Upward mobility declines sharply as the rich make off with the growth

Late last year (December 2016), an interesting academic research paper was released by the National Bureau of Economic Research – The Fading American Dream: Trends in Absolute Income Mobility Since 1940 – which provides stark evidence of the way in which this neo-liberal era is panning out and suppressing the opportunities for the least advantaged. One of the constantly repeating claims made by conservatives is that if governments run deficits they are really undermining the future for their children and their children. The claim is that while the current generation is living it up (deficits are tantamount in this narrative to living a profligate existence), the next generations will have to pay for it via higher taxes and reduced services.It is a bizarre argument given that each generation chooses its own tax burden and we cannot transfer real resources through time. There is truth in the argument that if the current generation imposes terminal damage to our natural environment then we are diminishing the prospects for the future. But that is not the point that the neo-liberals make. Indeed, there is a strong positive relationship between conservative views of fiscal policy (deficits) and the propensity to engage in climate change denial. Recently released research is now showing that around 50 per cent of American children born in 1980 have incomes higher than their parents compared to 90 per cent born in 1940. The so-called ‘American Dream’ is looking like a nightmare. Other research has shown that the bottom 50 per cent of the US income distribution have not enjoyed any of the growth since 1980 and that the top-end-of-town has increased its share of income from 12 per cent in 1980s to 20 per cent in 2014. These shifts are the result of deliberate policy changes and inaction by governments, increasingly co-opted by the rich to serve their interests at the expense of the broader societal well-being. Revolutions have occurred for less.

It was considered the norm of human progress that each generation would leave the next generation better off. As parents we would ensure our children were (collectively) better off.

In his 2012 study of cultural history, The American Dream, Lawrence Samuel reprised the term introduced in 1931 by James Truslow Adams (in his The Epic of America). The two books should be read together to understand the evolution of the thinking about an American identity.

Samuel reflected on the fact that “that the term ‘American Dream’ was created in the darkest days of the Great Depression was all the more interesting given that many feared it no longer existed”.

Times were so bad for many during that period.

Samuel published his book during the GFC, the worst downturn since the Great Depression. He considers there were six eras since the Great Depression marked by different characteristics and circumstance.

But binding the social progress that defines the ‘American Dream’ was, in the words of the NBER authors the “ideal that children have a higher standard of living than their parents”.

We think of our own progress relative to that of our parents.

In recent history, the parents of the baby boomers had endured the Great Depression with it mass unemployment and rising poverty rates, then the Second World War and its aftermath.

Reflecting on that experience, this generation worked through government to ensure there was full employment, broad rights of citizenship with respect to income support, improved public services and reduced income inequality through income redistribution.

Wages growth was strong and proportional with productivity growth and mass education and public health improvements made obvious positive contributions to the growing well-being.

The 1950s and 1960s were not nirvana, but they were a damn site better than the two decades before that and the many before those.

Full employment combined with mass education, in particular, were considered an essential part of the quest for upward mobility

Previous research has shown that US children (a result that transfers across most nations) are pretty much doomed from the start as a result of who their parents are and the resources the parents have at their disposal.

I have written about this before. Please see – Parents are advance secret agents for the class society.

The title of that blog came from the work of Dutch economist Jan Pen, who wrote in his 1971 book – Income Distribution – that public policy had to target disadvantaged children in low-income neighbourhoods at an early age if governments wanted to change the patterns of social and income mobility.

The message from Pen was that the damage was done by the time the child reached their teenage years. While the later stages of Capitalism has found new ways to reinforce the elites which support the continuation of its exploitation and surplus labour appropriation (for example, deregulation, suppression of trade unions, real wage suppression, fiscal austerity), it remains that class differentials, which have always restricted upward mobility.

This also means that as fiscal austerity has further pushed people towards to the bottom of the income distribution that increasing numbers of children will inherit the disadvantage of their parents and this inheritance becomes a vicious circle of poverty and alienation.

In America, research has clearly shown that it is socioeconomic status rather than race which “largely explains gaps that appear to be due to race” (see cited blog for sources).

It is very obvious now that the bias towards fiscal austerity, which has been the hallmark of the neo-liberal era has increased inequality and suppressed dynamic forces in labour markets that promote upward mobility.

By failing to quickly end the most recent downturn (GFC) governments have allowed dynamic forces to multiply which reinforce disadvantage and suppress upward mobility.

While unemployment has been high (and remains high in most nations), the great American economist Arthur Okun considered it to be the ‘Tip of the Iceberg’.

The point is that the costs of recession and the resulting persistent unemployment extend well beyond the loss of jobs. Productivity is lower, participation rates are lower, the quality of work suffers and real wages typically fall.

The facts associated with the current downturn are consistent with this general model.

Within this context, Okun outlined his upgrading hypothesis (in the 1960s and 1970s) and the related high-pressure economy model, which provided a coherent rationale for Keynesian demand-stimulus policy positions.

Two references of relevance are Okun, A.M. (1973) ‘Upward Mobility in a High-Pressure Economy’, Brookings Papers on Economic Activity, 1: 207-252 and Okun, A.M. (1983) Economics for Policymaking, Cambridge, MIT Press.

