The Escalation of Income
By Arnold Kling
"...of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production."
-- Robert E. Lucas, Jr.
The often-used phrase "distribution of income" suggests the metaphor of a pie. I believe that a more accurate metaphor would be an escalator. The pie metaphor treats income as static, thereby ignoring one of the most important facts about the standard of living, which is its rise over time.
For example, consider what I call the "Wobegon" phenomenon. The majority of all families in any given year will be in the top 40 percent of the income distribution fifteen years later! For example, in Myths of Rich and Poor, W. Michael Cox and Richard Alm produce the following information based on a panel of families surveyed in 1975 and again in 1991.
Where they Began in 1975
Percent who made it to the top 40 percent in 1991
Lowest Fifth
59%
Second Fifth
52%
Middle Fifth
49%
Fourth Fifth
70%
Highest Fifth
86%
Overall, over 60 percent of families surveyed in 1975 made it to the top 40 percent in 1991. If the "distribution of income" were a pie, this would be mathematically impossible. The top income category by definition cannot include the majority of people. To put it another way, in 1991 it appears that much of the lower-income category has vanished!
To solve the apparent mystery, think of an escalator. In 1975, many of the families surveyed were young families or new immigrants, and they were near the bottom of the escalator. After fifteen years on the escalator, many of them reached the top half of the escalator. When you came back and surveyed the same families in 1991, most of them were near the top of the escalator. That is, they were in the top income categories relative to all families in 1991.
In 1991, the families at the bottom of the escalator were families that had formed or immigrated after 1975, so that they could not be included in a study that followed families from 1975 to 1991. If you were to look at all families as of 1991, you could spread them evenly across five income categories, but it would be a different group of families than those surveyed in 1975 and 1991.
The Escalator Rides an Escalator
However, the escalation of income does not stop with the fact that new families tend to increase their relative position on the escalator over time. Even holding constant a family's relative income category, its standard of living tends to be rising over time. The escalator itself ratchets up as technological innovation increases productivity, raising income in every category. One could say that the escalator itself is riding on an escalator!
Recently, the Washington Post wrote an article on the theme of middle-class vulnerability. The story says,
"All kinds of jobs that pay in the middle range -- Clark's $17 an hour, or about $35,000 a year, was smack in the center -- are vanishing, including computer-code crunchers, produce managers, call-center operators, travel agents and office clerks."
In fact, the data that accompany the story, which were obscured in a visually incomprehensible chart, show that the direction of movement in incomes is more up than down. The Post reports the following data, which I believe come from the Census Bureau, in which incomes are adjusted for inflation and expressed in 2003 dollars.
Income %in 1967 % in 2003
$75K and up 8.2 26.1
$50K - $75K 16.7 18.0
$35K - $50K 22.3 15.0
$15K - $35K 31.1 25.0
under $15K 21.7 15.9
The proportion of families earning $35,000 to $50,000 has fallen from 22.3 percent to 15.0 percent, which is consistent with the tone of the story. However, the proportion of families earning less than that has fallen, also. The most dramatic development is the increase in households earning more than $75,000, which went from 8.2 percent of households in 1967 to 26.1 percent of households in 2003. A large portion of the population has been "squeezed up" into the highest income category.
Return of the Fear Factor
The nature of economic life is changing. Lifetime jobs are disappearing. In fact, lifetime careers may be disappearing. See Progress and Displacement (chapter 10 of Learning Economics).
The net effect of Progress and Displacement on most households is positive. However, some households do not adapt as well. There certainly are people whose incomes move down over time, contrary to the motion of the escalator.
From the standpoint of public policy, however, it is wrong to view the entire system as broken. Statistically, the overwhelming majority of households are riding the income escalator in the right direction. When journalists and politicians argue the contrary, this is a classic example of what I recently called The Fear Factor, in which threats are overstated in order to motivate people to turn over more power to government.
I am in favor of government efforts to help the small minority of people for whom the escalator does not work. What infuriates me is the characterization of the great mass of affluent America as a victim of "middle-class squeeze" or some similar phony ailment.
I distrust journalists, politicians, and economists who use the phrase "distribution of income" and speak in terms of pie metaphors. The "pie" metaphor produces many counterproductive ideas. For example, it might lead you to think that raising the minimum wage is a good idea, even if it leads to the creation of fewer jobs for low-skilled workers. In fact, this is not a good trade-off, because young people need jobs in order to get on the escalator.
If you want to address the real challenges of poverty in this country, use the metaphor of an escalator. Target government intervention at people who are unable to get onto the escalator, due to impediments that may be medical, behavioral, or social. But don't try to "fix" the escalator by carving it up like a pie.
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