the left think it’s bad for there to be rich people. They actually think that must mean the rest of us have less income.

But that’s not true. At least it’s not accurate if we start with the assumption that wealth is earned honestly and not accumulated thanks to subsidies, bailouts, protectionism, and other forms of cronyism.

So if it’s good to have more honest rich people, what’s the recipe to make that happen?

Frans Rautenbach, author of South Africa Can Work, recently crunched numbers and wrote about economic policy and the prevalence of billionaires.

Here is some of Frans’ accompanying analysis.

I calculated the relative number of billionaires by dividing the population of a country by the number of billionaires, to calculate the number of people per billionaire. So, the lower the number the greater the percentage of billionaires. …What is immediately clear, is that the three top performers in the table are Hong Kong, Switzerland and Singapore, all countries with exceptionally free markets and very low tax burdens. What that makes clear is, if a country is really serious about nurturing billionaires, free markets and low taxes are the way to go.

By the way, Frans focused on major countries.

If he included every jurisdiction, I very much suspect Monaco would be at the top of the list.

Followed by some of my other favorite places, such as Bermuda, Liechtenstein, and the Cayman Islands.

But it’s true that the numbers for those small place would distort the rankings, so it makes sense to remove them.

In his analysis, Frans also addresses the fact that Nordic nations do reasonably well and correctly attributes their success to the fact that they are very laissez-faire in areas other than fiscal policy.

What we also see, is that not all the Nordic countries are world-beaters in the billionaire stakes. The social democracy system (high taxes and spending on welfare benefits) has not worked to make Finland and Denmark top performers. …a fair question: Why do Sweden and Norway beat the US in the super-rich game? We now know that the high-equality welfare state of social democracy is not the reason. If that were so, it would have been fair to expect Finland and Denmark to beat the US too. And we would have expected all four these countries to have dynamic, high-growth economies – which they don’t. Having said that, it remains true that both Sweden and Norway are free markets in their own right. …The only criterion that identifies them as statist is size of government (tax, government spending, and so on). According to the other four criteria (trade policy, monetary policy, regulatory policy, and property rights and rule of law), these countries are very free. …What is more, until about 1950, Sweden and Norway had smaller governments than the UK, the US, Japan, Germany and France.

Now that we’ve looked at the policies associated with having more rich people, let’s look at the policies that are needed to retain them.

Bloomberg has a very interesting story on the migration of millionaires around the world.

The world’s wealthy are increasingly on the move. About 108,000 millionaires migrated across borders last year, a 14 percent increase from the prior year, and more than double the level in 2013, according to Johannesburg-based New World Wealth. Australia, U.S. and Canada are the top destinations, according to the research firm, while China and Russia are the biggest losers. …Wealth migration figures…can also be a key future indicator, said Andrew Amoils, head of research at New World Wealth. “It can be a sign of bad things to come as high-net-worth individuals are often the first people to leave — they have the means to leave unlike middle-class citizens,” he said. …Australia tops most “wish lists” for immigrants because of its perceived safety, no inheritance tax and strong business ties to China, Japan and South Korea.

Here’s an accompanying chart.

I’ll simply note that if the numbers were adjusted for population, the United States would not rank nearly so high (I’m guessing America’s unfair death tax is a major reason why some rich people choose other countries).

What can we say about the nations losing rich people?

If you peruse the data from Economic Freedom of the World, you’ll notice that they don’t rank very high.

China’s tightening grip on capital outflows in recent years has placed many of the country’s wealthier citizens in the crosshairs of the taxman, leading to a shift of assets and people. …Turkey losing 4,000 millionaires last year, the third straight year that many have left. About 7,000 millionaires left Russia last year.

My two cents is that rich people aren’t fully confident about stability in come countries (think Russia) and they’re quite worried about government greed in other nations (think France).

Another issue is that successful entrepreneurs and investors don’t feel comfortable having their private financial data being promiscuously shared, and one way to minimize government snooping is to move to move.

The desire for privacy is also prompting rich individuals to reconsider their place of residence. Under the Common Reporting Standard, launched by the Organisation for Economic Co-operation & Development in 2017, banks and other financial institutions are disclosing data on foreign account holders to their local tax authority. …”Many wealthy people are looking for opportunities to reduce risks associated with spreading information about their accounts,” said Polina Kuleshova of Henley & Partners. …Citizenship and residency by investment programs are big business: currently, the industry is worth an estimated $2 billion annually… The Organisation for Economic Co-operation & Development is scrutinizing…these schemes. In October 2018, it released a blacklist of 21 jurisdictions, including Malta and Cyprus, that it believes are undermining international efforts to combat tax evasion.

Since I’m a critic of the OECD’s efforts to create a global tax cartel, I’m glad people still have some options to protect themselves. Including the CBI programs.

P.S. This analysis of cross-border migration between nations also applies to cross-border migration between states. Unsurprisingly, successful people move from high-tax hellholes (places such as New Jersey, Illinois, and California) to zero-income-tax jurisdictions (places such as Texas, Florida, and Tennessee).

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Incomes, Fairness, Mobility, and Equality

I wish my leftist friends understood the Laffer Curve. I also wish they understood the downsides of artificially low interest rates. And the Rahn Curve. And comparative advantage.

But perhaps more than anything else, I wish they understood that poor people aren’t poor simply because rich people are rich.

John Stossel has a new video from Reason about the issue.

Spot on.

John is right about income growth. That’s why I think it’s so important to have policies that enable more growth. When the economy does well, that’s good for the poor, good for the rich, and good for the rest of us as well.

And this position is certainly supported by the historical data. We are much richer than 50 years ago and 100 years ago.

Heck, poor Americans are rich compared to people in many developing nations.

I also like what John said about income mobility. People can rise out of poverty. And they can fall out of prosperity.

By the way, I wish the discussion about unfairness also mentioned height and looks. There’s fairly solid academic evidence that taller people and better-looking people earn more money and have better lives.

That’s genuine unfairness, just like having better parents is a source of genuine unfairness.

Yet not even Bernie Sanders or AOC have proposed taxes to equalize those sources of real unfairness (since I don’t want to give them any ideas, hopefully they don’t read my columns).

P.S. I started today’s column by giving examples of things I wish leftists understood. Well, there are also issues where I wish my friends on the right had more insight. For instance, I would like them to understand that tax cuts very rarely pay for themselves. I wish they realized that spending caps are far preferable to balanced budget rules. And I wish they understood that disapproval of things such as drug use, gambling, and prostitution doesn’t mean those activities should be illegal.

P.P.S. I also mentioned at the start of the column that higher incomes for some people doesn’t imply lower incomes for other people. I should have included the caveat that this isn’t true if government is tilting the playing field. Bailouts, protectionism, subsidies, and other forms of cronyism enable the politically well connected to prosper at the expense of everyone else.

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The Chilean Economic Miracle: Big Benefits for the Poor, Part III

Today is my last day in Chile, so today’s column will build upon what I wrote last week.

I have three charts that illustrate how Chile’s pro-market reforms have been great news – especially for poor people (or, to be more accurate, for Chileans who used to be poor).

We’ll start with this chart from the most recent issue of Economía y Sociedad, which shows that there’s more mobility in Chile than any other OECD nation.

Honest folks on the left should view this as unambiguously positive.

Similarly, this Gini data (measuring the degree of inequality) should be slam-dunk evidence of progress for all left-of-center people.

For what it’s worth, I don’t care about the Gini coefficient. What matters to me is economic growth so that everyone can get richer.

If rich people happen to get richer faster than poor people (like in China), that’s fine.

And if poor people happen to get richer faster than rich people (like in Chile), that’s fine as well.

What irks me is that folks who fixate on inequality often support policies that retard growth. In other words, they’re so worried about rich people getting richer that they advocate for bigger government, which makes it harder for poor people to become richer.

