Income Mobility -- A Lifetime of Data

In Sunday's NY Times, Mark Rank from Washington University provides a take on "income inequality" looked at from an individual longitudinal perspective, rather than from a desire to create hysteria about abstract statistical groupings. Here are some of his findings:

• Almost three-quarters of the population will be in the top 20% of income earners at least once in their lives.
• Only 12% of the population will be in the top 1% of earners more than one year during their lifetime.
• Only 0.6% of the population will be in the top 1% for more than 10 consecutive years. 

This paints a very different picture than the President and his friends who would like you to think of "The Rich" as a small monolithic group standing at the gates of wealth barring others from entering.

Common sense would tell you that if you took a snapshot of people in their twenties and compared it to a snapshot of people in their fifties, there should be a very large difference in income between the two groups. Should you be upset by this? Would you conclude that those in their 20s are doomed to low incomes for the rest of their lives?

The hysteria that Democrats are trying to generate would be akin to looking at major league baseball batting data, observing that only 1.4% of all hitters batted over .325 in 2013, and then trying to convince players that they have no chance of having a number of multi-hit games during this season. Might as well hang up the spikes and turn to the commissioner to fix this awful situation.

Tax Day "Fairness" Tidbits

20% of the population pays 94% of the federal income taxes. That means for the other 80%, government programs that might increase current or future taxes have virtually no cost to them. And you wonder why they're so popular.




Over the last 30 years the federal income tax average rate has gone down for 99% of the population. The only group experiencing an increase is the reviled Top 1% .

Tax Day: Where Your Income Tax is Spent

Today is a day to reflect on what all the tax you pay (at least for the half of us who pay income tax) goes for. Pay attention to the note at the bottom. As much as you might be paying today, you'd have to pay about 25% more to cover all of what the Federal government actually spends.

The Fed Monetary Bubble

In 2008, the Federal Reserve held $800 billion on its balance sheet. For the last few years, it has purchased over a trillion dollars in U.S. debt. The Fed has been creating a 100-year supply of money every year for the last few years. It currently holds a 400-year supply of money. The last times I saw something like this (late 90s stocks and mid 00s housing prices) they were later called "bubbles". Just wondering. 

Promoting Workplace Envy at USA Today

In today's USA Today the front page story (above the Fort Hood shootings!) is "CEOs Get Richer; Workers Left Behind." At one point they quote Eleanor Bloxham (a "governance expert") as saying that "CEOs are scoring big and we still haven't left the land of layoffs."

I'm going to give USA Today the benefit of the doubt and assume that they are trying to support the Democrat's talking points. Otherwise I would have to conclude that they are just woefully ignorant.

First, the purpose of a company is not to provide jobs and income to its employees. It is to provide a return on the investment the owners have made in the company. Second, the pay of the CEO has nothing to do with the pay of others that work at the company. Each has a value to the company, and if Howard Schultz is paid less, that does not mean his barristas will be paid more. Let's turn this imagined linkage around. If there were a labor shortage and Starbucks had to pay more to attract barristas, would that mean Mr. Schultz should be paid more?

In a well-functioning economy pay is a function of market conditions. In poorly functioning economies (like France, for example) pay is something determined by entities like USA Today that have absolutely no ownership interest in the companies they try to bully by promoting envy among its readers.

Monday Update

Excellent timing from the Wall Street Journal and the Labor Department that offers some less sensational perspective on compensation. 

Among the interesting insights:

• On average orthodontists earn more than CEOs (I anxiously await USA Today's expose on orthodontists)
• While there are 250,000 CEOs, there are only 5600 Orthodontists. 
• One of every 17 works in retail stores. 

So essentially what USA Today is all worked up about are the outliers. The people at the very ends of the distribution. It's a bit like trying to hold up the Wichita Herald as evidence that USA Today's circulation is outrageous. 

Our Bloated School Staffing

The mantra for government schools is always "we need more money". Really? The chart below shows what really happened to all that money -- hugely bloated staffing. Imagine what would happen to any competitive business where your G&A grew 17x as fast as your customer count. Government is all about preventing competition. It's also why Mayor DiBlasio in New York has declared war on charter schools -- because it might upset this sweet cycle of spending without results.

The Astounding Ignorance at the IMF

A new paper from the International Monetary Fund concerning "Fiscal Policy and Income Inequality" starts out with this remarkable gem:

“In the United States, the share of market income captured by the richest 10 percent surged from around 30 percent in 1980 to 48 percent by 2012, while the share of the richest 1 percent increased from 8 percent to 19 percent."

According to the International Monetary Fund income is "captured". Not produced, earned or generated. Captured. Apparently income is like rain. It just happens. And if you have a really big bucket or a tarp you can capture more of it as it falls than others can.

I have a question for the IMF. Steve Jobs and Bill Gates were two of the wealthiest people in the world. How exactly did they "capture" all that wealth? Did they hold a gun to the heads of the public and force them to buy iPhones and Xboxes? I vaguely recall people sleeping on sidewalks to be able to purchase them early.

The ignorance of the International Monetary Fund is simply breathtaking -- and probably helps to explain some of the really stupid decisions they've made in the past.

