Onward and Upward

Class warfare has never had the saliency in the United States that it has had in Europe. Part of the reason is that in the United States, it has largely been the case, that economic opportunity has been open to merit. There have been critical exceptions like slavery that ended over 140 years ago, Jim Crow in the South, and lingering discrimination. Nonetheless, economic success is as open to talent in the United States as anywhere. It is hard to rail against the rich if the audience aspires to become affluent at some point and this aspiration is realistic.

A recent report from the Department of Treasury confirms the nature of upward economic mobility in the United States. The study began with taxpayers in 1996 and followed their income as reported to the IRS as well as Social Security payments. Individuals were tracked even with joint returns to follow incomes after divorce. Only taxpayers older than 25 were considered in the original cohort because students can go from virtually no income to high income quickly and overstate actual income mobility. About 88% of the original taxpayers in 1996 could be tracked to 2005, with a large fraction of the attrition associated with the death of the taxpayer. Death generally has very negative effect on personal income.

Even separate from the question of mobility the study found the the entire economic escalator had risen several steps. For the group in question, the median real income had increased by 25 percent over 10 years.

Over the course of lifetime, people progress through at least some portion of the income distribution. Most start at a relatively low income, maximizing their income in middle age, living in retirement off Social Security and accumulated assets at at lower income level. The width of the income distribution is a snapshot of the dynamic movement within the distribution.

The study had several other key findings:

  • About one half of the original cohort in the bottom quintile moved into a higher income quintile during the study period.
  • A similar percentage moved from one quintile to another quintile during the 10-year study.
  • At the very tip of the income distribution, the top one-hundredth of one percent, only 25 percent of those in this group in 1996 remained there in 2005. It is not that these people were now poor, only that people occupy the very pinnacle of the income distribution for a short time.
  • Income mobility in this period is consistent with income mobility in early decades.
  • “…[T]he median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.”

These results are consistent with previous studies showing intergenerational income mobility: i.e., that parental income is not a limiting factor to a child’s income. A University of Chicago study found that parental income explains only 37 percent of the child’s income. Extending to the next generation, the a grandparent’s income can explain only 14% of the variation in a grandchild’s income. There are very few hereditary limits on individuals in the United States.

As long as income mobility is maintained, the United States is likely to remain economically free, largely immune from populist animosity.

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