Income Inequality and Economic Mobility

Mark Thoma of Economist’s View writes in the Fiscal Times (excerpt):

Income Inequality Is Hobbling the Middle Class

Income inequality in the U.S. has been rising for the last several decades, and with it concern about the consequences. For example, to what extent does the large flow of income into the hands of financial executives give them the power to influence Congress through campaign donations? How does this have an impact on the willingness of legislators to impose regulations that would stabilize the financial system but inhibit the ability of the financial industry to make the huge profits that fund political campaigns?

If economic mobility increased along with the increase in inequality, then this would at least partially offset the worries associated with the rising concentration of income...

...What has happened to mobility in the U.S.? Is it any easier to move up and down the ladder than it used to be? Unfortunately, the answer is no. As Lane Kenworthy, one of the top experts on this topic notes: “Rising income and earnings inequality in the United States does not appear to have been offset by increased mobility.” He points to several ways we might increase mobility such as universal preschool, affordable college, improved K-12 schooling, and policies to strengthen the social safety net so that households do not lose ground when they experience problems such as the need for expensive health care or job loss in a recession.

There is another aspect of mobility that needs to be addressed. The type of mobility discussed above is within generation, or intra-generational mobility. This type of mobility refers to how easy it is to move up and down the income ladder during a person’s lifetime. Another type of mobility is how easy it is to move between social classes across generations, i.e. inter-generational mobility.

While many people believe that the U.S. is the most mobile country in the world, the evidence on inter-generational mobility tells another story. As economist Paul De Grauwe observes, contrary to what is widely believed, in recent times “many EU countries have created an environment in which it is significantly easier for the poor to climb the social ladder than it is in the U.S.”

Both types of mobility can be hampered by the concentration of wealth and power. For example, if wealth and power can be passed from generation to generation, and if the power that comes with wealth allows individuals to erect barriers that protect their businesses from competition or regulation, or to protect their position in society in other ways – for example access to better education – then the wealth that is passed from generation to generation serves as a barrier to mobility both within and across generations...

...There is one final factor to consider. A vibrant middle class is essential to mobility. For many people, the middle class serves as a steppingstone to the upper classes both within and across generations. If we continue along the path we are on to an increasingly two-tiered society, and if the middle class continues to experience problems, then there will be less room at the middle tiers of society for those who are trying to move up the ladder. Mobility between the classes will be reduced.

The increase in inequality in recent decades needs to be addressed. Increasing mobility can help, but this alone won’t overcome the inequality problem. However, we should still do our best to ease the frictions than inhibit mobility between social classes through better education, universal health care, social insurance programs that prevent large income losses, protection for the middle class, and other measures – including the redistribution of income to prevent the accumulation of wealth and power in society – that help to ensure that opportunity is more equitably distributed.

I usually cut down such articles for a more manageable read when I quote them on this blog. In this case, there are so many good points that there’s hardly anything I felt worth cutting. But go ahead and click on the link for the original – the couple of paragraphs I cut provide some nuance to the Professor Thoma’s explanation of the problem.