NYT: Income inequality not increasing

David Leonhardt writes in the NYT:

The odds of moving up — or down — the income ladder in the United States have not changed appreciably in the last 20 years, according to a large new academic study that contradicts politicians in both parties who have claimed that income mobility is falling. 

Both President Obama and leading Republicans, like Representative Paul Ryan, have argued recently that the odds of climbing the income ladder are lower today than in previous decades. The new study, based on tens of millions of anonymous tax records, finds that the mobility rate has held largely steady in recent decades, although it remains lower than in Canada and in much of Western Europe, where the odds of escaping poverty are higher. 

Raj Chetty, a professor of economics at Harvard and one of the authors, said in an interview that he and his colleagues still believed that a lack of mobility was a significant problem in the United States. Despite less discrimination of various kinds and a larger safety net than in previous decades, the odds of escaping the station of one’s birth are no higher today than they were decades ago.

The results suggested that other forces — including sharply rising incomes at the top of the ladder, which allows well-off families to invest far more in their children — were holding back talented people, the authors said. 

“The level of opportunity is alarming, even though it’s stable over time,” said Emmanuel Saez, another author and a professor at the University of California, Berkeley. Mr. Saez and Mr. Chetty are both recent winners of an award for the top academic economist under the age of 40. 

The study has the potential to alter the way Mr. Obama and other public figures talk about mobility trends. 

“The facts themselves are pretty unassailable,” said David Autor, an economist at the Massachusetts Institute of Technology who has read the paper, which the authors will soon submit to an academic journal. “How you want to interpret them is the question.” 

The study found, for instance, that about 8 percent of children born in the early 1980s who grew up in families in the bottom fifth of the income distribution managed to reach the top fifth for their age group today. The rate was nearly identical for children born a decade earlier. 

Among children born into the middle fifth of the income distribution, about 20 percent climbed into the top fifth as adults, also largely unchanged over the last decade.

Unfortunately, Chetty's methodology is fundamentally flawed as Leonhardt and I discussed in the New York Times last July regarding Chetty's previous study of income mobility by where children were raised. (See the update to the bottom of Leonhardt's post in the NYT.)

Thus you see bizarre examples like Scranton and Newark ranking near the top of Chetty's social mobility charts as the best places to be raised, while Charlotte and Atlanta rank near the bottom. (Chetty's analysis doesn't look just at municipalities, but at "commuting zones," so, for instance, Atlanta's sprawling suburbs are included.)

Yet, over the decades, lots of people have decided that it's in their overall self-interest to move out of Scranton (which is on the edge bankruptcy) and Newark and lots of people have decided it's in their self-interest to move to Charlotte and Atlanta. 

Why? A major problem is that Chetty looks at income but doesn't adjust for cost of living. The cost of housing is much higher in, say, New York City, a common destination for some fleeing Newark (e.g., Philip Roth) and Scranton, than in Atlanta or Charlotte, so wages and salaries are also lower in Atlanta and Charlotte.

Thus, people who fled the house where they grew up in collapsing Scranton or Newark for a small apartment in Queens may not feel like they a higher standard of living in their new life in NYC, but they have a higher income compared to the national average because incomes are high in NYC to account for the high cost of living in NYC, so they are counted by Chetty as upwardly mobile in income terms. 

In contrast, somebody born in Charlotte or Atlanta might feel less tempted to move to a place with higher nominal incomes because the local standard of living is pretty decent in Charlotte or Atlanta even if nominal incomes aren't shooting up because the cost of land is pretty low and stable.

Another major problem with Chetty's regional analysis that found that heavily black areas like the South and the Rust Belt have the least social (income) mobility while West Virginia has quite a bit of income mobility is simply racial regression to the mean. Here's Chetty's map, with places of lower income mobility in darker colors:

My blog response was entitled: "Breakthrough study: Poor blacks tend to stay poor, black."

Notice that according to Chetty West Virginia is an oasis of income mobility in the East, while nearby North Carolina is an abyss of stasis. Yet, lots of people raised in West Virginia who have something on the ball have moved to North Carolina to get ahead in life.

Since West Virginia is only about 5% black and has attracted very few Hispanics and Asians, the bottom 20% of West Virginians in income are majority white, so their children tend to regress toward the white mean, which is higher than the black mean. The bottom 20% in income in the Charlotte or Atlanta area is highly black, so their children tend to regress toward the black mean. Thus, West Virginia comes out looking better for social mobility than Atlanta and Charlotte in Chetty's methodology. 

This doesn't mean that if you had a peek around the Rawlsian curtain of ignorance, you'd choose to be born in West Virginia because of its strong social mobility. If you knew you were going to be born white, West Virginia would probably be last on your list of states to be born into. Nor does it mean that Blue State policies increase social mobility relative to red state policies. It's just mostly Moynihan's Canadian Border effect in action.

Chetty's new paper goes through a lot of contortions to disprove the race arguments I pointed out in the NYT last summer, but I'm not yet convinced.

As for Chetty's new study showing that over about a decade there wasn't much decline in social mobility, I'd take it with a grain of salt. Since he doesn't deal with standard of living, just with income, and since there have been massive population flows away from higher income, higher cost of living places toward lower income, lower cost of living places, and since he doesn't have good tools for dealing with race at the individual household level, I wouldn't consider this finding of stability over time definitive in a meaningful sense. I haven't had time to read it carefully, so I wouldn't reject it either. I just think that high-powered economists need to move on beyond simplistic measures like income to work on standard of living questions.

The ACCRA organization compiles careful data on cost of living by metropolis (including mortgage costs) for corporations moving managers around and needing an objective way to adjust their pay. It's not free, but a high-powered team of economists like Chetty and Saez should incorporate ACCRA data into their analyses.

Update: Chetty's new paper does use ACCRA cost of living adjustments, like I recommended to them last summer. This may be why their new finding is puzzling to the conventional wisdom.