"The Other 99%?"

2011 October 12
tags:
by Daniel Lakeland

There is a lot of bruhaha at the moment about the Occupy Wall Street protests that are ongoing. It seems that the anger may sometimes been misplaced, but that there are some legitimate complaints as well.

Leaving aside the specifics of the protesters message or lack there of, I've been thinking recently about the issue of economic growth and whether there is widespread participation in it. There have been a lot of graphs purporting to show that mainly the rich get the spoils of growth, such as this graph on Ezra Klein's Washington Post blog. The problem with these kinds of graphs is that as far as I can tell, they are never using longitudinal data. That makes these graphs nearly meaningless as they don't show how people experience life, but rather how a classification of people changes in time.

For a simple analogy suppose that you have water flowing through a pipe, you look at the water through a little window in the side, and you measure its temperature. You see that the water in the window stays the same temperature through time, and you conclude that the water is not heating up. "There is no growth in water temperature!" you say, and start marching on Wall Street protesting this fact. However, if you had looked at another window in the pipe 10 feet farther downstream you would have seen that the temperature there was 10 degrees hotter. Water that flows past the first window eventually makes it to the second window, and it's 10 degrees hotter! So for a particular bit of water, it is heating up, it's just that when the water goes past the first window it always has the same temperature!

This analogy works pretty much the same for income or net worth. Imagine we only look at people at age 20. We look at historical surveys of age 20 people in 1950, 1970, 1990, and 2010, we see that people age 20 have basically the same income after inflation adjustment, and we conclude that there is no growth in income. Except, we didn't call the people "people at age 20" we called them "people in the bottom 40% of income brackets" it just so happens that this correlates highly with not yet having a stable job and so most of the people in this group are age 20 or so.

It's entirely possible that what is really happening is that the influence of education and technology is causing people to experience higher income growth now, which is nevertheless delayed to later in life. So perhaps everyone age 20 today will experience 3%/yr income growth but by the time they are age 40 they will experience 10%/yr whereas a person age 40 today only experiences say 8%/yr income growth. This would be progress of a significant sort. I don't know of anyone who has data similar to this plotted in any form. I would love to know where to get ahold of this kind of data though. The graphs of different cohorts income growth through time would be very interesting.

 

One Response leave one →
  1. Manoel Galdino permalink
    October 13, 2011

    Take a look at this link. It seems to be related to what you talked here:
    http://crookedtimber.org/2011/09/17/living-in-the-70s/

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