Wednesday, April 26, 2006


From Rags to Richly Rags

A recent study on the "American Dream" of going from rags to riches was done by Tom Hertz from American University. The name of the paper is "Understanding Mobility in America" and was published today. The reality of the paper is that it does not compare apples to apples.

Making the comparison that "the likelihood that a child born into a poor family will make it into the top five percent is just one percent" to "a child born rich had a 22 percent chance of being rich as an adult" is not really appropriate.

In fact a senior economist at the Federal Reserve Bank of Cleveland said that, "this debunks the myth of America as the land of opportunity, but it doesn't tell us what to do to fix it". I have to disagree with this statement -- I doubt that it debunks anything!!

Not only is there an upward limit in these statistics, making it generally easier for someone "rich" to maintain "richness" (whether wealth or income). My opinion is that to make it a like-to-like comparison, we have to look at the relative upward mobility in wealth or income. To me, atleast, it would make more sense to compare an upper-low income individual with an upper-middle class income individual and see how they compare in upward mobility. Same for lower-upper and lower-middle. By looking only at the lowest quintiles of income or wealth and comparing it the highest quintile, leaves a lot out.

It will also be interesting to see how he corrects for many of the reasons why some people are poor and some people are rich.

I have not been able to find the paper online and therefore have not yet read it. This is just my analysis for the article, which you can find here.

"the likelihood that a child born into a poor family will make it into the top five percent is just one percent" to "a child born rich had a 22 percent chance of being rich as an adult"

Is "rich" and "top five percent" the same thing? If not, then this comparison is not only vague, but completely meaningless. In order to compare apples to apples, we need to know distances not simply end points.
Well, I can't really say much on the study until I read it. Considering it's an academic paper, I'm sure that he at least defines what he means by rich.

As to Chris' question, just from what I can make of the studies results and aims, they seem coherent to me. But I think Chris makes a good point that we will need more info if we want to interprut the situation correctly (which I will get to in a moment).

Really, these results shouldn't be a suprise to anyone. If income really is distributed according to marginal productivity, shouldn't we expect the children of the rich (productive people themselves) to be more productive? After all, they will not only have better opportunities to fulfill their potential, but they will inherit their parents genes. And those genes seem to play more of a role in determining income than previously thought.

Either way. One could say that rich kids were not starting on the same starting line as poor kids. And unless provide poor kids with the same opportunities as rich kids (an impossible task), we shouldn't expect to see the same results.

But there are a lot of problems here. One of them Chris pointed out. What about mobility between the two poles? That's a very important bit of info. We might not be able to ensure the same chance of success for poor kids as rich kids, but what about just increasing the chances they will be more successful than their parents? Maybe moving from poverty to middle class should be "enough" mobility.

But there is a problem here too because we are still running on this race analogy (get it). But economic life isn't a race and income is not its measure of success.

This becomes apparent when we look at the real estate mogile and the Harvard professor and we ask "who won the race of life?". Surely, income couldn't be the only measure. What about happiness?? Maybe they both won. Maybe a capitalist system ensures that people have the opportunity to co-operate for mututal advantage, making everyone better off???

Anyways, I'm rambling now. Back to work.
I think you make some good point.

Money at the end of the race, does not mean you actually took the purse.
Now, you statistics people help me with this. Of the bottom ? percent, only 1 percent ever make it to the top 5 percent. If only 5 percent of all people ever make it to the top 5 pecrcent... then none of us has any better than a 5 percent chance of making it. Shouldn't there be a bell curve in here somewhere?
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