Arthur Okun (1983: 171) believed that:

… unemployment was merely the tip of the iceberg that forms in a cold economy. The difference between unemployment rates of 5 percent and 4 percent extends far beyond the creation of jobs for 1 percent of the labor force. The submerged part of the iceberg includes (a) additional jobs for people who do not actively seek work in a slack labor market but nonetheless take jobs when they become available; (b) a longer workweek reflecting less part-time and more overtime employment; and (c) extra productivity – more output per man-hour – from fuller and more efficient use of labor and capital.

The positive side of this thinking is that disadvantaged groups in the economy were considered to achieve upward mobility as a result of higher economic activity. The saying that was attached to this line of reasoning was “all boats (large or small) rise on the high tide”.

Okun’s (1973) results are summarised as follows:

The most cyclically sensitive industries have large employment gaps, and were dominated by prime-age males, offered high-paying jobs, offered other remuneration characteristics (fringes) which encouraged long-term attachments between employers and employees, and displayed above-average output per person hour.

In demographic terms, when the employment gap is closed in aggregate, prime-age males exit low-paying industries and take jobs in other higher paying sectors and their jobs are taken mainly by young people.

In the advantaged industries, adult males gain large numbers of jobs but less than would occur if the demographic composition of industry employment remained unchanged following the gap closure. As a consequence, other demographic groups enter these ‘good’ jobs.

The demographic composition of industry employment is cyclically sensitive. The shift effects are in total estimated (in 1970) to be of the same magnitude as the scale effects (the proportional increases in employment across demographic groups assuming constant shares).

This indicates that a large number of labour market changes (the shifts) are generally of the ladder climbing type within demographic groups from low-pay to higher-pay industries.

So prior to the neo-liberal onslaught and during the period that governments were cogniscant of their responsibilities to maintain full employment (and actively used fiscal and monetary policy to attack high unemployment relatively quickly), a recovery reversed the damage caused by the recession.

The evidence supported the proposition that when the economy is maintained at high levels of employment, workers in low paying sectors (or occupations) also receive income boosts because employers seeking to meet their strong labour demand offer employment and training opportunities to the most disadvantaged in the population. If the economy falters, these groups are the most severely hit in terms of lost income opportunities.

The full employment era (roughly 1945 to the late 1970s) to some extent, therefore, eroded the worst effects of the class differences that we discussed earlier.

Which is one reason why the conservatives had to take control of the state, which had been acting as a mediator in the class struggle – to encourage upward mobility.

The onslaught against full employment and the Welfare State (the hallmark of the social democratic era) began in the early 1970s as well-funded right-wing (so-called ‘free market’) think tanks started to publish a barrage of propaganda, infiltrated academic institutions, took over the mainstream media, and, even compromised judicial processes (for example, the appointment of Lewis Powell to the US Supreme Court).

The upshot has been that once full employment was abandoned and governments adopted a chronic bias towards fiscal austerity (the belief that fiscal deficits are intrinsically bad), the upgrading benefits that used to accompany growth have been hijacked by the rich and the vast majority of the population now miss out.

In part, this is due to the increased casualisation of the labour market, the suppression of real wages growth, the attack on trade unions, and the shift away from high productivity job creation towards the FIRE sector, which is a largely unproductive sector.

The neo-liberal attack on the role of government in ensuring policy advances the well-being of all has changed the way the distributional system operates – with workers now finding it harder to gain access to real income growth despite contributing more per hour (productivity growth stronger).

Under these circumstances, the old class screening and channelling that the schooling system has provided for the Capitalist system is intensified and inequality accelerates.

We are now starting to see the empirical results of this as cohort studies permit generational comparisons. Shedding light on what has been happening between generations is the task of the NBER paper cited in the Introduction.

The paper by a host of US academics (Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren. Robert Manduca and Jimmy Narang) asks two questions:

First, what fraction of children earn more than their parents today? Second, how have rates of absolute mobility changed over time?

Absolute income mobility is defined as the:

… the fraction of children earning or consuming more than their parents.

They seek to answer these questions using “historical data from the Census and CPS cross-sections with panel data for recent birth cohorts from de-identified tax records” that allows them to uniquely bind parent and children incomes.

I will leave it to your interest to explore the techniques they employed. They are very innovative.

Basically they:

1. “measure income in pre-tax dollars at the household level when parents and children are approximately thirty years old, adjusting for inflation …”

2. “estimate the fraction of children who earn more than their parents in each birth cohort …”

The headline findings are:

1. “we find that rates of absolute upward income mobility in the United States have fallen sharply since 1940”.

2. “the fraction of children earning more than their parents fell from 92% in the 1940 birth cohort to 50% in the 1984 birth cohort.”

3. “Rates of absolute mobility fell the most for children with parents in the middle class.”

4. The finding of a decline in absolute majority is robust across different dimensions (pre-tax, post-transfer; age of child when measured; regions, gender, impacts of immigration, etc).

5. “Absolute mobility fell in all 50 states between the 1940 and 1980 cohorts, although the rate of decline varied, with the largest declines concentrated in states in the industrial Midwest states such as Michigan and Illinois.”

