With Income, Mobility Is the Issue—Not Inequality

Judging by surveys by the Pew Charitable Trust and others, it is further down on the list of things most people care about.

Yet President Obama calls it “the defining challenge of our time.” Senator Harry Reid says there is “no greater challenge” facing the country. Not to be outdone, Massachusetts Senator Elizabeth Warren goes further, saying “the system is rigged.”

Attention is further focused on this with the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, a book so popular with the bien pensant that if it wasn’t so full of dry data it would have been turned into a Hollywood screenplay by now. Piketty’s work in collaboration with University of California-Berkley economist Emmanuel Saez represents an impressive collection of data that analyzes income distribution over long periods of time.

The share of income received by the top 1 percent, according to Piketty and Saez, has grown from $1 out of every $10 in 1979 to one $1 of $5. Some say middle-class wages and household incomes have stagnated. Poverty has risen; economic mobility has fallen.

Is this true? And even if it is, does it accurately reflect the challenges America truly faces? In the first place, studies that measure income inequality by largely focusing on pretax incomes while ignoring the transfer payments and spending from unemployment insurance, food stamps, Medicaid and other safety net programs are conceptually flawed. By ignoring benefits such as employer-provided health insurance and showing capital gains as giant lump sums of income, such studies exaggerate income concentration.

“Politicians who rest their demands for more redistribution on studies of income inequality but leave out the existing safety net are putting their thumb on the scale,” observes AEI resident scholars Keven Hassett and Aparna Mathur.

Consumption is a better way to measure overall welfare than pre-tax income. Using data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, Hassett and Mathur conducted a recent study, “A New Measure of Consumption Inequality,” and found that the consumption gap across income groups has remained remarkably stable over time. “It is not at all clear that the interpretations of the data presented by Piketty and Saez show what they say they do,” says Donald Boudreaux, professor of economics at George Mason University, and scholar at the Mercatus Center. “It is the nature of some researchers that they are comfortable with data that confirms their basic beliefs as opposed to data that contradict it.

For example, there is a huge amount of fluctuation, not to mention uncertainty, in income groups. People move in and out of these statistical quintiles. Charles and David Koch may not leave the top quintile, but people in the lower groups move up and down all the time.” People generally have access to many more material possessions than they did in, say, the 1980s.

An Apple iPhone 5S is equally available to a Dominos delivery boy as it is to Bill Gates and doesn’t perform any better for either person. From 2000 to 2010, for example, consumption has climbed 14 percent for individuals in the bottom fifth of households, 6 percent for those in the middle fifth, and 14.3 percent for people in the top fifth when accounting for changes in the U.S. population and size of households.

The larger question ought to be whether income disparities in any way disturb the historic ability of Americans at the bottom to become the next Bill Gates or Mark Zuckerberg. With long-term unemployment and high degree of economic insecurity in the wake of the Great Recession, it’s understandable why some have grown more concerned.

Scott Winship, Walter Wriston Fellow at the Manhattan Institute, has studied this since his days at Brookings. He argues that no research shows real correlation between income inequality and mobility. He says, “upward mobility is the same today as it was two or three generations ago.” Winship adds that while mobility has not changed in decades it has been stuck at unacceptably low levels for many people. The true culprits are advances in technology and the rise of globalization, which have transformed our economy, marginalizing people with low skills.

In short, inequality is a distraction. Our real defining challenge is to boost economic growth and close the skills gap that widens opportunity for all.