January 29, 2012
There is a big market in defending the One Percent these days and the Post is rising to the challenge. It presented a front page Outlook piece by James Q. Wilson that tells readers that inequality is not a really big deal because of the all the mobility in U.S. society. Furthermore, it tries to tell us we would be worse off with less inequality because inequality fell in Greece over the last three decades.
Wilson’s main source for his claims about mobility is a study from the St. Louis Fed which in turn relies on data from a study from President Bush’s Treasury Department. Wilson tells us that less than half of the people in the top one percent were still there 10 years later. This reflects the findings of the study. However 75 percent of the top one percent were still in the top 5 percent 10 years later and almost 83 percent were in the top ten percent.
Much of the mobility found in this study was likely simply the result of life-cycle effects. Earnings peak between ages 45 and 65. If we assume that people in these age groups are twice as likely to be in the top one percent as people who are younger or older, then we would expect 25 percent of the people in the top one percent to fall to a lower income category over a 10 year period simply because they have aged out of their peak earnings years.
Unlike most other studies of income mobility, the Treasury study did not restrict itself to prime earners (ages 25-55 at the start of the 10-year period). This would lead it to find greater mobility than other studies. Also, since this study is based on tax filing, some of the mobility may reflect the ability of individuals to game the tax system so that they show very low income in either the first or last year. If had restricted itself to the 25-55 age group it like would have found less mobility. [Thanks Stuart.]
Wilson’s claim about Greece as an example of a country that has not seen an increase in inequality is the sort of argument by anecdote that people make when the data will not support their case. There were other countries, such as France, which have not seen an increase in inequality without obvious negative economic impacts. In fact, the rise in inequality across most European countries has been quite modest over the last three decades.
In addition, the most obvious factor that undermined Greece’s economy seems to have been its decision to join the euro. This prevented it from allowing its currency to devalue in order to remain competitive. It is difficult to see how greater inequality would have improved its situation. Furthermore, since one of the country’s main problems is a huge amount of tax evasion, data on income inequality is probably not very reliable.
It is also worth noting that this piece exclusively discusses the loser liberalism approach of taxing the income of the top 1 percent to redistribute income to the rest of the population. It does not address an agenda of reversing the policies that lead to the enormous upward redistribution of the last three decades. The Post appears to have a ban of any discussion of this approach.
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