Magazine February 6, 2012, Issue

The President’s Depressing Statistics

Obama is simply wrong about economic mobility

On January 12, Council of Economic Advisers chairman Alan Krueger gave a speech on inequality at the Center for American Progress. It was the second salvo of what is shaping up to be a major campaign theme for President Obama: the problems posed by inequality, in particular the lack of opportunities for the poor and the middle class. It is understandable that the president and his advisers find this theme attractive. The likely Republican nominee is a former private-equity captain worth as much as $250 million who likely pays a marginal tax rate of 15 percent on the income he receives. Mitt Romney is even having to fend off attacks on his stewardship of Bain Capital from opportunistic Republican presidential candidates. And there is another reason the president wants to talk about inequality. The more he can make the election about big-picture economic issues such as inequality and mobility, the less flak he will take for the immediate problem of a still-sluggish economy.

Politics being politics, there would not be much point in criticizing the president’s strategic decision, if not for one fact: He and his team are systematically misrepresenting the nature of economic opportunity in America. And they are not only using bad numbers, but also using them in a way that is likely to depress mobility and hinder the nation’s recovery from the Great Recession.

This is a strong accusation, to be sure, but an assessment of two big inequality speeches since early December — the first by the president, and the second Krueger’s — reveals its truth.

One particular claim from the president’s much-discussed December 6 speech in Osawatomie, Kan., jumped out at me:

We tell people — we tell our kids — that in this country, even if you’re born with nothing, work hard and you can get into the middle class. . . . And yet, over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk. You know, a few years after World War II, a child who was born into poverty had a slightly better than 50/50 chance of becoming middle-class as an adult. By 1980, that chance had fallen to around 40 percent. And if the trend of rising inequality over the last few decades continues, it’s estimated that a child born today will only have a one-in-three chance of making it to the middle class — 33 percent.

These data appeared to be brand new, and they sparked a quiet behind-the-scenes search among economists and journalists across the ideological spectrum for their origin. Not only were the numbers new, they also contradicted the existing research literature, the balance of which shows little change in mobility over time.

The biggest shortcoming of this research was that no one had looked at the intergenerational income mobility of Americans born after the early 1970s, mostly because data are hard to come by. Children born in 1980 are barely 30 years old today, and few data sets exist that tracked them as they grew up. So as I looked into the president’s claims, I decided also to fill in this research gap with estimates of my own. I used two Labor Department surveys, one of which followed men and women born around 1960, the other of which followed Americans born in the early 1980s. I compared children born between 1962 and 1964 with children born between 1980 and 1982, and looked at their parents’ incomes when they were 14 to 16 years old and their own incomes twelve years later, when they were 26 to 28.

In contrast to the president’s claim of declining mobility, I found that the percentage of poor children who made it to the middle class or even rose above it had not declined. Rather, their chances rose from about 50 percent to about 55 percent. Partly because of data limitations, this increase is not statistically reliable, but there is certainly no evidence of the sort of decline that the president claims has happened.

My definitions of “poor” and “middle class” were based on those used for the president’s figures, which I investigated by reaching out to David Card, the economist who produced them. In his analysis, “poverty” meant having a family income in the bottom 10 percent, and “middle class” meant having an income in adulthood at least half — but no more than one and a half times — that of the household at the midpoint. Because this seemed a strange way to think about upward mobility — move up, but not too far up! — my estimates differed from the president’s in counting those who went “from rags to riches” as also upwardly mobile.

But the main way in which my figures differed from the president’s is that mine were fully based on real-world data, while his were calculated by feeding a mix of data and assumptions into a mathematical model. The gory details, for those who want them, can be found in my recent National Review Online article “The President’s Suspect Statistics” (Jan. 2, 2012), but allow me to note here that one thing I did to test the president’s model was to feed it data corresponding to the periods covered by the aforementioned Labor Department surveys. The model showed a sizable decline in mobility — even though the data themselves indicate an increase. When an assumption-laden model fails to reproduce real-world data, you have to conclude that the model is misleading.

My demonstration seems to have quashed the president’s whole initial analysis, since there was nary a mention of those figures in Krueger’s speech. In their place were two new sets of numbers. The first purportedly showed that the middle class has “shrunk,” a claim also made by the president in the passage quoted above. Krueger presented estimates that the percentage of American households in the middle class fell from 50 percent in 1970 to 42 percent in 2010.

These estimates use the same definition of “middle class” as the president’s earlier estimates: having income between half the median and 150 percent of it. I reran the numbers using the same data source as Krueger and found that the entire reason the middle class has “shrunk” is that more households today have incomes that put them above the middle class. The share of households with income that puts them in the middle class or higher was 76 percent in 1970 and 75 percent in 2010 — figures that are statistically indistinguishable. A shrinking middle class is a problem only if it reflects fewer people’s reaching the middle class. That is clearly the impression the administration wants to give, but it is not the truth of the situation.

