There has been a great deal of press lately about the terrors and travesties of The 1%. We have been reminded repeatedly by the Occupy Wall Street (OW) movement , via the mainstream media, how our degenerate and out–of-control capitalistic system has systematically moved large piles of cash into the coffers of the ultra rich, all at the expense of the remaining, somehow monolithic, and ultimately disenfranchised 99%. And while the OW message that our economic system has become corrupted by cronyism, is correct, their insistence that the vast swath of America is licking the boots of modern-day robber barons whilst wallowing in poverty, or at the very least, material stagnation, is an absolute falsehood, one that is perpetuated by a weak economic analysis known as the “snapshot fallacy.”
The premise of this fallacy is that it is illogical and unreliable to take a still picture of any phenomenon (any large system), and then extrapolate truths used to make policy decisions that project into the future. This is precisely what occurred when pundits interpreted recent U.S. Census data. It was not that the data itself was erroneous. However, because census data is taken every ten years, it does not capture the movement of people through the economic system over time. Hence, interpretations of this snapshot are misleading at best, and likely deceptive.
This is because all events, whether economic or social, are dynamic, meaning they take place over time and are therefore subject to significant changes. Much like listening to only to a single contentious conversation between a husband and a wife might lead one to believe that the entire relationship is on the rocks, taking a snapshot of the economy at one point in time and then drawing conclusions about categories can be misleading. This is because, as the systems philosopher and author of The Rational Optimist: How Prosperity Evolves Matt Ridley points out, attempting to understand complex adaptive systems with our limited, temporal-bound perceptions distorts reality and reduces the world to zero-sum terms. 1
Then again, we are a society obsessed with categorization: we are white, black, Hispanic, Asian, blonde, brunette, fat, skinny, young, old. However, the ultimate dichotomy is classism, an ongoing conflict that cleaves Americans into rich and poor camps, into oppressors and oppressed.
A better, more accurate, and realistic way of judging the economy (and people for that matter) is to look at data and behavior over time. This economic data is available from the U. S. Treasury Department data. By following specific individuals over time from their tax returns to the Internal Revenue Service, the data reveals that the incomes of those particular taxpayers who were in the bottom 20 percent in income rose 91 percent by 2005, while the income of those particular taxpayers who were in the top 20 percent in 1996 rose only 10 percent by 2005 -- and those in the top 5 percent and top one percent actually declined. Moreover, 86 percent of those in the lowest 20 percent of income earners in 1979 had moved to a higher income category by 1988; 66 percent reaching the middle range or above, while 15 percent ascended to the top fifth of income earners.2
In fact , according to the economists Bruce D. Meyer of the University of Chicago and James X. Sullivan University of Notre Dame, by accounting for inflation, taxes, and
noncash benefits (welfare), something conveniently left out of U.S. Census, the median income rose by more than 50 percent over the past three decades. 3
Other data also support this overall rise in prosperity for all Americans. According to a University of Michigan longitudinal study tracking more than fifty thousand Americans from 1968-1991:4
- Only 5 percent of the families in the bottom fifth of income distribution in 1975 were still there in 1991. More than three-fourths of them had made their way up to the two highest income quintiles.
- The poorest families made the largest gains. Those who started in the bottom 20 percent in 1975 had an inflation-adjusted gain in annual income of $27,745 by 1991; those who started in the top 20 percent in 1975 also improved, but only by $4,354.
- Less than 1 percent of the sample population remained in the bottom 20 percent during the entire time period under study.
- Among the second poorest quintile in 1975, more than 70 percent had moved to a higher quintile by 1991, and one-fourth reached the top 20 percent bracket.
- With education and training the rise up the income brackets was even swifter: more than half of the families who were in the bottom 20 percent in 1975 made it to a higher bracket within four years.
This economic progress is known as income mobility. Rather than a static snapshot of where people are at a given point in time, this data paints a picture of robust economic progress over time, something that has been a constant narrative in America since the first major waves of immigration in the early 19th century.
But you have to be willing to look beyond the here and now. Consider the following graph:
This looks as though income disparity has indeed been on the march for some time. Until that is, you look at it longitudinally, across time. When you do this, a vastly different set of data materializes:
You can see that over time, income mobility is at play, and has moved people up the economic ladder. In other words, when you compare where specific people were and how they progressed and changed, rather than using fixed snapshots and categories, a more realistic, accurate and complete picture emerges.
Of course, this is rather dry, academic stuff. Terms like “longitudinal,” “snapshot fallacy,“ and “income mobility” pale in comparison to emotionally charged terms such as “inequality,” “oppression,” and “greed.” Such incendiary language and meteoric rhetoric, while stoking the fires of class warfare, do little to provide accurate data, much less grow our economy or propel the poor to a better place.
These divisive efforts have always failed, and always will, because this approach suffers from the same shortsightedness of other approaches based on snapshots: people are not static, statistical categories to be judged, manipulated and adjusted at the whim of supposedly benign and omnipotent central force. We’re individuals with unique ambitions, talents, and dreams. And we don’t need government, or protestors to classify us, categorize us, or move us form one data point to another via income redistribution schemes. What we need is economic freedom, something that is fading swiftly from our horizon and threatens to undermine our republic. If there is one important message we can glean form the OW crowd, it is that we have lost our perspective in regard to the role that money should play in our lives. When we prize materialism above people and then expect government to redress this wrong, we simultaneously abdicate personal responsibility and autonomy, moving us further down the road to serfdom. That will be the topic of my next blog.
Gary
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