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Inequality I

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Is America still the land of opportunity?  On Friday, the Wall Street Journal had a front page piece [2] with the headline:

As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls

On Sunday, the New York Times ran a mammoth article [3], the first in a series, examining class in America and looking at the perceptions and reality of class and income inequality in America.

These discussions of income inequality and most others mix together a bunch of different concepts and use empirical evidence that is easily misinterpreted.  This week I’m going to write a series of posts on the issues of inequality and class mobility.

The received wisdom on these topics is well-esconced in the minds of the public.  The rich are getting richer, capturing a disproportionate share of increases in income and wealth.  Some evidence suggests that the poor are getting worse off not just relative to the rich but absolutely.

Income inequality is inherently considered bad and the growing gap between rich and poor is seen as a social problem.  Those who would disagree often point to the fact that not everyone who is poor stays poor.  Not everyone who is rich stays rich.  Class in America is mutable.   But a recent series of studies highlighted in the Journal and the Times suggests that even this consolation is mistaken.  Class is rigid and being poor in America is much closer to a life sentence.

What do we really care about?  Here are a few possible ideals:

An equal distribution of income.

An equal distribution of opportunity—everyone should have an equal chance of becoming rich

A better life over time—each generation should be better off than the one before

Virtue is rewarded—if you work hard and make the right decisions, you’ll get ahead in the absolute and perhaps the relative sense as well.

We also care about changes in the things we care about:

Is the distribution of income getting more or less equal?

If you start out poor, are the chances of getting rich rising or falling over time?

If each generation gets richer, is the rate of improvement rising or falling?

Is the relationship between virtue and reward rising or falling?

Answers to these questions allow some people to conclude that life in America is getting better or worse.  Usually implicit in this discussion is an assumption that the processes that underlie these variables are under someone’s control, either the government’s or some class that manipulates the system to its own advantage.  So when people see the observed distribution of income getting less equal, it is presumed that this result is controlled by the rich.  And if the chances of the poor becoming rich is unchanged or worsening, then this must be someone’s explicit policy goal.

In particular, data seem to suggest that the poor are not just falling behind the rich, but the poor are falling behind absolutely.  The chances of the poor becoming rich is either constant over time or falling.  And the overall distribution of income is becoming more rigid.  If this is true, then someone is to blame and something should be done to return America to the land of opportunity.

These data are puzzling.  If anything, non-rich folks have more access to education and capital than ever before.  Then what explains the data?  I will argue in the next few posts that the data are being misinterpreted and that the class is closer to half-full than half-empty.