Economic growth, by contrast, truly is the rising tide that lifts all boats.

Which is why this final chart (based on the Maddison database) is so powerful. It shows 1975-2016 income trends for Chile (red) and other major Latin American economies. As you can see, Chile started near the bottom and is now the region’s richest nation.

Wow, Chile didn’t just converge. It surpassed.

It’s also worth noting how nations such as Argentina, Venezuela, and Cuba have enjoyed very little income growth over the past 40 years.

The bottom line is that those nations are evidence of the costly impact of statism, while Chile is an amazing example of how capitalism generates widely shared prosperity.

P.S. I’m not claiming Chile is a perfect role model. It is #15 in Economic Freedom of the World, so there is considerable room for improvement. But I am arguing it is a successful example of how better policy is great news for all segments of society.

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Chile’s Pro-Market Reforms Generate Big Benefits for the Less Fortunate, Part II

I’m currently in Chile, enjoying the warm sun and doing research on the nation’s impressive economic performance.

I met yesterday with Jose Pinera, the former minister who created Chile’s incredibly successful system of personal retirement accounts (he’s also one of the people Gary Johnson should have mentioned when he was asked to identify an admirable foreign leader).

Back in 2013, I shared some of Jose’s data showing how the economy took off after Chile enacted pro-market reforms.

I was especially impressed by the stunning reduction in the poverty rate, which had dropped from 50 percent to 11 percent (it’s now down to 7.8 percent).

In other words, capitalism has been great news for poor Chileans. Simply stated, when given more freedom and opportunity, most of them escape poverty.

Interestingly, Reuters reports that even the IMF recognizes Chile’s superior performance.

The International Monetary Fund (IMF) hailed Chile’s strengthening economy in a report published on Friday while encouraging President Sebastian Pinera to push forward with promised structural reforms. In a statement following its annual consultation with Chile, the IMF praised Pinera’s proposed reform drive… Conservative billionaire Pinera took office in March with a strong mandate to make changes to the country’s pension system and labor laws and simplify the tax code. …The bank praised his early efforts, which it said were aimed at “re-invigorating investment and economic growth.”

Hmmm…, makes me wonder if the IMF (given its dismal track record) actually understands why Chile has become so prosperous.

Though the World Bank has praised the country’s pro-market reforms, so international bureaucracies sometimes stumble on the right answer.

But let’s not get distracted. Today, I want to share further evidence about how pro-market reforms produce big benefits for the less fortunate.

Here’s a chart from an article in the latest edition Economia y Sociedad. The article is in Spanish, but a translation of the relevant passage tells us that, “in Chile, the income of the poorest 20% of the population has risen at a rate (8.2% per year) that is 50% higher than that to which the income of the richest 20% has risen ( 5.3% per year).”

In other words, a rising tide lifts all boats (just as in the U.S.), but the bottom quintile is enjoying the biggest increases.

Sounds like great news. And it is great news. But some people put on blinders.

My left-leaning friends loudly assure me that they are motivated by a desire to help poor people. Yet if that’s true, why aren’t they falling over themselves to praise Chile? Why are they instead susceptible to waxing rhapsodic about the hellhole of Venezuela or bending over backwards to defend Cuba’s miserable regime?

And why do some anti-capitalist economists engage in absurd examples of cherry picking in failed efforts to discredit Chile’s accomplishments?

The bottom line is that Chile became the Latin Tiger thanks to economic liberty. That’s great news for the country, but especially good for the less fortunate.

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Income Mobility and Middle Class Prosperity

I generally don’t write much about the distribution of income (most-recent example from 2017), largely because that feeds into the false notion that the economy is a fixed pie and that politicians should have the power to re-slice if they think incomes aren’t sufficiently equal.

I think growth is far more important, especially for poor people, which is what I said (using the amazing data from China) in a recent debate at Pomona College in California.

But some people don’t accept the growth argument.

Or, to be more exact, they may acknowledge that there is growth but they think the rich wind up with all the gains when the economy prospers.

So let’s review some of the evidence. We’ll start with Robert Samuelson of the Washington Post, who points out that living standards have jumped for people at all levels of income in America.

…the rich are getting richer. The rest of us — say politicians, pundits and scholars — are stagnating. The top 1 percent have grabbed most income gains, while average Americans are stuck in the mud. Well, it’s not so. …the Congressional Budget Office…recently found that most Americans had experienced clear-cut income gains since the early 1980s. This conclusion is exceptionally important, because the CBO study is arguably the most comprehensive tabulation of Americans’ incomes. Most studies of incomes have glaring omissions. …The CBO study covers all…areas. …If the bottom 99 percent experienced stagnation, their 2015 incomes would be close to those of 1979, the study’s first year. This is what most people apparently believe. The study found otherwise. The poorest fifth of Americans (a fifth is known as a “quintile”) enjoyed a roughly 80 percent post-tax income increase since 1979. The richest quintile — those just below the top 1 percent — had a similar gain of nearly 80 percent. The middle three quintiles achieved less, about a 50 percent rise in post-tax incomes.

And here’s the data from Samuelson’s column showing what’s happened in the 21st Century.

Incidentally, economists from the Federal Reserve Bank of San Francisco explain that weaknesses in data mean that upward mobility in America is not being properly measured.

…one needs to keep in mind that measured productivity growth is designed to capture growth in market activities. Thus, it may not fully capture the growth in people’s economic welfare… Measuring real growth properly is useful for addressing a host of questions. For example, existing studies use measured inflation to calculate the real income of children relative to their parents. Chetty et al. (2017) find that 50% of children born in 1984 achieved higher incomes than their parents at age 30. Adjusting for missing growth would raise the real income of children about 17% relative to their parents, increasing the fraction of those who do better than their parents by a meaningful amount.

Moreover, Professor Russ Roberts points out that many analysts rely on snapshots at two periods of time when estimating changes in prosperity.

Adjusted for inflation, the US economy has more than doubled in real terms since 1975. How much of that growth has gone to the average person? …Most people believe that the middle class and the poor are stagnating, treading water, while the rich get all the goodies. …these depressing conclusions rely on studies and data that are incomplete or flawed. …the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. So for example, researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. …But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress.

When you follow the same people over time, however, you get a much more optimistic assessment.

When you follow the same people over time, you get very different results about the impact of the economy on the poor, the middle, and the rich. Studies that use panel data — data that is generated from following the same people over time — consistently find that the largest gains over time accrue to the poorest workers and that the richest workers get very little of the gains. This is true in survey data. It is true in data gathered from tax returns. Here are some of the studies… This first study, from the Pew Charitable Trusts, conducted by Leonard Lopoo and Thomas DeLeire uses the Panel Study of Income Dynamics (PSID) and compares the family incomes of children to the income of their parents.⁴ Parents income is taken from a series of years in the 1960s. Children’s income is taken from a series of years in the early 2000s. As shown in Figure 1, 84% earned more than their parents, corrected for inflation. But 93% of the children in the poorest households, the bottom 20% surpassed their parents. …Gerald Auten, Geoffrey Gee, and Nicholas Turner of the Office of Tax Analysis in the Treasury Department used tax returns to see how rich and poor did between 1987 and 2007. They find the same encouraging pattern: poorer people had the largest percentage gains in income over time.

For more information, here’s some data from the Pew study.

Let’s also look at a column by Professor Mark Rank in the New York Times. It was written back in 2014, but his observations about people rising and falling show that there is considerable mobility in the United States.

To what extent do everyday Americans experience these levels of affluence, at least some of the time? In order to answer such questions, Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60… The results were striking. It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution. …the image of a static 1 and 99 percent is largely incorrect. …This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60… Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. It suggests that the United States is indeed a land of opportunity, that the American dream is still possible

Amen.

