Wednesday, February 27, 2008

ECON 365: Promoting Income Mobility

We will, at some point in the near future, turn to discussing growing income inequality, stagnant income mobility, and the appropriate government response to it (if any). Rather than wait until then and provide a bunch of links all at once, I am going to start trying to build your interest now.

To start, here is an interesting discussion of ways in which the government currently promotes income mobility and a discussion of several policies that might produce "a bigger mobility bang for the buck". Here is a little teaser to, hopefully, get you interested:

A recent report (pdf) by the Economic Mobility Project attempts to answer this question. The report groups federal government spending into three broad categories: (1) expenditures aimed, at least in part, at promoting mobility; (2) expenditures on income maintenance, such as social security, health care, welfare, and housing support; (3) expenditures on public goods such as defense, environment, and transportation. As of 2006 about one fifth of federal spending — $740 billion, or 6% of GDP — was in the mobility-promotion category. Most of this takes the form of tax subsidies rather than direct expenditures.

The most striking of the report’s findings is how little of the federal government’s mobility expenditure goes to those with low incomes. This chart shows the estimated amounts that go to lower-income households (bottom two quintiles of the income distribution) versus middle-and-upper-income households (top three quintiles). In total, only about a quarter goes to the former group.

This seemingly-perverse distribution is not surprising. Spending decisions aren’t made by an omniscient policy czar seeking to maximize opportunity for upward mobility. They are a product of a political system characterized by clashing interests, ideologies, motives, and means.

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