Increasing Mobility of Low Income People to Higher Incomes

I am going to comment on an article by W. Bradford Wilcox posted at the American Enterprise Institute on income mobility in the United States.  He has presented some data of Harvard economist Raj Chetty, a principal investigator at the Equality of Opportunity Project, based on local variations of local income growth, the share of single mother households locally, and local government spending.  The mobility is question here was actually one with a very high bar.  A child born into a lowest quintile household has to be a highest quintile earner by age 30.  Most highest quintile earners are well into their careers and tend to be much older 30.

Wilcox has fit these data sets with linear functions.  The data are interesting, though the linear fits are problematic for two of his three plots of the data.  In light of the recent renewal of Obama's redistributionist efforts, only partially and even falsely carried out by ObamaVaporCare, this is a good time to talk about what really affects income mobility.

The first plot, which is reasonably fit with a linear function, is:

This is not surprising.  Where income growth is strong in America, labor is more valued and those who want to work hard have many opportunities to make money.  Of course Obama's anti-business policies, high energy costs, excessive regulations, and the costs of ObamaVaporCare decrease income growth and are therefore likely to decrease income mobility on the national scale.  Nonetheless, local government efforts to suppress the free market will still leave a strong imprint on local mobility variations.  There is no question that it is much easier to start a business in some areas than in others, as an example with important affects on mobility.

Another critical effect on income mobility is:

Clearly an increasing share of households run by a single mother has a very negative effect on income mobility for their children.  The linear fit here is nonsense.  The proper fit is with a hyperbolic curve, which indicates a much stronger impact of single mother households on income mobility than a linear effect.  It has long been understood that there was a strong effect, but this data makes it very clear how strong and dominant that effect is.  It is well-understood that entitlement programs tend to increase the number of single mother households, so most of Obama's likely efforts to decrease income inequality will likely make it worse.  One of the many impacts of his policies already has been to increase energy costs, which really hurts those with little income badly.  How local government welfare programs are run will have a big impact on the number of single mother households.  Generally, the more money spent on such programs, the more single mother households.

The third plot is:

The thought here was that local government spending supports education, so with better local education systems, income mobility would be increased.  There probably is some such effect in some school districts, but we also know that generally increased spending on schools does not really correlate well with greater learning.  In some school districts, the people do have a high regard for education, but in many other districts it is just another labor union entitlement program to gain the teachers union votes.  Many inner city school systems are well-funded, but horribly managed.  So it is not surprising that the data does not follow any definable dependence in this case.  The data more nearly resembles a hand print with the palm pressed firmly and the fingers splayed out and pressing lightly.  Indeed, the thumb is nearly straight up, indicating that one can get virtually any result from spending $2,000 per capita on income mobility.  Clearly, neither local government spending nor local education spending is the primary effect on income mobility.  This is not to say that real learning is not important.  That I am sure is a critical effect.  But, sad to say, real learning is not something Obama is interested in.

Income mobility depends upon the opportunity to earn a living, which is heavily dependent upon government policies not shutting down or over-regulating opportunities.  Because freedom of contract is heavily suppressed in the USA, many opportunities to earn are decreased.  One such egregious way to decrease opportunity to earn and to develop a career is to increase the minimum wage.  Doing so hurts the under-educated the most by keeping them from getting their first jobs.  This keeps them from acquiring skills and from establishing a record as a worthy employee.  It forces many to turn to crime.  The high costs of providing health insurance under ObamaCare and the minimum wage increases that took effect just before and during the start of the Great Socialist Recession have already had a disproportionate impact on ensuring the unemployment and part-time employment of those in the lowest quintile income households.  Obama has been no friend to the small businesses that often hire young people and give them their first opportunity to prove themselves.

It is another Obama farce to claim that he is going to do something to increase income mobility and to reduce income inequality.  As always, he will cause effects opposed to those he claims he will achieve.  Of course his main purpose in this income inequality rhetoric is to distract the American People from the disasters he has already caused in the economy and with our medical care.

A Fallacious Liberal Claim of Income Stagnation

Democrats like to make the claim that median U.S. worker income has been almost stagnant since 1980.  This is said to show that trickle-down, supply-side, or self-responsibility economics does not work for the median worker.  Only the rich benefit, they say.  Let us examine this claim.

It is true that between 1980 and 2005 the median worker income minus benefits increased a mere $700 from $25,000 in 1980.  This ignores the fact that benefits grew at a much faster rate than did worker compensation in the form of direct income.  It also ignores the fact that many more workers with incomes above the median are making much more money now than they were in 1980.  Average income went up much more than did median income.  In 1980, only 23% of all jobs were considered high paying professional jobs, while more than half of all new jobs since 1980 are high paying professional jobs.  If this were to continue into the future, more than half of all jobs in existence will become high paying professional jobs and the median income will climb sharply.  But as yet, the median job is not a high paying professional job.  But we should note that the stagnation in median income is not due to most new jobs being burger flipping.