Last but not least, for those of you who really like digging into data, here’s a video from Russ Roberts about the different ways of measuring middle-class incomes.

I cited some Pew data above, so I’ll close by calling your attention to the video of Pew data in this 2015 column. The bottom line is that middle-class Americans are enjoying more prosperity over time.

But it’s also true that different government policies could lead to higher or lower levels of income.

Which is why I’m perplexed that my left-wing friends want policies that would make the United States more like Europe.

Unsurprisingly, I think we should focus instead on pro-market changes that will increase America’s advantage over Europe.

P.S. The healthcare exclusion has a negative impact on take-home pay for ordinary Americans.

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Free Enterprise, Creative Destruction, and Consumer Power

I fully agree with my leftist friends who say that corporations want to extract every penny they can from consumers. I also (mostly) agree with them when they say corporations are soulless entities that don’t care about people.

But after they’re done venting, I then try to educate them by pointing out that the only way corporations can separate consumers their money is by vigorously competing to provide desirable goods and services at attractive prices.

Moreover, their “soulless” pursuit of those profits (as explained by Walter Williams) will lead them to be efficient and innovative, which boosts overall economic output.

Moreover, in a competitive market, it’s not consumers vs. corporations, it’s corporations vs. corporations with consumers automatically winning.

Mark Perry of the American Enterprise Institute makes a very valuable point about what happens in a free economy.

Comparing the 1955 Fortune 500 companies to the 2017 Fortune 500, there are only 59 companies that appear in both lists (see companies in the graphic above). In other words, fewer than 12% of the Fortune 500 companies included in 1955 were still on the list 62 years later in 2017, and more than 88% of the companies from 1955 have either gone bankrupt, merged with (or were acquired by) another firm, or they still exist but have fallen from the top Fortune 500 companies (ranked by total revenues).

It’s not just the Fortune 500.

…corporations in the S&P 500 Index in 1965 stayed in the index for an average of 33 years. By 1990, average tenure in the S&P 500 had narrowed to 20 years and is now forecast to shrink to 14 years by 2026. At the current churn rate, about half of today’s S&P 500 firms will be replaced over the next 10 years.

Here’s Mark’s list of companies that have stayed at the top of the Fortune 500 over the past 62 years.

Mark then offers an economic lesson from this data.

The fact that nearly 9 of every 10 Fortune 500 companies in 1955 are gone, merged, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction over the last six decades. It’s reasonable to assume that when the Fortune 500 list is released 60 years from now in 2077, almost all of today’s Fortune 500 companies will no longer exist as currently configured, having been replaced by new companies in new, emerging industries, and for that we should be extremely thankful. The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy.

He also emphasizes that consumers are the real beneficiaries of this competitive process.

…the creative destruction that results in the constant churning of Fortune 500 (and S&P 500) companies over time is that the process of market disruption is being driven by the endless pursuit of sales and profits that can only come from serving customers with low prices, high-quality products and services, and great customer service. If we think of a company’s annual sales revenues as the number of “dollar votes” it gets every year from providing goods and services to consumers… As consumers, we should appreciate the fact that we are the ultimate beneficiaries of the Schumpeterian creative destruction that drives the dynamism of the market economy and results in a constant churning of the firms who are ultimately fighting to attract as many of our dollar votes as possible.

Incidentally, Mark did this same exercise in 2014 and 2015 and ascertained that there were 61 companies still remaining on the list.

So creative destruction apparently has claimed two more victims.

Or, to be more accurate, the needs and desires of consumers have produced more churning, leading to greater material abundance for America.

I’ll close with two points.

• First, my argument is in favor of free enterprise, not big business. That’s because large companies can be soulless profit maximizers, even if it means using the coercive power of government to impose cronyist policies that generate unearned profits. Just think about how the big health insurance companies and big pharmaceutical companies endorsed Obamacare in hopes of generating government-guaranteed income. Or think about companies like GE that have long-standing “expertise” in manipulating the political process. Or big agribusiness interests fleecing taxpayers and consumers with farm subsidies. And Goldman Sachs and other Wall Street firms supporting Dodd-Frank in hopes of getting oligopolistic profits. Or Exxon-Mobil ripping off taxpayers and getting special advantages thanks to the Export-Import Bank. I could continue, but you get the point.
• Second, the churning that Mark Perry describes is a good example of why antitrust laws are misguided in theory (and I would argue that they are misguided in practice since incumbent companies often use such laws to thwart upstart competitors).

All of which explains why I want separation of business and state.

The bottom line is that an unfettered market produces the best results for the vast majority of people. Yes, people are greedy, but that leads to good outcomes in a capitalist environment.

But we get awful results if cronyism is the dominant system, and that seems to be the direction we’re heading in America.

P.S. Even when corporations try to exploit people in the third world, the pursuit of profits actually results in better lives for the less fortunate.

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The Sad Decline of Economic Literacy at the New York Times

Every so often, I mock the New York Times for biased or sloppy analysis.

• Claiming Medicaid cuts in a piece that shows rising outlays for the program.
• Asserting that government schools are “starved of funding” when taxpayer subsidies actually have skyrocketed.
• Claiming that budget-cutting austerity nations are doing worse than “stimulus” nations, but getting the numbers backwards.
• Writing that the sequester will mean “deep automatic spending cuts” when the budget actually will climb by $2.4 trillion.
• Claiming that Italy is more prosperous than the United States and that there is less poverty.
• Asserting that U.S. multinationals pay little tax on foreign-source income, but forgetting to include the taxes paid to foreign governments.

Now there’s a new column by David Leonhardt that cries out for correction.

He’s very upset that upper-income people are enjoying higher incomes over time.

A…team of inequality researchers…has been getting some attention recently for a chart… It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality. …the very affluent, and only the very affluent, have received significant raises in recent decades. This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. …only very affluent families — those in roughly the top 1/40th of the income distribution — have received…large raises. …The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

And here’s the chart that ostensibly shows that the economy is broken.

And what is the solution for this alleged problem? Class-warfare taxation and bigger government, of course.

…there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population. Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

Whenever I see this type of data, I’m automatically suspicious for two reasons.

1. The people at various income levels in 1980 aren’t the same as the people at those income levels in 2014. In other words, there is considerable income mobility, with some high-income people falling to the middle of the pack, or even below, and some low-income people climbing the middle of the income distribution, or even higher. At the very least, this type of chart exaggerates the degree to which “the rich are getting richer.”
2. Moreover, rich people getting rich doesn’t imply that poor people are losing income. This chart shows that all income percentiles generally enjoy more income with each passing year, so it isn’t grossly misleading like the charts that incorrectly imply income gains for the rich are at the expense of the poor. Nonetheless, a reader won’t have any way of knowing that more inequality and poverty reduction can go hand in hand.

But I think this chart from the New York Times inadvertently shows something very interesting.

As shown in the excerpt above, Mr. Leonhardt wants us to look at this data and support bigger government and class warfare.

Yet look at the annual data. The chart above has the numbers for 1980 and 2014. To the right, I’ve put together the numbers for 1987, 1996, and 2004.

One obvious conclusion is that prosperity (as shown by rising income levels) was much more broadly and equally shared in the 1980s and 1990s, back when the economy was moving in the direction of free markets and smaller government under both Reagan and Clinton.

But look at what happened last decade, and what’s been happening this decade. Government has been expanding (as measured by falling scores from Economic Freedom of the World).

And that’s the period, thanks to Bush-Obama statism, when lower-income people began to lag and income gains were mostly concentrated at the top of the income redistribution.

As the very least, this certainly suggests that Leonhardt’s policy agenda is misguided. Assuming, of course, the goal is to enable more prosperity for the less fortunate.

I’ll add another point. I suspect that big income gains for the rich in recent years are the result of easy-money policies from the Federal Reserve, which have – at least in part – pushed up the value of financial assets.