These are Trump’s ‘rust belts’ that he appealed to during the Presidential election.

The following graph is one of many they produce (each offering a different dimension, for example, wage income, family income etc) and “plots the fraction of children earning more than their parents (‘absolute mobility’) by … average by child birth cohort.”

So you interpret it as saying that 90 per cent of children born in 1940 will on average have incomes higher than their parents, whereas, only 50 per cent of children born in 1980 will on average have incomes higher than their parents, and so on.

The authors ask: “Why have rates of upward income mobility fallen so sharply over the past half century?”

They offer the following possible reasons:

There have been two important macroeconomic trends that have affected the incomes of children born in the 1980s relative to those born in the 1940s: lower Gross Domestic Product (GDP) growth rates and greater inequality in the distribution of growth …

They reject the first, saying that “the slowdown in aggregate economic growth in recent decades, although important, does not explain most of the observed decline in absolute mobility.”

Their counterfactual analysis shows that:

… increasing GDP growth without changing the current distribution of growth would have modest effects on rates of absolute mobility.

The problem is that:

… a large fraction of GDP goes to a small number of high income earners today, higher GDP growth does not substantially increase the number of children who earn more than their parents.

The key takeaway of their research is this:

The key point is that reviving the “American Dream” of high rates of absolute mobility would require more broadly shared economic growth rather than just higher GDP growth rates.

This research is consistent with studies in other nations. For example, see the analysis in my blog – Policy changes needed to arrest decline in fortunes for low-pay British workers.

The point is that the neo-liberal era with widening income inequality, entrenched labour underutilisation, suppressed wages growth and continued attacks on income support systems is producing an unsustainable society.

Eventually, there will be a counterattack as the middle class prospects continue to be eroded. While it might not come from the current generation, the children who are no coming into adulthood have been dealt a very poor hand by their parents.

If the NBER research is correct, then 50 per cent of Americans born in 1980 (now in their mid-1930) are enjoying absolute mobility (relative to their parents), which brings into question the concept of the ‘American Dream’, a cultural device to maintain social stability and endeavour.

It should not be forgotten that the parents themselves are under attack from this dysfunctional system and the prospects of growing intergenerational wealth through inheritance is becoming a faded reality for many families.

Another perspective is offered in this paper also released in December 2016 by French economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman – : Distributional National Accounts: Methods and Estimates for the United States.

The paper examines the “growth rates for each quantile of the income distribution consistent with macroeconomic growth” in the US since 1913.

I will look at it more closely another day but its major findings are that:

1. “a sharp divergence in the growth experienced by the bottom 50% versus the rest of the economy.”

2. “The average pre-tax income of the bottom 50% of adults has stagnated since 1980 at about $16,000 per adult (in constant 2014 dollars, using the national income deflator), while average national income per adult has grown by 60% to $64,500 in 2014.”

3. “As a result, the bottom 50% income share has collapsed from about 20% in 1980 to 12% in 2014.”

4. “In the meantime, the average pre-tax income of top 1% adults rose from $420,000 to about $1.3 million, and their income share increased from about 12% in the early 1980s to 20% in 2014.”

5. “The two groups have essentially switched their income shares, with 8 points of national income transferred from the bottom 50% to the top 1%. The top 1% income share is now almost twice as large as the bottom 50% share, a group that is by definition 50 times more numerous. In 1980, top 1% adults earned on average 27 times more than bottom 50% adults before tax while today they earn 81 times more.”

6. “government redistribution has offset only a small fraction of the increase in pre-tax inequality.”

7. “the upsurge of top incomes has mostly been a capital-driven phenomenon since the late 1990s. There is a widespread view that rising income inequality mostly owes to booming wages at the top end, i.e., a rise of the “working rich.” Our results confirm that this view is correct from the 1970s to the 1990s. But in contrast to earlier decades, the increase in income concentration over the last fifteen years owes to a boom in the income from equity and bonds at the top. The working rich are either turning into or being replaced by rentiers. Top earners became younger in the 1980s and 1990s but have been growing older since then.”

So beware the middle-class. Your children are already losing out but neo-liberal is eating into the parental well-being as well as the financial capitalists prosper.

Conclusion

This situation is obviously unsustainable.

It is time for the Left to stand up and lead the way out of this mess.

Growth and redistribution is needed. Governments have to take on the top-end-of-town. They can start by introducing employment guarantees that provide decent pay (with social wage additions) to anyone, thus eliminating the income insecurity.

Then some serious regulation is required to rein in the financial sector (I would basically eliminate much of it).

The Left are scared to say anything because, in part, their leadership is compromised by relationships with the financial capitalists (for example, the revelations about Hillary Clinton in the leaked E-mails), and, also, because they have a massive inferiority complex when discussing macroeconomics.

They think if they argue that fiscal deficits are usually desirable and should be continuous they will look irresponsible. Well that is because they have allowed the public to be indoctrinated into these erroneous views.

The Left has to launch a massive educational onslaught to redress this knowledge gap as they set about reversing the ravages of neo-liberalism.

My blog is just a little pixel in the phalanx!

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.