There is further news indicating that the median income figures for all workers are hiding the important truth.  It turns out that both white men and white women in the workforce have had much higher income gains since 1980 than the reported all worker gain of 3%.  White men have gained in income by 15% and white women have gained by 75%!  Does this mean that non-white workers have lost income since 1980?  No, not at all.  Nonwhite men gained 16% in income.  Nonwhite women gained 62% in income.  Every one of the individual categories gained many times more than 3% in income since 1980!  The reason the median income for all workers barely increased was because the workforce came to be increasingly composed of nonwhites and white women whose median group incomes were below the median income of all workers in 1980.  Changing demographics is the explanation for the nearly stagnant median income minus benefit result.

The median income for white men rose from $30,700 to $35,200, moving most of their income distribution curve well above the total worker distribution curve median.  Nonwhite men increased their income from $19,300  to $22,300.  White women raised their incomes from $11,200 to $19,600, while nonwhite women raised theirs from $10,200 to $16,500.  Because the fraction of the population which is nonwhite is growing, part of the reason for their lower incomes is because the nonwhite men and women have lower median ages and therefore less job experience.  Younger people with less job experience generally earn less.

The fact that the median income of all workers has been essentially stagnant between 1980 and 2005 is not an indictment of supply-side economics or Reaganomics as the Democrats love to claim.  This is a result of the very large increase in the fraction of nonwhite workers in that period who have long had lower incomes than white males.  This rapidly growing nonwhite worker fraction also has a lower median age and therefore has less job experience.  The employed Hispanic population was the primary growth fraction of the employed in 2005 compared to 1980.  The fraction of white workers decreased by more than 6%, while the fraction of black workers went up about 7%.  The fraction of Hispanics increased by a factor of 2.43!

Between 1980 and 1990, the labor force participation rate for women grew rapidly before plateauing from then until 2005.  The labor force participation rate of men fell slightly from 1980 to 2005.  This also caused the fraction of workers in a lower earning group to increase.

Supply-side economics or Reaganomics was advanced as a method to raise all boats.  It performed as advertised, despite being applied in only a modest and half-hearted manner.  White female worker and nonwhite female worker income advanced sharply, 75% and 62%, respectively.  White male and nonwhite male incomes advanced less dramatically, but they still increased 15% and 16%, respectively, from 1980 to 2005.  We should all be reasonably happy with these results in the face of a rapidly changing demographics.

Texas Rewards Success, California Taxes It

California and Texas are 1 and 2 in Gross State Product (GSP), the state equivalent of the GNP. The 2008 GSP of California was $1.847 trillion and that for Texas was $1.224 trillion, with New York not too far behind Texas. From 2005 to 2008, the states with the fastest growth in GSP and their ranking on the personal and economic freedom index of Ruger and Sorens published by the Mercatus Center of George Mason University (dated February 2009) are:

Wyoming, 33.56%, 20
North Dakota, 28.52%, 4
Texas, 24.59%, 7
Utah, 23.17%, 14
Alaska, 21.72%, 47
Louisiana, 21.42%, 28
Oklahoma, 21.14%, 17
Montana, 20.48, 21
South Dakota, 20.34, 1

The corresponding results for California are:

California, 13.40%, 48

An article in the Investor's Business Daily called A Trenchant Tale of Two States points out further contrasts between these two states.  California had lost 1.46 million jobs due to this socialist recession we are in as of August when comparing to the jobs of December 2007.  But, Texas had replaced the jobs that were lost there earlier in the recession.  As of August, California alone accounted for 22.74% of the jobs lost in the nation since December 2007!

The magazine Chief Executive polls CEOs about the business environment in the states and California was ranked 50th of the states each of the last five years.  Texas was ranked #1.  The CEOs blame California's high taxes, its over-regulation, and bias against the profit motive.  On the other hand, Texas is appreciated for not having a personal income tax, not taxing capital gains, and having a more reasonable regulatory burden.  California's capital gains tax is as high as 10.55%.  Its regulations raise labor costs, promote litigation, and put building projects into suspended animation.  The state and local governments make a habit of preying on businesses and property owners with fees and mandates.