The bottom line is that Leonhardt seems motivated by ideology, so he bends the data in hopes of justifying his leftist agenda.

What makes this sad is that the New York Times used to be far more sensible.

Back in 1982, shortly after the Professors Hall and Rabushka unveiled their plan for a flat tax, here’s what the New York Times opined.

Who can defend a tax code so complicated that even the most educated family needs a professional to decide how much it owes? …President Reagan’s tax package will eventually roll back rates to the level of the late 1970’s, but it will not simplify the code or rid it of provisions that penalize hard work and reward unproductive investment. …the income base that is taxed has been so eroded by exceptions and preferences that the rates on what is left to tax must be kept high. Thus, the tax on an extra dollar of income for a typical family earning $20,000 is 28 percent and progressively higher for the more affluent. …The most dramatic fresh start, without changing the total amount collected, would be a flat-rate tax levied on a greatly broadened income base. Senator Helms of North Carolina would rid the law of virtually every tax preference and tax all income at about 12 percent. Representative Panetta of Cali-fornia would retain a few preferences and tax at a flat 19 percent. Either approach would greatly improve the efficiency of the system, simplifying calculations and increasing the incentive to earn.

And here’s what the editors wrote about Governor Jerry Brown’s modified flat tax in 199s. They started by praising the core principles of the flat tax.

Taking Jerry Brown seriously means taking his flat tax proposal seriously. Needlessly, he’s made that hard to do. By being careless, the former California Governor has bent a good idea out of shape. …Mr. Brown’s basic idea — creating a simplified code that encourages saving — is exactly right. …The present tax code is riddled with wasteful contradictions and complexity. For example, profit from corporate investment is taxed twice — when earned by the corporation and again when distributed to shareholders. That powerfully discourages savings and investment — the exact opposite of what the economy needs to grow. The remedy is, in a word, integration, meshing personal and corporate codes so that the brunt of taxes falls on consumption, not saving. …there is a reform that achieves all these objectives. Robert Hall and Alvin Rabushka, economists at the Hoover Institution, have proposed an integrated code that applies a single rate to both personal and corporate income. Their plan wipes away most deductions and exemptions, permitting a low tax rate of 19 percent. …Under the Hall-Rabushka plan, individuals would pay taxes on earnings and corporations would pay tax on interest, dividends and profits. That way, every dollar of income would be taxed once and only once.

And they rightly criticized Governor Brown for violating those principles.

Jerry Brown borrowed some of the elements of Hall-Rabushka. He too would eliminate wasteful exemptions, adopt a single rate and favor saving by exempting corporate investment. But at that point, he turns glib. He would impose on corporations a value-added tax, similar to a national sales tax. That eliminates the elegant symmetry of Hall-Rabushka. Indirectly, Mr. Brown’s variation would tax some income twice — which is why his supposed 13 percent rate would collect revenue equal to about 20 percent of total income.

Wow, this isn’t what I would write, but it’s within shouting distance.

The editors back then understood the importance of low marginal tax rates and they recognized that double taxation is a bad thing.

Now check out what the New York Times believes today about tax reform.

First and foremost, the editors want more money taken from the productive economy to expand the D.C. swamp.

Real reform would honestly confront the fact that in the next decade we will need roughly $4.5 trillion more revenue than currently projected to meet our existing commitment…. Even more would be needed if the government were to make greater investments.

And even though class-warfare taxation is unlikely to generate much revenue, the editors want both higher tax rates and more double taxation.

…it would make sense to increase the top rates on them and eliminate a break on income from investments. …the richest 1 percent pay 33 percent of their total income in taxes; if rates were changed so they paid 40 percent, it would generate $170 billion of revenue in the first year.

The editors want to take one of the most anti-competitive features of the current system and make it even worse.

It would also be a good idea to scale back accelerated depreciation allowances that let businesses write off investments faster than assets actually wear out. Speedy write-offs for luxuries like corporate jets could be eliminated altogether.

They also want to further undermine the ability of U.S. companies to compete on a level playing field in foreign markets.

…they should agree to close…the ability of corporations to defer tax on profits earned abroad.

In a display of knee-jerk statism, the editors also want new tax burdens to finance an ever-larger burden of government. Such as an energy tax.

New forms of taxation are also needed. Even prominent Republicans like James Baker III, George Shultz and Henry Paulson Jr. support a carbon tax imposed on emissions to reduce greenhouse gases. …revenue generated by carbon taxes could be used for other purposes as well, including investments in renewable energy and public transportation.

And a tax on financial transactions.

Revenue can also be raised by imposing a tax on the trading of stocks, bonds and derivatives. …Estimates show that a financial transaction tax of even 0.01 percent per trade ($10 on a $100,000 trade) could raise $185 billion over 10 years, enough to finance prekindergarten for 3- and 4-year olds, with money left over.

But the granddaddy of new taxes would be the value-added tax, a money machine for bigger government.

A value-added tax would be akin to a national sales tax, but harder to evade than traditional sales taxes and thus an efficient revenue raiser.

I’m genuinely curious whether there is any type of tax increase the NYT wouldn’t support.

But that’s not really the point of this column. The real lesson is that it’s sad that the editors have gone from being rationally left to being ideologically left.

P.S. I confess that I especially enjoy when the New York Times inadvertently publishes pieces that show the benefits of free markets and personal liberty.

• Accidentally showing the superiority of funded private retirement systems.
• Revealing how feminist policies backfire against women.
• Unintentionally showing the folly of gun control.

Which is sort of what happened with Leonhardt’s data, which shows more broadly shared prosperity when economic liberty was increasing.

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Hillary, Bernie, and the Fixed-Pie Fallacy

I don’t know whether it’s because I’m dedicated or masochistic, but I woke up at 3:00 AM in Serbia to live-tweet the Democratic presidential debate.

In retrospect, staying in bed would have been a better choice. This debate was basically the same as the others, with both Hillary Clinton and Bernie Sanders competing on who could turn America into Greece at the fastest rate.

Both candidates argued for higher tax rates on evil rich people, as well as sinister corporations, ostensibly because bigger government will make America more equal.

For those who care about the real world, however, this isn’t such a good idea.

Larry Lindsey, a former Governor at the Federal Reserve, writes in the Wall Street Journal that leftist policies actually cause inequality.

…when you look at performance and not rhetoric, the administrations of political progressives have made the distribution of income more unequal than their adversaries, who supposedly favor the wealthy. …inequality rose more under Bill Clinton than under Ronald Reagan. And it wasn’t even close. While the inequality increase as measured by the Gini index was only slightly more during Clinton’s two terms, the Theil index and mean log deviation increased two and three times as much, respectively. Barack Obama’s administration follows this pattern… The Gini index rose more than three times as much under Mr. Obama than under Mr. Bush. The Theil index increased sharply during the Obama administration, while it fell slightly under Bush 43.

Larry explains what drove these results.

And two big factors are easy-money monetary policies that artificially push up the value of financial assets (thus helping the rich) and redistribution policies that make dependency more attractive than work (thus hurting the poor).

Democratic presidents presided over bubble economies fueled by easy monetary policy. There is no better way to make the rich richer than to run policies that push up the price of financial assets. Cheap money is a boon to those who have access to it. …Transfer payments under Mr. Obama increased by $560 billion. By contrast private-sector wages and salaries grew by $1.1 trillion. So for every $2 in extra wages, about $1 was paid out in extra transfer payments—lowering the relative reward to work. …the effective tax rate on the extra earnings—including lost government benefits such as food stamps, the earned-income tax credit, and medical support payments—is between 50% and 80%. This phaseout of the ever increasing array of benefits has created a “working-class trap” instead of a “poverty trap” that is increasing inequality and keeping the income of these households lower than they might otherwise be.

I especially like Larry’s conclusion.