The second new line of evidence Krueger offered centered on a chart depicting what he called the “Great Gatsby Curve.” The chart plotted ten OECD countries according to two variables: the countries’ overall economic inequality in 1985; and a measure of economic immobility taken in more recent years indicating the tendency to have an income similar to one’s parents. The chart demonstrated that countries with higher inequality tend to have more immobility; of the countries included, the U.S. had the highest level of inequality and the second-highest level of immobility.

Krueger also noted that American inequality has risen since 1985, and that the correlation between inequality and mobility would suggest that mobility has declined. Krueger used the overall relationship between the two variables — represented in the chart by a “best fitting” line, or the straight line that comes closest to passing through all the points — to make what he called a “rough forecast” for “today’s children.” He predicted that in the next generation, the increase in inequality will cause immobility to rise substantially.

But the forecast is so rough that it is uninformative. Each of the points in the Great Gatsby chart represents an immobility estimate taken from independent earlier studies. It is very difficult to get comparable estimates of immobility for different countries. One needs measures of income defined in a common way across countries. Ideally, one would have multiple years of income data for each generation, and the analyses would use real data, as opposed to model-based estimates, about adults and about their parents when they were children. This last requirement is perhaps the hardest to meet. Many governments do not conduct studies tracking children’s income as they grow older, or have started to do so only recently, so researchers must estimate childhood income using an algorithm obtained from a separate data set and compare the result against the actual income of the children as adults.

Because of these technical difficulties, for some countries — particularly the United Kingdom — researchers come up with widely varying estimates. Building a Great Gatsby chart thus requires choosing from among the estimates that might represent each country. Different scholars choose different estimates, with the result that their best-fitting lines differ. The version I trust the most, from the Oxford Handbook of Economic Inequality, shows a relationship between inequality and immobility, but it is driven entirely by three high-inequality countries — the United States, Italy, and France.

Admittedly, all of the charts like this that researchers have created show a relationship between inequality and immobility. There is one other big problem with them, though, particularly when a researcher is estimating future mobility, as Krueger did. If one believes that inequality diminishes opportunity, one should look at how inequality experienced in childhood affects mobility between childhood and adulthood. Krueger’s immobility data are, for the most part, from people who were in their 30s during the 1990s. They should therefore be matched with inequality data from the 1960s, when they were children, but instead they are matched with inequality data from 1985. Cross-national differences in inequality were much bigger by 1985 than they were in the 1960s, so it is likely that the relationship between childhood inequality in the 1960s and immobility experienced between the 1960s and the 1990s is weaker than the Great Gatsby chart suggests.

More to the point, all of this means that Krueger’s prediction of immobility for “today’s children” is not so much a projection of what today’s children will experience as adults as it is a model-based estimate of what today’s adults have already experienced. And we don’t need an estimate of that at all — we can instead calculate how much mobility today’s adults experience and then compare the numbers with those of past generations. With the same figures I used to debunk the Osawatomie claims, I have found that immobility as measured by household income actually declined between the generation born in the early 1960s and the generation born in the early 1980s.

It is true, as I wrote in National Review a couple of months ago (“Mobility Impaired,” November 14), that America has an upward-mobility problem, and the administration could do a lot of good by emphasizing this fact. But it can and should do so without needlessly scaring the middle class into doubting the security of its socioeconomic position. A 2005 Journal of Politics article by political scientist B. Dan Wood and his colleagues found that optimism and pessimism expressed in presidents’ speeches between 1978 and 2002 had a detectable effect on consumers’ sentiments regarding the economy and unemployment, which in turn affected economic growth. So the president’s strategy is likely to hinder recovery from the Great Recession. There is also reason to believe that Americans are more generous when they feel they are doing well than when they feel they are at risk, in which case the administration’s strategy is doubly counterproductive for those at the bottom whose welfare depends in part on charitable giving and on how much redistribution taxpayers will allow.

Worse than any impact on middle-class anxiety or even on the strength of the recovery, however, is the message the president is sending to those struggling to pull themselves out of poverty. The data indicate that it is no less true today than it was in the past that poor children can make a better life for themselves. To be sure, it is no more true than in the past, either, a fact that should discourage complacency. But by arguing — against the evidence — that opportunity is on the decline, the president needlessly dampens the hope of those who wish to transcend their disadvantages.

– Mr. Winship is a fellow in economic studies at the Brookings Institution.

Scott Winship directs the Social Capital Project for Senator Mike Lee in the Joint Economic Committee. His writings reflect his own views, not those of Senator Lee or the JEC.

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