As the IBD article graphics above show, Texas over a ten-year period, had a lower personal tax burden, its gross state product growth was higher, personal income growth was higher, its population growth was much higher, and its non-farm payroll employment growth was much higher when compared to California.  Texas also bettered the national averages in all of these categories.  In addition, there was a strong net domestic migration out of California and a strong migration into Texas.  People vote with their feet.

The issue of a state personal income tax is worth looking at more closely.  Texas and the eight other states with no state personal income tax grew their nonfarm payroll by 11.76% from 1999 to 2009.  California and the other eight states with the highest upper personal income tax brackets, grew the nonfarm payroll by only 2.48%.

Some states, such as California, are very highly biased against the profit motive, business, and property owners.  It makes doing business in those states very unpleasant.  Some companies move out of the state, while others simply choose to do their future expansion in other areas.  Sometimes the other area is Texas and sometimes it is in another country.

The IBD article concludes with an interesting anecdote:  California governments love alternative energy.  The City Manager of Brisbane, CA pretends to be enthusiastic about solar power, but this does not stop him from charging $13,510 for a permit to install a 131 kilowatt system.  He claimed it made no sense to allow a commercial firm a break on that fee, since they only wanted a profit.  The bias against profit might as well be a bias against jobs and income growth.  This bias is a characteristic of the more socialist states such as California and they pay a steep price for that bias.

Federal Government Civilian Worker Salaries

According to Will Wilkenson, Cato Institute Research Fellow, the average federal civilian worker in 2005 was compensated at over $106,000. This is double the average compensation of private workers and falls in the top 5% of personal incomes. In 2005, the average wages for a federal employee rose 5.8%. In the private sector, the income increase was only 3.3%.

Isn't it rather miraculous that private sector workers are so productive that the U.S. is the world leader in productivity, despite every effort these well-paid federal employees make to create roadblocks for their creative energies? We should assume that the government pays such high salaries because it wishes to lure the very best roadblockers into its employ.

Richard Rahn: Manslaughter by Politicians

Richard Rahn published an article called "Manslaughter by Politicians" in the Washington Times on 4 June 2008 which is a good read. Commonly, politicians find reasons to pass many thousands of pages of new legislation every year that affect our ability to perform work and to produce goods and services. The greater part of this legislation imposes great costs, which few people stop to consider. They simply accept whatever intended purpose for the legislation the politician offers up as being the only important result of the legislation. If it seems it might be nice to reduce the amount of CO2 emitted into the atmosphere by the human use of energy, then why bother to calculate the cost of using less energy, of developing and using new forms of energy which emit less CO2, or figuring out what human activities will have to be given up to pursue the goal of reducing CO2 emissions. The same is true with respect to many other things that seem good to people, such as OSHA requirements for workplace safety. When do we ever calculate the actual cost of nice sounding legislation against the expected benefit of that legislation? Almost never, and when we do, the calculation is simple-minded and biased toward proving that the legislation was necessary, since it is usually the government that is funding the research study.

Economics is the study of the use of limited resources and all resources are limited and finite, especially perhaps that of human life hours. We are all constantly faced with the decision to do this or to do that. Often, we cannot do both and if we can, we still often have to decide which action we will take first. So, if we are spending more of our money to buy gasoline because the government will not allow oil and gas companies to drill for oil in the United States, then we will have less money to spend on our medical needs. If we must pay more for food because the government is requiring the use of a large fraction of all US corn to make ethanol for gasoline fuel mixtures and driving up the costs of food production with crop subsidies, then again we will be able to spend less on medical care. Since worldwide food prices have doubled in the last year, many poor people around the world are suffering increased malnutrition, which leads to shortened lifespans. There are reasons why the average life expectancy is highly correlated with the per capita income of a society and why income growth is correlated with economic freedom.

Rahn cites a study by Frank Lichtenberg of the National Bureau for Economic Research that found that the medical expenditure needed to gain one life year in the US is about $11,000 and the pharmaceutical R&D expenditure needed to gain one life year is $1354. Consequently, when the politicians proposed allowing Americans to buy their prescription drugs in Canada, where a national health system puts pressure on pharmaceutical companies to sell their drugs at prices below those sufficient to fund the development of new drugs, the necessary expenditure to buy one year of life through pharmaceutical developments becomes impossible. So, does it make sense to save some money now on drug purchases at the expense of not further extending American lives in the future? Few people ask and think about this question, yet it is a central question.

When politicians fail to ask such questions and to weigh them rationally, they are committing manslaughter. When dealing with manslaughter, we have a serious responsibility to name the crime, even if it does not seem to be the nice thing to do in a non-confrontational society. But, it is better to force a confrontation and examine the consequences of the actions we force upon others carefully, then to unthinkingly bury the bodies as they pile up.