He points out that statist policies have a long history of failure. The only real beneficiaries are members of the parasite class in Washington.

None of this should really be surprising. If the socialist ideal of “from each according to his ability, to each according to his need” worked in practice, the Berlin Wall might still be standing. …Redistribution through the political process is not costless—even in a perfect world there would be a large bureaucracy to feed. Special-interest elites also emerge when so much money is being moved around. They take their cut, introducing even more inefficiency into the system. …voters who think the progressives running today are going to reduce inequality are falling into the same trap as people entering fifth or sixth marriages—the triumph of hope over experience.

So why do our friends on the left have such an anti-empirical approach to the issue of inequality?

Instead of fixating on inequality, why don’t they focus on policies that will actually help poor people?

Some of them probably don’t care. They simply view class warfare as a way of creating resentment and getting votes.

But many leftists are doubtlessly sincere and genuinely want to help the less fortunate.

The problem is that they suffer from the fixed-pie fallacy.

My Cato Institute colleague Chelsea German explains this fundamentally flawed understanding of the world.

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since. …A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer. Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Amen.

And it’s not just the U.S. data on how all income classes are climbing over time. Check out the “hockey stick” showing how the entire world is becoming richer.

Last but not least, Kyle Smith also addresses the topic of inequality in his New York Post column. He starts by explaining there isn’t a problem.

…there is no inequality crisis. …The US is only 42nd (out of 117 countries measured) in income inequality, according to the World Bank. We’re only 16th when it comes to the wealth held by the top 1%.

He then makes a far more important point, which is that it’s good to have an economy and a society where people can become rich by providing goods and services that the rest of us value.

Inequality is to some extent a residual effect of success: If there weren’t any billionaires or millionaires, inequality would be vastly diminished. America attracts and breeds success so brilliantly that we nearly beat the rest of the world combined in some respects: 42% of the world’s millionaires are Americans, and 49% of those with $50 million or more in assets. The American tendency to respect, and expect, success runs counter to the progressive plan to tax it away.

He basically reaches the same conclusion as Larry Lindsey.

In other words the left’s favorite policies help Washington insiders and hurt poor people.

A cap on incomes above, say, $100,000 would massively increase both equality and poverty as millions of middle-class people whose jobs depend on the rich in one way or another found themselves unemployed. …People tend to suspect, rightly, that government intervention in the name of fighting inequality will lead to exactly what’s happened in the Obama era: more inequality, with bureaucrats and their cronies standing to gain.

By the way, here’s a satirical Jonathan Swift version of what happens when you get rid of “rich” people.

P.S. Here’s my video on class warfare, featuring the clip of then-candidate Obama saying he favored a tax hike even if it imposed so much economic damage that the government collected no tax revenue.

P.P.S. The President isn’t the only leftist to have this spite-driven mentality.

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Leftist Tax Policy: Shoot at the Rich, Wound the Poor

Folks on the left tell us that they want to help the less fortunate.

I sometimes wonder if their real motive is to penalize success and punish the “rich,” but let’s be charitable and assume that many of them truly wish to help the poor.

That’s a noble sentiment, to be sure, but this is why it’s also important to look at the consequences of policy, not just the intentions.

I explained last year that certain left-wing fiscal, regulatory, and monetary policies actually harm the poor and help the rich, and I augmented that analysis earlier this year by showing how farm policies line the pockets of upper-income people.

Let’s now add to this research by looking at a new study (h/t: Tyler Cowen) from Mario Alloza of University College London. Here are some of the key findings from the study’s abstract.

Household panel…between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. …higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. …the effect of taxes on income mobility…is particularly significant when considering mobility at the bottom of the distribution.

And here are some of the findings from the study.

…to the extent that income mobility is a desirable feature of an economy, it is then relevant to consider how fiscal policy may affect it. …The results obtained suggest that higher marginal tax rates reduce income mobility. Particularly, I find that an increase of one percentage point in the marginal rate is associated with declines of about 0.5-1.3% in the probability of changing deciles of income. …The economic mechanism that induces this impact seems to be related to the labour market incentives created by changes in the tax schedule. …While some studies have pointed out to the importance of progressive taxation in addressing inequality, the results from this paper suggest that such changes may have a detrimental impact on income mobility.

Not surprisingly, it turns out that marginal tax rates are the most important variable, as we learned in our discussion of Cam Newton’s (fiscally) disastrous Super Bowl.

The effect of a percentage point reduction in marginal tax rates fosters relative income mobility across deciles…by about 1%. Similarly, households are about 6% more likely to stay in the same quintile of income when the marginal tax rates goes up by one percentage point… This evidence suggests that the economic mechanism that determines the effect of taxes on income mobility is based on incentives.

And here are more details on how higher tax rates appear to disproportionately harm the less skilled, while lower tax rates are more likely to help.

…non-college are, on average, more likely to move down in the income distribution, while college households are likely to move up (or, at least, less likely to move down) as a result of an increase in the marginal tax rates. …Fiscal reforms that homogeneously reduce marginal tax rates seem to contribute to income mobility by making households with non-college education more likely to occupy relatively higher positions within the income distribution (and vice versa for college-graduated households).

The bottom line is that some of our friends on the left want to shoot at the rich, but they wind up wounding the poor instead by greasing the rungs on the ladder of economic opportunity.

Which is why, for the umpteenth time, I’ll emphasize that market-driven growth is the moral and practical way to help the less fortunate.

P.S. Here’s an update on my travels. I’m in Beijing for a couple of speeches and I probably should say something substantive about how genuine federalism is an ideal long-run outcome for China, Hong Kong, Macau, and Taiwan. They can all be one country, if that’s what everyone wants (and that’s already the case for China, Hong Kong, and Macau), but that doesn’t mean there’s a need for a one-size–fits-all approach to domestic policy. In other words, a version of the advice I offered on Ukraine,Scotland, and Belgium basically applies in this part of the world as well. Call it one nation with three or four systems.

But the most memorable part of the trip (in a bad way) is that my communication lines with the world have been severed. The problem started when I left my phone in an airport security scanner on my way from Cambodia to Hong Kong.

Then I get to China and I learn that my laptop can’t access either the Cato remote desktop or my Gmail account. Or Twitter. Or Facebook.

This is a not a trivial problem since I got to Beijing in the evening, had a speech in the morning, but couldn’t access any of the information (and I’m not organized enough to print things out ahead of time). I eventually figure out a solution for my morning event by asking the front desk to connect me with the person who made the room reservation, which eventually leads to me getting in contact with someone else in the hotel who is there for the same event.

But that’s only part of the story. I still haven’t had email for several days. And I obviously don’t have a phone, either. So while I’m able to access a lot of stuff on the Internet using my laptop, I’m in the dark about what’s happening at Cato or what’s happening in the rest of my life. By the way, if you’re asking why I don’t create a new email address, that’s not as easy as it sounds since the widely-used email sites have security features such as asking to send you a text to confirm your new account, something that obviously wouldn’t work for me.

Oh, and I’m not able to access my blog while in China. So to maintain my pattern of producing a column every single day for however many years, I had to create a word document and then randomly approach someone in the hotel restaurant to ask if he could upload my column from a thumb drive and email it to friends back in Washington.

Oh well, nobody said the fight for liberty was easy.

P.P.S. Now that I’m done whining, let’s return to our original topic and look at a cartoon showing what Obama wants.

But then let’s look at what Obama has actually delivered, which sort of confirms the research discussed above.

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Economic Mobility, Class Warfare, and Poverty

The quality of economic analysis from politicians is never good, but it becomes even worse during election season.

The class-warfare rhetoric being spewed by Bernie Sanders and Hillary Clinton is profoundly anti-empirical. Our leftist friends genuinely seem to think the economy is a fixed pie and that it’s their job to use coercive government power to reallocate the slices.

