Only 5 percent of those who were initially in the bottom quintile were still there in 1991

I am reading the new edition of Thomas Sowell's Intellectuals and Society and he has some very useful discussion about the fraught issue of income inequality, poverty and income mobility. I have posted in the past on the issue at Jobless recoveries and rising income inequality and Income Inequality, Positional Goods, Identity Multiplicity, and Functional Convergence.

What Sowell highlights is the misuse and abuse of statistics and the obfuscation of terms and definitions. What do we mean when we speak of inequality and poverty and mobility? The empirical reality is usually quite different from the abstract proxy measures such as average income by quintile and the Gini index. Sowell is arguing that we focus on the real empirical issues rather than the abstract categories that have only a tenuous usefulness. When we do that, it becomes clear that the issues we need to focus on are enabling people to become more productive and ensuring that there is a robust escalator that allows people to move up and down the income scales according to their productivity.

This recasting of the thought process prompts the recognition that most of the current discussion of inequality is misplaced but there does remain an interesting question. Comparison of income quintiles over time are close to meaningless if there is a real and functioning movement between the quintiles by individuals. However, the remaining question is valid. Why is there a widening gap between early starters (new to the workforce) in the bottom quintile and the most productive of the established workers. That's a different post but I suspect it has a lot to do with automation, the shifting comparative value between combinations of cognitive and non-cognitive skills, and the emergence of the winner-take-all marketplace (a function of globalized competition and Six Sigma production processes).

From Intellectuals and Society, page 44.

Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories - and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one category to another over time.

In terms of statistical categories, it is indeed true that both the amount of income and the proportion of all income received by those in the top 20 percent bracket have risen over the years, widening the gap between top and bottom quintiles. But U.S. Treasury Department data, following specific individuals over time from their tax returns to the Internal Revenue Service, show that in terms of people, the incomes of those particular taxpayers who were in the bottom 20 percent in income in 1996 rose by 91 percent by 2005, while the incomes of those particular taxpayers who were in the top 20 percent in 1996 rose by only 10 percent in 2005 - and those in the top 5 percent and one percent actually declined.

While it might seem as if both these radically different sets of statistics cannot be true at the same time, what makes them mutually compatible is that flesh-and-blood human beings move from one statistical category to another over time. When those taxpayers who were initially in the lowest income bracket had their incomes nearly double in a decade, that moved many of them up and out of the bottom quintile - and when those in the top one percent had their incomes cut by about one-fourth, that may well have dropped them out of the top one percent. Internal Revenue Service data can follow particular individuals over time from their tax returns, which have individual Social Security numbers as identification, while data from the Census Bureau and most other sources follow what happens to statistical categories over time, even though it is not the same individuals in the same categories over the years.

Many of the same kinds of data used to claim a widening income gap between "the rich" and "the poor" - names usually given to people with different incomes, rather than different wealth, as the term rich and poor might seem to imply - have led many in the media to likewise claim a growing income gap between the "super-rich" and the "merely rich."

[snip]

Once again, the confusion is between what is happening to statistical categories over time and what is happening to flesh-and-blood individuals over time, as they move from one statistical category to another.

Despite the rise in the income of the top 0.1 percent of the taxpayers as a statistical category, both absolutely and relative to the incomes in the other categories, as flesh-and-blood human beings those individuals who were in that category initially had their incomes fall by a whopping 50 percent between 1996 and 2005. It is hardly surprising when people whose incomes are cut in half drop out of the top 0.1 percent. What happens to the income of the category over time is not the same as what happens to the people who were in that category at any given point in time. But many among the intelligentsia are ready to seize upon any numbers that seem to fit their vision.

It is much the same story with data on the top four hundred income earners in the country. As with other data, data on who were among the top 400 income earners from 1992 to 2000 were not data on the same 400 people throughout that span of time. During that span, there were thousands of people in the top 400 - which is to say, turnover was high. Fewer than one-fourth of all the people in that category during that span of years were in that category more than one year, and fewer than 13 percent were in that same category more than two years.

Behind many of those numbers and the accompanying alarmist rhetoric is a very mundane fact: Most people begin their working careers at the bottom, earning entry-level salaries. Over time, as they acquire more skills and experience, their rising productivity leads to rising pay, putting them in successively higher income brackets. These are not rare, Horatio Alger stories. These are common patterns among millions of people in the United States and in some other countries. A University of Michigan study which followed the same working individuals over time found a pattern very similar to that in the Internal Revenue Service data. More than three-quarters of working Americans whose incomes were in the bottom 20 percent in 1975 were also in the top 40 percent of income earners at some point by 1991. Only 5 percent of those who were initially in the bottom quintile were still there in 1991, while 29 percent of those who were initially at the bottom quintile had risen to the top quintile.

[snip]

Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a "problem" for which a "solution" is necessary. They have created the powerful vision of "classes" with "disparities" and "inequities" in income, caused by "barriers" created by "society." But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the "barriers" assumed by many, if not most, of the intelligentsia.

The confusion between statistical categories and flesh-and-blood human beings is compounded when there is confusion between income and wealth. People called "rich" or "super-rich" have been given those titles by the media based on the basis of income, not wealth, even though being rich means having more wealth. According to the Treasury Department: "Among those with the very highest incomes in 1996 - the top 1/100 of 1 percent - only 25 percent remained in this group in 2005." If these were genuinely super-rich people, it is hard to explain why three-quarters of them are no longer in that category a decade later.

With a clearer picture, it allows us to refocus. There isn't much return on improving categories. And by-and-large, people seem to be riding the escalator between the quintiles. What remains are 1) the endemically poor, the 5% who reside in the bottom quintile over long stretches of time and 2) potentially those who have a high quintile volatility, i.e. who hover between the bottom three quintiles and never progress further.

Charles Murray's Coming Apart, gives us a pretty clear picture of what is required to live in and remain in the top two quintiles. What are the appropriate policies for those who keep falling off the escalator in the bottom three quintiles? That is a far more complex issue than anything we are currently discussing but it is also far more likely to lead to real world improvements, as opposed to much of what we do today. What are the changes necessary to individual KESVB portfolios (Knowledge, Experience, Skills, Values, and Behaviors) that will allow people to better improve and more reliably improve their productivity?