Income Inequality Is Hobbling the Middle Class
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The Fiscal Times
October 25, 2011

Income inequality in the U.S. has been rising for the last several decades, and with it concern about the consequences. For example, to what extent does the large flow of income into the hands of financial executives give them the power to influence Congress through campaign donations? How does this have an impact on the willingness of legislators to impose regulations that would stabilize the financial system but inhibit the ability of the financial industry to make the huge profits that fund political campaigns?

If economic mobility increased along with the increase in inequality, then this would at least partially offset the worries associated with the rising concentration of income. To see how, suppose there are two types of jobs in society. One type is desirable and well paying; the other is hard, miserable work with little compensation. Suppose also that one group in society always gets the good jobs while the other gets the bad even though most people within each group are equally qualified to do both types of work. Thus, this is a highly unequal outcome. However if there is mobility – if we prevent one group from keeping the good jobs through political power or other means and instead use a lottery at the beginning of each week to see which of the qualified workers does which job – then the random allocation of jobs over time helps to solve the inequality problem.

What has happened to mobility in the U.S.? Is it any easier to move up and down the ladder than it used to be? Unfortunately, the answer is no.  As Lane Kenworthy, one of the top experts on this topic notes: “Rising income and earnings inequality in the United States does not appear to have been offset by increased mobility.” He points to several ways we might increase mobility such as universal preschool, affordable college, improved K-12 schooling, and policies to strengthen the social safety net so that households do not lose ground when they experience problems such as the need for expensive health care or job loss in a recession.

There is another aspect of mobility that needs to be addressed. The type of mobility discussed above is within generation, or intra-generational mobility. This type of mobility refers to how easy it is to move up and down the income ladder during a person’s lifetime. Another type of mobility is how easy it is to move between social classes across generations, i.e. inter-generational mobility. 

While many people believe that the U.S. is the most mobile country in the world, the evidence on inter-generational mobility tells another story. As economist Paul De Grauwe observes, contrary to what is widely believed, in recent times “many EU countries have created an environment in which it is significantly easier for the poor to climb the social ladder than it is in the U.S.”

Both types of mobility can be hampered by the concentration of wealth and power. For example, if wealth and power can be passed from generation to generation, and if the power that comes with wealth allows individuals to erect barriers that protect their businesses from competition or regulation, or to protect their position in society in other ways – for example access to better education – then the wealth that is passed from generation to generation serves as a barrier to mobility both within and across generations.

Recently, the American Family Business Foundation began pushing for a cut in estate taxes as a job-creation policy. The job creation angle is, of course, just an excuse to advocate for a cut in these taxes, and this is far from the first or the last time we’ll hear an argument from Republicans that these taxes should be reduced or eliminated entirely. But in addition to the fact that reducing estate taxes would cost us revenue at a time when we are looking to shore up our long-term finances, we should also consider the extent to which this would perpetuate existing social and power structures and erect barriers to social and economic mobility. If anything, these taxes should be increased.

There is one final factor to consider. A vibrant middle class is essential to mobility. For many people, the middle class serves as a steppingstone to the upper classes both within and across generations. If we continue along the path we are on to an increasingly two-tiered society, and if the middle class continues to experience problems, then there will be less room at the middle tiers of society for those who are trying to move up the ladder. Mobility between the classes will be reduced.

The increase in inequality in recent decades needs to be addressed. Increasing mobility can help, but this alone won’t overcome the inequality problem. However, we should still do our best to ease the frictions than inhibit mobility between social classes through better education, universal health care, social insurance programs that prevent large income losses, protection for the middle class, and other measures – including the redistribution of income to prevent the accumulation of wealth and power in society – that help to ensure that opportunity is more equitably distributed.

University of Oregon macroeconomist Mark Thoma writes primarily about monetary policy its effect on the economy. He has also worked on political business cycle models. Thoma blogs daily at Economist’s View.