The Texas-Wisconsin Paradox and intergenerational income mobility

There has been a spate of papers in the past couple of years calling into question whether the US is the highly mobile, equal opportunity nation we like to consider ourselves to be, compared to the developed countries of the Old World and OECD (See American Exceptionalism in a New Light by Markus Jantti, et al and Intergenerational Social Mobility: The United States in Comparative Perspective by Emily Beller Michael Hout). This argument has been contested by others (See Why economic mobility measures are overrated by Tyler Cowen). Having lived and worked in Europe, North America, and Asia, this new view of lower American mobility compared to others is inconsistent with my experience and perception of those countries. Anecdotal assessment does not trump empirical data but it is a catalyst to skepticism. Cowen and others raise important points. I want to explore an avenue of criticism which I have not seen discussed elsewhere; the impact of cultural heterogeneity on aggregate intergenerational income mobility statistics.

In a “perfect” world, someone in one quintile would have an equal chance of ending up in any one of the five income quintiles (i.e. the difference of the quintile of the parental home into which they are born and the quintile at which they arrive at some point in life, say retirement or death). In order to take this randomness as the standard of fairness and equality, one has to assume that the quintile in which one is positioned, both at birth and later at death, is simply a function of luck. This assumption is a common one among the glitterati and chattering classes. Anything less than random distribution is taken as evidence of structural impediments, discrimination, protectionism, etc. In some countries these structural and cultural impediments are real though I do not believe them to be in America.

However, if one accepts that people are purposeful, then the quintile to which they evolve is a function of exogenous circumstances interacting with cultural and individual attributes such as values, behaviors, knowledge, skills and patterns of decision-making. For any given set of exogenous circumstances, some individuals/cultures will be better positioned to make more productive decisions than others. Likewise, over a period of time and a range of exogenous circumstances, it is likely that some individuals/cultures will be more responsive and adaptive than others. It is demonstrable that certain cultures are more robust over time (they survive and evolve) and/or are more prone to greater productivity. In other words, values, behaviors, knowledge, skills and patterns of decision-making are the decisive determinants of productivity and continuity over time (and over a broad spectrum of random exogenous events) rather than luck.

The validity of the expectation that fairness is represented by equal intergenerational mobility is belied by looking at national economies. Were one to accept the premise that fairness is defined as random quintile movement between generations, one would expect to see dramatic changes in the order of national economies each 25 years. While virtually all economies have improved in the past 250 years (ten generations), the relative order of national economies has remained relatively stable, i.e. there is very little intergenerational movement of national economies. Intuitively we understand that this a function of national cultures and institutions rather than random luck. Countries with stable law, property rights, personal and commercial freedoms, etc. combined with cultural attributes such as future-orientation, tolerance, risk aversion, personal accountability, diligence, work-ethic, trust, etc. are and remain more productive than other countries lacking these attributes. Countries that have evolved up the hierarchy of productive countries (Chile, Singapore, South Korea, Taiwan, etc.) have all been countries that have a winning combination of such elements. There is no correlation between a country’s luck (natural endowment of resources) and its hierarchical position of productivity.

Countries that are already productive and have robust cultures that predispose them towards further productivity retain their positions in the rankings. This makes sense to most people and we do not expect dramatic changes in rankings from generation to generation because we do not believe that national productivity is simply statistical luck. Nor do we believe it should be.

Why is it that we expect that dynamic to be different at the individual level? We don’t. We want the rules to stay the same for all individuals so that there is some form of manageable predictability on which to base life-decisions but we don’t expect all individuals to make equally good decisions. The reality that there are some configurations of culture (values, behaviors, knowledge, skills and decision-making) which are more adaptive to a broader range of exogenous circumstances is simply an evolutionary reality which can be transmitted via cultural structures. While we can identify a portfolio of specific cultural attributes which correlate with productivity, we are not at a point of knowledge where we can identify the exact mix and relative importance of the particular attributes. For example are personal freedoms more important to productivity than stable laws? We know they are both important but we don’t know how important each is overall or relative to each other.

At the level of individuals, there is a broad range of evidence, which individually is not particularly robust but which cumulatively is more compelling, supporting the idea that quintile placement is not a matter of random luck but is a purposeful achievement based on certain combinations of values, behaviors, knowledge, skills and patterns of decision-making (see Creating an Opportunity Society by Ron Haskins and Isabel Sawhill for empirical evidence of the significant impact of behavioral norms on life achievement as well as A Farewell to Alms by Gregory Clark for evidence regarding the impact of “middle class” cultural values). See Surnames and the laws of social mobility for evidence regarding the durability of constant re-achievement of success across multiple generations.