The only real quandary is whether Bernie’s sincere demagoguery is more disturbing or less disturbing than Hillary’s hypocritical attacks on the top 1 percent.

Since I mentioned that the left’s rhetoric is anti-empirical, let’s look at the evidence.

I’ve previously shared very detailed IRS data showing that the so-called rich pay a hugely disproportionate share of the tax burden.

Let’s augment that analysis by perusing some data on income mobility.

Writing for Money, Chris Taylor explains that America is not a land of dynastic wealth.

…70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy. …When I asked financial planners why…second- and third-generation heirs turn out to be so ham-handed, the answers were surprisingly frank. A sampling: “Most of them have no clue as to the value of money or how to handle it.” “Generation Threes are usually doomed.” “It takes the average recipient of an inheritance 19 days until they buy a new car.”

But you don’t have to examine several generations to recognize that American society still has a lot of income mobility.

Tami Luhby looks at how people move up and down the income ladder during their lives.

The Top 1% is often considered an exclusive, monolithic group, but folks actually rise up into it and fall out of it quite often. …Some 11% of Americans will join the Top 1% for at least one year during their prime working lives (age 25 to 60), according to research done by Thomas Hirschl, a sociology professor at Cornell University. But only 5.8% will be in it for two years or more. As for holding onto this status for at least 10 years? Only a miniscule 1.1% of Americans are this fortunate. “Affluence is dynamic, said Hirschl… “The 1% really isn’t the 1%. People move around a lot.”

The same is true for the super-rich, the upper-middle class, and the poor.

The IRS looked at how frequently the same Top 400 taxpayers appeared on the list over a 22-year period ending in 2013. Some 72% ranked that high for just one year. Only 3% were listed for a decade or more. …While just over half of Americans reach the Top 10% at least once in their careers, only 14% stay in it for a decade or more, Hirschl found. …On the flip side, it’s not uncommon for Americans to spend some time at the bottom of the heap. Some 54% of Americans will be in or near poverty for at least one year by their 60th birthday, Hirschl said.

Here’s a table of numbers for those who like digging into the data.

Now let’s shift back toward public policy.

The good news (relatively speaking) is that the politics of envy don’t seem to work very well. This polling data finds that most Americans do not support higher taxes (presumably from the rich) to impose more equality.

And when you combine these numbers with the polling data I shared back in 2012, I’m somewhat comforted that the American people aren’t too susceptible to the poison of class warfare.

Let’s close with some ideological bridge building.

I certainly don’t share the same perspective on public policy as Cass Sunstein since the well-known Harvard law professor leans to the left.

But I think he makes an excellent observation in his column for Bloomberg. Smart leftists should focus on how to help the poor, not demonize the rich.

Bernie Sanders and Hillary Clinton have been operating within the terms set by Top 1 Percent progressivism. …For Top 1 Percent progressives, the accumulation of riches at the very top is what gets the juices flowing. They prioritize much higher taxes on top-earners, more aggressive regulation of Wall Street, restrictions on the compensation of chief executives, and criminal prosecution of those responsible for the financial crisis. Top 1 Percent progressivism emphasizes the idea of fairness — but it’s nevertheless a politics of outrage, animated by at least a trace of envy.  It’s as if “millionaires and billionaires” were the principal problem facing America today.

Sunstein correctly says the focus should be helping the less fortunate.

Bottom 10 Percent progressives  are not  enthusiastic about concentrations of wealth. But that’s not what keeps them up at night. Their focus is on deprivation and lack of opportunity. They’re motivated by empathy for people who are suffering, rather than outrage over unjustified wealth. They want higher floors for living standards, and do not much care about lower ceilings.

So far, so good.

I’ve also argued that our goal should be reducing poverty, not punishing success.

This is why I want pro-growth tax reform, a smaller government, and less suffocating red tape.

Unfortunately, Prof. Sunstein then wanders into very strange territory when it comes to actual policy. He actually endorses the utterly awful economic “bill of rights” proposed by one of America’s worst presidents.

Their defining document is one of the 20th century’s greatest speeches, delivered by Franklin Delano Roosevelt in 1944, in which he called for a Second Bill of Rights, including the right to a decent education, the right to adequate medical care and food, and the right to “adequate protection from the economic fears of old age, sickness, accident, and unemployment.”

If you think I’m exaggerating about FDR being an awful President, click here.

And if you want more information about FDR’s terrible “bill of rights,” click here.

So I like his diagnosis of why the left is wrong to fixate on hating success.

But he needs to look at real-world evidence so he can understand that free markets and small government are the right prescription for prosperity.

P.S. Here’s my video listing five arguments against class-warfare taxation.

There’s a lot of material in a short period of time, though I think the most disturbing part occurs at about 4:30. What sort of person would actually want to impose tax policy that is so punitively destructive that the government doesn’t collect any additional revenue?!?

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Four Principles to Boost America’s Economic Ladder of Opportunity

In conversations with statists, I’ve learned that many of them actually believe the economy is a fixed pie. This misconception leads them to think that rich people get rich only by somehow making others poor.

In this simplistic worldview, a bigger slice for one person means less for everyone else.

In reality, though, their fixation on the distribution of income leads them to support policies that hinder growth.

And here’s the ironic part. When you have statist policies such as high taxes and lots of redistribution, the economy weakens and the result is a stagnant pie.

In other words, the zero-sum society they fear only occurs when their policies are in effect!

To improve their understanding (and hopefully to make my leftist friends more amenable to good policy ideas), I oftentimes share two incontestable facts based on very hard data.

1. Per-capita economic output has increased in the world (and in the United States), which obviously means that the vast majority of people are far better off than their ancestors.

2. There are many real-world examples of how nations with sensible public policy enjoy very strong growth, leading to huge increases in living standards in relatively short periods of time.

I think this is all the evidence one needs to conclude that free markets and small government are the right recipe for a just and prosperous society.

But lots of statists are still reluctant to change their minds, even if you get them to admit that it’s possible to make the economic pie bigger.

I suspect in many cases their resistance is because (at least subconsciously) they resent the rich more than they want to help the poor. That’s certainly the conclusion that Margaret Thatcher reached after her years in public life.

So, in hopes of dealing with this mindset, let’s augment the two points listed above.

3. There is considerable income mobility in the United States, which means today’s rich and today’s poor won’t necessarily be tomorrow’s rich and tomorrow’s poor.

Let’s look at some evidence for this assertion.

And we’ll start with businesses. Here’s what Mark Perry of the American Enterprise Institute found when he investigated changes in the Fortune 500.

Comparing the 1955 Fortune 500 companies to the 2015 Fortune 500, there are only 61 companies that appear in both lists… In other words, only 12.2% of the Fortune 500 companies in 1955 were still on the list 60 years later in 2015… The fact that nearly 9 of every ten Fortune 500 companies in 1955 are gone, merged, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction… The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy, and that dynamic turnover is speeding up in today’s hyper-competitive global economy.

Here’s the list of the companies that have managed to stay at the top over the past six decades.

Now let’s shift from companies to people.

The most famous ranking of personal wealth is put together by Forbes.

Is this a closed club, with the same people dominating the list year after year?

Well, there’s considerable turnover in the short run, as noted by Professor Don Boudreaux.

…21 of the still-living 100 richest Americans of only five years ago are no longer in that group today.  That’s a greater than 20 percent turnover in a mere half-decade.

There’s a lot of turnover – more than 50 percent – in the medium run, as revealed by Mark Sperry.

Of the 400 people in the 2001 Forbes list of the wealthiest Americans, 230 were not in the 1989 list.

And there’s almost wholesale turnover in the long run, as discovered by Will McBride of the Tax Foundation.

Of the original Forbes 400 from the first edition in 1982, only 35 remain on the list. …Of those on the 1987 Forbes 400 list, only 73 remain there in 2013.

