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Thursday, September 27, 2012

The Myth (And Reality) Of Income Mobility

Income mobility has become an important issue in this year’s election, and both parties have staked their political reputation on increasing it.  Democrats have long felt that by government intercession in the marketplace through poverty alleviation, job training, and a variety of educational and social programs, talented individuals from lower socio-economic segments of the population can more easily move up and out of poverty.  Republicans have felt that by freeing the individual from the chains of state welfare and demeaning and inefficient government programs, natural pent-up creative energy can be released.

In an article in the The New Republic (2.8.12) by Timothy Noah traces the historical roots of the myth of Horatio Alger, the now-familiar icon of The American Dream:

Alger wrote dime novels for boys about getting ahead through virtue and hard work….and fully 5 percent of all the books checked out of the Muncie, Indiana, public library between November 1891 and December 1902 were authored by Alger.

His influence stems from the fact that one of these books—The Epic of America (1931)—introduced the phrase “the American dream” to our national discourse. Writing at the start of the Great Depression, Adams envisioned not “a dream of motor cars and high wages merely,” but rather “a dream of a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”

Noah concludes, however that the American Dream is a myth.  Although most Americans deeply and passionately believe that through hard work and enterprise alone an individual can be successful, and that America is the only country where this is possible, there is no basis in fact for these beliefs.  Most of us are stuck where we were born.

Noah bases his conclusions on comparative historical studies of fathers and sons from different socio-economic levels.  Based on census data from 1850 to 1920 and between 1950 and 1973, Joseph Ferrie of Northwestern concluded that:

Forty-one percent of farmers’ sons advanced to white-collar jobs between 1880 and 1900, compared with 32 percent between 1950 and 1973. Ferrie’s conclusion held up when he looked at all four job categories (factory-worker, white collar, etc.)  Between the horse-and-buggy days and the interstate-highway era, American society had become significantly less mobile.

This, of course, is a specious argument. Every statistician and economist studying change knows that the lower the starting point, the easier it is to move to a higher level.  It is far easier to improve academic achievement, for example, from a score of 10 to 20 percent (100 percent improvement) than from 90 to 100 percent. In 1880, although most families worked the land, America was just beginning one of the most dynamic economic periods in its history, one in which the demands for labor were high and where any reasonably talented and ambitious worker could move from a demanding and only modestly-rewarding farm job to a higher-paying industrial one.  While there is no doubt that the important labor reforms which improved the lot of industrial workers came only later, a move to the city was still up and out.

The US population between the years 1950-1973 was not only many times greater than in the earlier Alger generation of the 19th Century (thus increasing competition for jobs) but that workers were far more skill-dependent than previously. Whereas a farmer in 1900 could move up to an industrial job, and a factory worker could move up to a clerical or even management position, he could do so because jobs at all levels were less skill-dependent than they were in the mid-Twentieth Century.  The post-WWII period was one of great economic expansion, few government regulations, and many government incentives (e.g. the G.I. Bill); and yet, mobility decreased.  This could only have been due to a structural economic immobility.

Since 2000 there have been many retrospective studies on ‘intergenerational income elasticity’ (income heritability)– or, how likely is a son or likely to achieve a higher socio-economic status then his father.  Interpretations vary, but the most recent and most convincing is about 60 percent – that is, you have only a 40 percent chance of moving to a higher status than your father, thus suggesting that the American Dream is only partially true.

Yet this conclusion is also disingenuous and disregards certain formative historical events. The 1960s were years in which many young people rejected the values of their parents and chose lifestyles and careers which were not tracked to continue the moneymaking of the flush 50s.  Although this phenomenon was restricted to middle-class individuals (i.e. not working class), their numbers cannot be ignored. In other words, many young people of the Sixties deliberately chose to move ‘down’ the socio-economic scale.

Many studies have shown that income heritability in Europe is lower than the United States, suggesting that despite their Old World image, Western European countries have changed their ways:

Meanwhile, mobility in the United States has fallen dramatically behind mobility in other comparably developed democracies. A 2007 study by the Organization for Economic Cooperation and Development (OECD) combined a number of previous estimates and found income heritability to be greater in the United States than in Denmark, Australia, Norway, Finland, Canada, Sweden, Germany, Spain, and France.

This, too, is not surprising because Europe has had its own ‘Sixties’ when EU effects kicked in, governments were less centrally-planned, labor was free to move, and income could be determined by opportunity not family.  At the same time, the US mobility has decreased because of a large immigrant population that has not yet found its economic running shoes.

Yet, there may be an upside to the American tendency to overestimate their chances for mobility:

James Fallows writes that a society in which “people routinely overestimated their chances for success,” in which entrepreneurs “launched ventures that by rational standards were likely to fail,” was a society that, collectively and over the long term, would invent more, innovate more, and succeed more. Society benefits when people don’t know “their place.”

The philosopher Joseph Campbell found myth to be central to all civilizations and should never be dismissed simply because it was not ‘real’.  Myth can be as powerful a motivating, guiding, and disciplinary force as any more rational or secular one.  The American Dream falls into that category.

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