Saturday, February 18, 2006
Land of Opportunity? Part 1
Is a distribution of income in which those at 99.9th percentile make 10 times as much as those at the 90th percentile, make 29 times as much money as those at the median, and make 90 times as much as those at the 20th percentile, and where the gaps between those at the top and those at the middle and bottom are growing, fair? Is such a distribution efficient?
Answering these questions is not nearly as simple as many believe. There are several key questions that need to be address before one can hope to assess the equity and efficiency of such a distribution. E.g., what is the time horizon of the distribution? Does this distribution describe individuals’ or families’ relative earnings for a single hour? A day? A year? A lifetime? Several generations? Obviously, these distinctions matter. Depending on how much mobility there is across time, the distribution of income described above (which roughly describes the distribution of annual income in the US in 2001) could look very different if the incomes of several generations are included. (E.g., in a world with lots of mobility, those at the top today come from families who were poor yesterday, so if we include parents and children together things balance out and the distribution is not nearly as wide.)
Further, how does this distribution compare to the distribution in previous periods (using a consistently defined period like a decade)? That is, how much income growth is there and how is it distributed? Is the entire distribution of inflation adjusted income shifted right, so that every position in the distribution is better off than it used to be, or are some (or all) positions worse than they were before?
Finally, are there acceptable tradeoffs between inequality and growth? E.g., is higher income inequality acceptable if all parts of the income distribution have grown (so everyone is absolutely better off, but some are relatively worse off)? Or would we prefer to exchange some amount of income growth for less inequality?
These questions form the foundation for much of the debate about social policy in the US and around the world. The answers to these questions define who is rich and who is poor, how we feel about them, and whether and what might need to be done to address any potential concerns. Yet, very rarely do people clearly articulate their assumptions about these issues when discussing them. As such, people talk past each other, fail to communicate, and ultimately become more and more frustrated with each other.
Over the next several weeks, I plan to return to these questions in hopes of both clarifying your (and my own) thoughts on these important issues and showing how economists try and clarify discussions by focusing people’s attention on the essential assumptions that underlie their point of view.
Eventually, I will provide a few basic facts about Americans' attitudes about these topics. Following that, I plan to discuss the potentially growing disparity in relative income (regardless of time horizon) by describing the trends in income inequality and mobility. Next, I will describe growth across the income distribution for several different periods. Once I have provided a reasonable description of where we are, I will speculate on where we may be heading based on what we think is driving current trends. Finally, we will discuss if where we are (and where we are heading) seems like where we want to be in terms of both equity and efficiency. If so, why are we satisfied? If not, where would we like to be and what might we do in order to try and get there.
I am not sure what the schedule will be, and this is slightly off topic for where we are in the course. But, part of the beauty of a blog is that I can post things as I am motivated to get them done, and they will still be here later.
Answering these questions is not nearly as simple as many believe. There are several key questions that need to be address before one can hope to assess the equity and efficiency of such a distribution. E.g., what is the time horizon of the distribution? Does this distribution describe individuals’ or families’ relative earnings for a single hour? A day? A year? A lifetime? Several generations? Obviously, these distinctions matter. Depending on how much mobility there is across time, the distribution of income described above (which roughly describes the distribution of annual income in the US in 2001) could look very different if the incomes of several generations are included. (E.g., in a world with lots of mobility, those at the top today come from families who were poor yesterday, so if we include parents and children together things balance out and the distribution is not nearly as wide.)
Further, how does this distribution compare to the distribution in previous periods (using a consistently defined period like a decade)? That is, how much income growth is there and how is it distributed? Is the entire distribution of inflation adjusted income shifted right, so that every position in the distribution is better off than it used to be, or are some (or all) positions worse than they were before?
Finally, are there acceptable tradeoffs between inequality and growth? E.g., is higher income inequality acceptable if all parts of the income distribution have grown (so everyone is absolutely better off, but some are relatively worse off)? Or would we prefer to exchange some amount of income growth for less inequality?
These questions form the foundation for much of the debate about social policy in the US and around the world. The answers to these questions define who is rich and who is poor, how we feel about them, and whether and what might need to be done to address any potential concerns. Yet, very rarely do people clearly articulate their assumptions about these issues when discussing them. As such, people talk past each other, fail to communicate, and ultimately become more and more frustrated with each other.
Over the next several weeks, I plan to return to these questions in hopes of both clarifying your (and my own) thoughts on these important issues and showing how economists try and clarify discussions by focusing people’s attention on the essential assumptions that underlie their point of view.
Eventually, I will provide a few basic facts about Americans' attitudes about these topics. Following that, I plan to discuss the potentially growing disparity in relative income (regardless of time horizon) by describing the trends in income inequality and mobility. Next, I will describe growth across the income distribution for several different periods. Once I have provided a reasonable description of where we are, I will speculate on where we may be heading based on what we think is driving current trends. Finally, we will discuss if where we are (and where we are heading) seems like where we want to be in terms of both equity and efficiency. If so, why are we satisfied? If not, where would we like to be and what might we do in order to try and get there.
I am not sure what the schedule will be, and this is slightly off topic for where we are in the course. But, part of the beauty of a blog is that I can post things as I am motivated to get them done, and they will still be here later.
// posted by BW @ 5:57 PM 
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