In other words, it’s not easy to stay at the top. New entrepreneurs and investors constantly take the place of those who don’t manage to grow their wealth.

So far, we’ve focused on the biggest companies and the richest people.

But what about ordinary people? Is there also churning for the rest of us?

The answer is yes.

Here are some remarkable findings from a New York Times column by Professor Mark Rank of Washington University.

I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking. It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution. …This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60…this information casts serious doubt on the notion of a rigid class structure in the United States based upon income.

A thoroughly footnoted study from the National Center for Policy Analysis has more evidence.

…83 percent of adults born into the lowest income bracket exceed their parents’ income as adults. About 40 percent of people in the lowest fifth of income earners in 1986 moved to a higher income bracket by 1996, and roughly half of the people in the lowest income quintile in 1996 moved to a higher income bracket by 2005. …In both the 1970s and 1980s, 8 percent of children born in the bottom fifth of the income distribution rose to the top fifth. About 20 percent of children born in the middle fifth of the income distribution later rose to the top fifth.

And here’s some of Ronald Bailey’s analysis, which I cited last year.

Those worried about rising income inequality also often make the mistake of assuming that each income quintile contains the same households. They don’t. …In 2009, two economists from the Office of Tax Analysis in the U.S. Treasury compared income mobility in two periods, 1987 to 1996 and 1996 to 2005. The results, published in the National Tax Journal, revealed that “over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period.” …The Treasury researchers updated their analysis of income mobility trends in a May 2013 study for the American Economic Review, finding that about 75 percent of taxpayers between 35 and 40 years of age in the second, middle and fourth income quintiles in 1987 had moved to a different quintile by 2007.

Last but not least, let’s look at some of Scott Winship’s recent work.

…for today’s forty-somethings who grew up in the middle fifth around 1970…19 percent ended up in the top fifth, 23 percent in the middle fifth, and 14 percent in the bottom fifth… Among those raised in the bottom fifth, 43 percent remain there as adults. …30 percent made it to the top three-fifths… Mobility among today’s adults raised in the top fifth displays the mirror image: 40 percent remain at the top, 37 percent fall to the bottom three-fifths.

The bottom line is that there is considerable income mobility in the United States.

To be sure, different people can look at these numbers and decide that there needs to be even more churning.

My view, for what it’s worth, is that the correct distribution of income is whatever naturally results from voluntary exchange in an unfettered market economy.

I’m far more concerned with another economic variable. Indeed, it’s so important that we’ll close by adding to the three points above.

4. For those who genuinely care about the living standards of the less fortunate, the only factor that really matters in the long run is economic growth.

This is why, like Sisyphus pushing the rock up a hill, I keep trying to convince my leftist friends that growth is the best way to help the poor. I routinely share new evidence and provide real-world data in hopes that they will realize that good results are more important than good intentions.

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Debating the “American Dream”

What is the American Dream?

I suspect it’s a bit like beauty, in the eye of the beholder, but here’s the Wikipedia definition:

…a national ethos of the United States, a set of ideals in which freedom includes the opportunity for prosperity and success, and an upward social mobility for the family and children, achieved through hard work in a society with few barriers.

That sounds reasonable. My view, for what it’s worth, is that people will prosper in a system of free markets and limited government.

Now let’s ask a tougher set of questions. Is the American Dream a myth or reality? And if it’s real, does it still exist?

Perhaps most important, what’s needed for the Dream to be a reality?

Writing for the New York Times, I added my two cents on this issue, taking part in a “Room for Debate” on the issue of “Is the Modern American Dream Attainable?”

As you can see, I’m cautiously optimistic.

…the American Dream is still a reality. Even with relatively sub-par economic performance in recent years, our economy’s overall level of output, as well as the annual growth rate, is still the envy of the developed world.  …The burden of government in the United States is smaller than it is in Europe, and our markets are more open and deregulated than they are in Latin America, Asia and Africa. These features mean that poor people have considerable opportunity to climb the ladder, limited only by their talents, abilities and willingness to work hard. But things could be even better. There’s been a big expansion of government intervention under both President George W. Bush and Obama. And when government gets more power to dictate who wins and who loses in the marketplace, powerful and politically well-connected incumbents almost always reap the benefits on this cronyism. …if we can restrain the size and scope of government, there’s every reason to believe that the America Dream will be strong for the rest of the 21st century.

If the editors had allowed me more room, I would have included very powerful data showing that people in the United States have much higher living standards than their European counterparts, augmented by data from the rest of the world showing the relationship between small government and economic growth.

There were five other participants in the debate, and I’ll share their main points followed by my reactions.

Erin Currier of Pew was somewhat pessimistic. She cited figures on relative mobility and argued that too few people climb out of poverty.

Forty-three percent of those raised in the bottom fifth of the income ladder remain there a generation later, and 40 percent of those raised at the top stay there. Just 4 percent raised at the bottom rung of the income ladder make it to the top a generation later. …Americans feel increasingly financially insecure, perhaps in part because of this lack of mobility out of the bottom rung of the economic ladder.

Maybe I’m a glass-half-full guy, but I’m wondering whether it’s actually a sign of social mobility that only 40 percent of people stay in the quintile of their parents.

Though I suppose we can’t really draw big conclusions without seeing historical patterns, adjusted for changing demographics.

Stephanie Coontz of the Council on Contemporary Families was even more pessimistic, arguing that there were positive effects from the New Deal and the Civil Rights era, but that those have now faded.

Americans are right to believe the American Dream is fading. But that dream only became a possibility for white men as a result of the labor struggles and reforms of the New Deal, and it began to extend to minorities and women only after the civil rights and women’s movements of the 1960s and 1970s. If we want to revive and achieve the American Dream, we need to change a situation in which the people whose hard work makes this country run cannot earn a living wage, while bankers, speculators and corporate elites – the real “takers” in today’s society – skim off far more than their fair share.

I largely disagree.

First, if you look at the amazing historical story in this video, you’ll see that prosperity soared in the United States because of economic liberty. And you’ll see the same pattern in certain other parts of the world in this video and this video.

Moreover, the New Deal unquestionably retarded prosperity.

Professor Robin Fretwell Wilson of the University of Illinois Law School makes a good – and I assume relatively uncontroversial – point about the value of family stability.

Ask young people about their hopes, marriage and family top the list. Ask them why they cannot marry now, they say they need financial security first — to finish school, pay-off spiraling debt, get that first big job. They want a stable family life, and marriage is key. The upper class knows this; they marry in droves. For Dad, the military cleared a path to the middle class and a stable married family. What will provide that pathway now for the next generation of young men…?

I agree, at least to the degree that she’s embracing the value of social capital.

Professor Lester Spence of Johns Hopkins University focuses on some challenges for the African-America community.

The best data we have suggests that over the last 40 years upward mobility has stagnated significantly. Further, this data suggests that America fares far worse than other developed nations. …Americans in general and African-Americans in particular then have a right to be pessimistic… Even as it became painfully clear that the city of Ferguson’s policy of using policing as a municipal revenue generator is partially to blame for conditions there, city officials recently decided to increase police fines to bolster revenue shortfalls.

I don’t know the data, so I don’t know if Spence is right about stagnating mobility.

Regardless of the veracity of that data, I think the black community has been especially harmed by the initiative-sapping and family-destroying welfare state and the failings of the government school monopoly. That’s where significant gains could be achieved.

And he makes a very good point about the dangers of law enforcement being turned into a revenue-generating machine. I touched on that issue here, but read this Radley Balko article if you really want to understand how low-income people suffer as a result of greedy local governments.

Last but not least, Professor Steven Bender of Seattle University Law School uses the example of a Mexican immigrant family to highlight the challenge of home ownership.