Once we accept that quintile placement is not a matter of luck but of purposeful achievement, then we are freed to investigate what variables in which combination are most likely to yield the highest level of robust, continuing productivity over time. In a dynamic, heterogeneous, and uncertain environment, it is difficult to pin down cause-and-effect. At the same time there are some trade-offs that emerge under many circumstances: With more freedom comes greater inequality; With greater equality comes lower productivity; With greater heterogeneity comes greater inequality, etc.

This all serves as background to what I suspect may be happening with regard to measured intergenerational income mobility between the US and other developed countries in the OECD. The first point to make is that the US is the most culturally heterogeneous large OECD country (Singapore comes close in terms of heterogeneity but is only 3 million people.) Broadly the US is made up of 65% descendant of northwestern Europeans, 15% descendants of Africans, 15% descendants of Hispanics (Mesoamericans and Spanish heritage), and 5% other. In all other large OECD countries, there is far greater cultural, ethnic, and temporal homogeneity (temporal homogeneity reflecting the degree of recent emigrants). Most other OECD countries are at 85-95% homogeneity compared to the US’s 65%. This opens up the issue of apples to oranges comparisons, the nature of which can be illustrated by the Texas–Wisconsin educational paradox where Texas does a better job of educating (as reflected in test scores) each of its ethnic/cultural subgroups compared to Wisconsin but Wisconsin has higher average test scores.

How can each of the constituent components in Texas be higher but the overall average be lower? Differential scores between the constituent groups, i.e. Asians score highest on average and then in descending order, whites, Hispanics and then African-Americans. While all groups score higher in Texas than in Wisconsin, Texas has a dramatically higher proportion of its population from lower scoring groups than does Wisconsin. Basically Texas is a White, Hispanic and African-American state whereas Wisconsin is a White state. So which state has the better education system? The one that has higher overall average scores from a high scoring homogeneous group or the state in which each ethnic/cultural group scores higher than their corresponding group in the other state?

In the field of international education comparisons, Programme for International Student Assessment (PISA) is an attempt to compare educational K-12 outcomes across the OECD. The US usually lands pretty much in the middle of the test results seeming to indicate a relatively poor performance considering the per capita expenditures on education (far higher in the US than elsewhere). However – apples and oranges. The US is basically educating three heterogeneous groups – descendants of northwestern European and heirs to Western Civilization, descendants of Africans and heirs to 250 years of subjugation, and recently arrived descendants of Mesoamerican and Spanish civilizations. I have not seen a thorough disaggregation but the elements I have seen seem to indicate that the US whites score close to the top of the PISA tests compared to European countries, US African-Americans score at the top compared to the few predominantly black countries that participate in PISA and US Hispanics score at the top compared to Latin American countries. So an overall middle performance but with every sub-group performing higher than their apples-to-apples peers. The Texas-Wisconsin paradox at work again.

There is a similar paradox, little discussed, in terms of violence. Overall, the US is a much more violent country than most European countries but this ignores the fact that there are dramatically different levels of violence within different sub-groups. Nearly fifty percent of murders in the US occur within the African-American community (which represents approximately 13% of the overall population). If, once again, you break out violence by group, you find that white America has levels of violence close to or below most of the large European countries, African-Americans better than most black majority countries and Hispanics better than most Latin American countries. The Texas-Wisconsin paradox at work again.

My suspicion is that measures of intergenerational income mobility are similarly plagued by the Texas-Wisconsin paradox. I do not have the measures to prove it, in part because this is a relatively new field where there is not a lot of reliable historical data. If and when we are able to get that data, I suspect what we will find is that there is relatively high levels of intergenerational income mobility among whites, principally driven by educational attainment and family structure. I suspect we will find relatively low intergenerational income mobility among African-Americans but with a 10-20 year kink in the trend line around 1950-1970 when labor market, legal structures and cultural practices opened up opportunities for all African-Americans but which had the net effect of burgeoning opportunities for the elite in the community and depressing opportunities for the less advantaged. Specifically, the cycle of single parenthood which emerged in the 1950s onwards will have had a powerful depressing effect on income mobility overall. Finally, the record for Hispanics will be very mixed. I suspect that culturally integrated Americans of Hispanic descent (i.e. Hispanic Americans whose families have been in the US for several generations) will show the same level of intergenerational income mobility as whites but the larger number of new and first generation immigrants will show very low intergenerational income mobility and their large numbers will swamp those of the entire group. It usually takes large immigrant groups 2-4 generations to integrate and take on the macro-culture and until that culture change has occurred, the intergenerational mobility will continue to look like that of their original cultures of origin.