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May 2015 Brief: Volume 22, Number 13

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America’s Income “Dynamics,” Not Income “Inequality,” Is Important

 

by Deborah D. Thornton

 

 

America has fabulous income “dynamics.” That is what Bill de Blasio and Hillary Clinton, and especially all the Republican presidential candidates, should be talking about, not income “inequality.” Having a dynamic income and life is the promise and the reward of American citizenship and capitalism. Not income equality.

 

What is income dynamics? The evolution and change of a worker’s or family’s income over time and their ability to influence and change that dynamic.[1] Since 1968 the University of Michigan has collected data on a continuing group of families and their children, and now their children’s children, on their economic well-being. It was originally set up to assess the results of President Johnson’s “War on Poverty.” A study recently published by sociologists from Cornell University and Washington University using this data discusses the income dynamics of the U.S. and how it affects all of us. The “Panel Study on Income Dynamics (PSID)” shows that by age 60:


• Seven of ten of our population will have spent at least one year in the top 20th percentile of income. They will have been one of the “20 percenters.”
• Over half will have been a top “10 percenter” for at least one year.
• At least one of every ten workers will have been a “1 percenter” for at least one year.[2]

 

So, statistically if you take a snapshot of ten people between the ages of 25 and 60, seven of them will have done well economically for at least one year, five will have done very well, and one will have done very, very well in the income they earned. These are not the same people, nor are the individuals in the same category every year. The economic situations, up and down, of Americans are changing all the time. That is income dynamics.[3]

 

Seven of ten people will be in the top 20 percent of income earners for a least one year in their lifetime. This is a huge success of American capitalism and a huge success for our people and our economy. That is the aspect of our American economy we need to be celebrating.

 

The vast majority of people do not stay in the 1 percenter category for their entire lifetime or even for ten years. So what happens to them? Of those ten people between age 25 and 60, almost half will have used a government need-based program like food stamps at some point before they turn 60.[4] According to the book Chasing the American Dream, 54 percent will have “at least one year of poverty” whether or not they used government aid programs. So they will have been “rich” and they will have been “poor” – all in the same lifetime.

 

Obviously those 50 percent who were poor figured out how to not be poor. And some of those who were rich couldn’t figure out how to stay that way. Neither the 1 percenters nor the 99 percenters are fixed, stable categories. Few of us stay in either group. Nor do we have to.

 

Based on the analysis of the PSID income data from 1968 to 2002 by the Pew Charitable Trusts, most of our children (84 percent) earn more income than we do, no matter how much we make.[5] Of those families in the bottom 20 percent, 93 percent of their children earn more than they did at the same age. This is a good thing and indicative of the strong positive income dynamics at work.

 

The question is, “How do we have more of it?” “How do we help those who have fallen economically behind?”

The thing we do not do is impose more government controls on our families and workers and more government intervention through increased taxation and forced redistribution. A recent analysis of the economic freedom levels in the U.S. found that the states which have the least intrusive state government, which do not micro-manage their people through excessive taxing and spending, have lower levels of income inequality.[6] Economic freedom is a result of strong private property rights and reduced regulation and taxation of businesses. Presumably with increased economic freedom and lower levels of inequality, the people in these states also have higher levels of income dynamics. More of those in the bottom 20 percent of incomes are moving up.

 

The eight states which have the greatest economic freedom are Texas, South and North Dakota, Virginia, New Hampshire, Louisiana, Nebraska, and Delaware. They have significantly less income inequality than the states with the least economic freedom: Maine, Vermont, Mississippi, New York, Rhode Island, West Virginia, New Jersey, and California.

 

Rather than hearing from and following the policies of Mayors and Governors such as Bill de Blasio, Chris Christie, and Jerry Brown, Iowans just might be better off listening to Rick Perry, Bobby Jindal, Pete Ricketts, and Dennis Daugaard. New York City Mayor de Blasio was recently in Iowa, attempting to tell us how to run our state (ending Right-to-Work and mandating $15 minimum wages), but as his city and state are caught in a “vicious circle of high income inequality and heavy redistribution,” with no positive income dynamics for anyone, maybe he should stay home and leave us alone. Iowans are doing pretty well, attracting new businesses and new jobs, providing opportunity for entrepreneurs and young people. We do not need a city slicker’s help with our income dynamics…unless he wants to get on a tractor and start planting corn and soybeans!

 

(Endnotes)
[1] Katherine A. McGonagle, “The Panel Study of Income Dynamics: overview, recent innovations, and potential for life course research,” Longitudinal and Life Course Studies 2012, Volume 3, Issue 2, p. 268, <http://psidonline.isr.umich.edu/llcs2012.pdf> accessed on April 17, 2015.
[2] Thomas A. Hirschl and Mark R. Rank, “The Life Course Dynamics of Affluence,” The Public Library of Science, PLoSOne, January 28, 2015, <http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0116370> accessed on April 18, 2015.
[3] Chris Matthews, “The Myth of the 1% and the 99%,” Fortune, March 2, 2015, <http://fortune.com/2015/03/02/economic-inequality-myth-1-percent-wealth/> accessed on April 17, 2015.
[4] Ibid.
[5] Susan K. Urhan, “Pursuing the American Dream: Economic Mobility Across the Generations,” Pew Charitable Trusts, July 22, 2014, p. 2, <http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/PursuingAmericanDreampdf.pdf> accessed on April 16, 2015.
[6] Ronald Bailey, “Less Economic Freedom Equals More Income Inequality,” Reason.com, February 20, 2015, <http://reason.com/archives/2015/02/20/less-economic-freedom-equals-more-income#.kkhroo:YGpT> accessed on April 16, 2015.

 

Deborah D. Thornton is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact her at Public.Interest.Institute@LimitedGovernment.org.

 

Permission to reprint or copy in whole or part is granted, provided a version of this credit line is used:"Reprinted by permission from INSTITUTE BRIEF, a publication of Public Interest Institute." The views expressed in this publication are those of the author and not necessarily those of Public Interest Institute. They are brought to you in the interest of a better-informed citizenry.

   

 

 

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