Homeownership is a marker for many of attainment of the American Dream. With the primacy of family wellbeing at its core, Latinos are especially motivated to become homeowners — a 2002 study found 90 percent of Latino homeowners strongly agreed that owning a home is better than renting for raising a family. …Their factory employer paying them just $7.75 despite almost 20 years of experience signals how challenging it is to grasp the brass ring of homeownership, and to repair that home, if you are a Latino immigrant family, and increasingly for anyone fighting the strong current of our swiftly rising wage and wealth inequality.

Bender makes some valid points, particularly about the importance of protecting vulnerable people from fraud, but I have a slightly more optimistic take on his story.

The couple from Mexico may face challenges, but I’m guessing that their living standards are much higher as a result of their decision to emigrate.

In other words, they’re an example of the American Dream.

No, it’s not perfect, as I acknowledged in my contribution to the debate, but it’s still real.

Let’s close with some polling data. Here’s a look at whether people believe that the American Dream exists.

The good news is that almost everybody agrees with the concept. The bad news is that many people believe it’s a thing of the past.

P.S. Shifting to another topic, I can’t resist offering a contrarian perspective on a recent Mona Charen column.

She said Jonathan Gruber wins the undesirable prize of having had the “worst year.”

Gruber…may well have had the worst year in American public life. His repeated demonstrations of arrogance, contempt for the American people and smug self-satisfaction brought mortification to his party and president. …all hail the verbally incontinent Gruber for revealing the truth underlying Obamacare: It would not have passed if it had been presented honestly. …Obamacare was unpopular when proposed and despised when passed, and it remains disliked to this day. Gruber’s contribution was to put a frame around its essential deception.

I don’t disagree with any of that, but I actually think Gruber had a pretty good year.

Sure, he was exposed as a despicable fraud, but he also “earned” millions of dollars as an Obamacare consultant.

In other words, he was yet another corrupt insider who used the law to line his own pockets. I suspect he’s laughing all the way to the bank.

P.P.S. Shifting gears again, I’m a big fan of political humor, even when libertarians get victimized.

And I also can appreciate clever leftist humor. And here’s a good example.

Kudos to Mr. Rogers, at least in this case. His cartoon reminds me of this Scott Stantis gem in that both rely on inadvertent responses.

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The Biggest Impediment for the Poor Is Government, not Inequality

A bunch of well-connected rich people and government officials are descending upon Switzerland for the annual World Economic Forum meeting in Davos.

This upsets many people, and perhaps with some justification. After all, bad things often happen when big business and big government intersect.

But some folks reflexively think that wealth is bad and they would like us to believe that the economy is a fixed pie, meaning that the rich have more money because the poor have less money.

If you think I’m exaggerating, check out a new report from Oxfam, a UK-based group that was created to alleviate poverty but has largely morphed into a left-wing pressure group.

The folks at Oxfam complain about the supposed “capture of opportunities by the rich at the expense of the poor and middle classes” and that “tax rates for the richest have fallen in 29 of the 30 countries.”

Here are some excerpts from a report in the EU Observer.

As the world’s richest and most powerful men and women prepare to meet in the Swiss resort of Davos for the annual World Economic Forum on Wednesday (22 January), the British development charity, Oxfam, has issued a new report on global inequality. According to its findings, the wealth of the world’s 85 richest people – €81.2 trillion – amounts to that of the poorest half of the world population, or 3.5 billion people. …”In Europe, austerity has been imposed on the poor and middle classes under huge pressure from financial markets whose wealthy investors have benefited from state bailouts of financial institutions,” the charity said. Financial deregulation in the US has contributed to the situation, in which the richest one percent of the population has more money than ever since 1933.  …The charity said Davos participants should reverse the trend and pledge to support higher taxes for the rich, while refraining from using their wealth to seek political favours.

There are several parts of this excerpt that deserve attention, including passages that are correct (such as bailouts giving undeserved money to the rich) and passages that are nonsensical (the financial crisis was caused by intervention, not deregulation).

But I want to focus solely on the inequality issue. Let’s assume Oxfam is right and that the world’s 85 richest people have $81.2 trillion of wealth. The group obviously wants us to think this accumulation of wealth is bad and that it somehow comes at the expense of the rest of us.

Tim Carney of the Washington Examiner hits the nail on the head, explaining that there’s a big difference between honest wealth and riches obtained through government coercion.

…is it a bad thing for a country to have some really rich people? Again, it depends on how they got rich. Sutirtha Bagchi of the University of Michigan’s business school and Jan Svejnar of Columbia’s School of International and Public Affairs studied how inequality correlates with economic growth. In general, more inequality meant slower growth, and less inequality meant faster growth. But in many countries, over various time periods, growing inequality had no effect on economic growth. The new study suggests that an increase in inequality hurt the economy when the rich were getting rich through political connections. That is, inequality hurts the economy when “a large share of the national wealth is held by a small number of politically connected families,” as the authors put it. …Bagchi and Svenjar took pains to classify political billionaires as narrowly as possible. …The political billionaires were only people who “would not have become a billionaire in the absence of political connections that resulted in favoritism and/or explicit government support.”

The oft-missed lesson here is that undeserving wealth generally is obtained because of big government.

Which reminds me of a very astute observation by a former Cato colleague, who wrote that, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”

Carney continues, pointing out that wealth obtained through markets is good. Such success creates a bigger pie and helps boost living standards for everyone.

But wealth achieved via government is cronyism, and that contributes to economic stagnation.

When a country’s wealthiest got wealthy through market means, the resulting inequality has no negative effect on economic growth. This jibes with what we know about free markets. If people can get rich by providing valuable things at good prices, then society will get more valuable things at good prices—and people across the income spectrum benefit. But if people get rich by pocketing subsidies and using the state to crush competitors, then they gained their wealth at the expense of everyone else. Bill Gates became a billionaire by making and selling something that makes regular people more productive and more connected. Buffett got rich largely by providing capital to underfunded but well-run businesses. If Bagchi’s and Svejnar’s findings are correct, then the bottom line is this: Inequality itself doesn’t hurt the economy. Cronyism hurts the economy.

I fully agree with Tim’s analysis, though I would have drawn a distinction between the younger Warren Buffett, who was a savvy investor and the older Buffett, who has climbed into bed with the political elite.

The bottom line is that the poor aren’t poor because of honest rich people. The poor are suffering because of big government, including the cronyism that lines the pockets of dishonest companies and individuals that feed at the public trough.

Unfortunately, many insider leftists are perfectly content with those policies and they use inequality to distract voters from the real problem.

There are honest leftists, of course, and they presumably would be outraged by the sleaze in national capitals. Their problem is that they genuinely think the economic is fixed pie. Or they think that inequality is such a bad thing that they would be willing to reduce incomes for the poor if it meant the rich suffered even more.

If you don’t believe me, watch this marvelous video of Margaret Thatcher debunking the left.

And my old grad school colleague Steve Horwitz also has some very sage observations on income inequality and class warfare.

P.S. In its report on inequality, Oxfam also went after tax havens and said more revenue for government would help reduce poverty.

Oxfam also estimated that €15.5 trillion of the wealth is hidden from the taxman in offshore accounts, at a time when governments are cutting public spending. …tax avoidance by EU and US corporations in Africa is depriving its governments from resources which could be use to fight poverty.

I wrote a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax taliban.”

But what really irks me about that passage is the assumption that bigger government reduces poverty. That’s nonsense. The data shows that growth is the best way of helping the poor.

P.S. I wrote yesterday about Chris Christie’s problems in New Jersey. I said his real challenge was the need to reduce the burden of government, not the bridge scandal.

But I’m a sucker for good political humor, so enjoy this image that appeared in my inbox.

P.P.S. Since Oxfam criticized tax havens, I can’t resist calling your attention to my video tutorial on tax competition and tax havens.

Simply stated, we need some external check on the greed of the political class.

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