Minimum Wage Is Not For the Poor

The average household income of someone earning minimum wage is over $50,000.

Obamacare's Dramatic Effect on Hours Worked

The chart below shows how the average workweek has changed in lower-wage industries. Let's see now, what could possibly have happened that would cause employers to reduce the number of hours that they allowed people to work? Hmmm. Wait. It'll come to me.

Government Urges People To Gamble Away Their Retirement

Every week most of us hear the exhortations from our state governments to buy lottery tickets. The average lottery player spends about $150 per month in the US and ranges from $46 in North Dakota to almost $900 in Massachusetts. Participation in lotteries is heavily skewed to low income households -- i.e. the ones that can least afford to lose their money, i.e. the ones who when they reach retirement age tell us that they have not been able to save any money.

Let's consider an alternate scenario, one in which the states exhorted these people to be prudent rather than reckless. Imagine that the average person were to put $150 per month into an IRA account. With reasonable investment return assumptions, those people would have about a half million dollars in that account after 45 years!

Government is supposed to be serving the best interests of the public. Clearly in this case they are working only to serve the best interests of government.

Obamacare Prevents Work. Really.

There's been a lot of smoke blowing over the report by the Congressional Budget Office that Obamacare will result in millions of fewer people working. The CBO report said that as a result of Obamacare, over 2 million people would either seek less work or leave the labor market completely. While this appears to be simple common sense anywhere outside of Washington, the President denies that this would happen. Let's look at a real example using the government's own website heatlhcare.gov.

John and Mary live in Fort Myers, Florida. They are both 60 years old and earn $63,000 per year (about $9,0000 above the median US household income)  They received a cancellation notice from Blue Cross and are thinking about buying a "bronze" healthcare plan from the healthcare.gov exchange. The premium for this plan is $1109/month -- $13,308 annually. Mary wonders what would happen if she stopped working at her part time job and they lost $3000/year in income. Luckily healthcare.gov supplies the answer. They are now eligible for a government subsidy and their premium drops to $311.

Mary is not a math whiz, but even she can do this one.

Lost income due to quitting her job                 -$3000
Income and payroll taxes saved                       +$700
Healthcare premium saved                             +$9576

Net benefit to quitting                                     +$7276

In other words, the government will pay Mary $7276 to quit her job and send a bill to her neighbors who are still working for over $10,000. What do you think Mary will do? Who do you believe is correct about the impact of Obamacare -- the President or the CBO?

The Great Government Mutual Fund Investment Opportuntiy

Imagine there was a new mutual fund with the following proposition. We want you to take money out of your current investments and give it to us. Here's our plan. First, we're going to impose a 20% load on your investment up front, so that you will have to take $1.20 out of your current portfolio for every dollar we invest. Then, we're going to invest your money in companies and projects that have such low return prospects that ordinary investment funds refuse to fund them.

Does that sound like something you'd be anxious to do? You're probably saying, "Why, the only way they could raise money for that fund would be to threaten to put you in jail if you didn't invest!" And you'd be right.

In fact this is a good approximation of the prospectus the Federal government should publish for it's spending operations.

1. Government raises the money it spends from taxes -- mostly income taxes. Compliance costs for administering this tax are about 20% of the revenue collected. That means that effectively the government takes $1.20 out of the economy for every $1 it plans to spend.
2. While in theory, government could spend most of it's money on things that have good economic returns, in practice it doesn't. It invests in things like Solyndra and Cash for Clunkers, but mostly it sends checks out to subsidize people who aren't producing much right now.

This is the fundamental reason why government spending is not, and really cannot be economically productive (or "stimulative") -- any more than the mutual fund we've described can produce better results than the ones in which you already invest.

Wealth Inequality Facts II

In a bit of rather good timing, just a week before President Obama will stand before Congress and declare there to be a crisis in income inequality and economic mobility, a group of economists led by Raj Chetty of Harvard University have published an extensive paper which concludes that "contrary to popular perception, economic mobility has not changed significantly over time".  This is a somewhat polite way of saying that the President has no factual support for his assertion.  He, understandably, desires to change the subject from the myriad failures of his administration to something that will sound good -- at least to those willing to ignore the facts. 

The chart below plots the difference in average income percentiles for children born to low vs. high-income parents in each year from 1971-1993. On average, children from the poorest families grow up to be 30 percentiles lower in the income distribution than children from the richest families, a gap that has been stable over time. 

The Wealth Inequality Facts

As if we needed more proof that the "Wealth Inequality" claptrap is simply a political gambit by Democrats and the media to divert attention from actual real problems like Obamacare. Why on earth would it suddenly be a crisis that the wealthiest 1% of Americans actually have a slightly smaller share of total wealth than they did 25 years ago? Once again, for the political class the level of noise is inversely related to the amount of supporting factual evidence.

The Magic of 50

Here's a quick intelligence quiz.

Q. Why does France have 2 1/2 times as many companies with 49 employees as with 50?

A. Because the French government commands that companies with 50 employees must create three worker councils and submit any employee terminations to those councils for approval. They must also create a formal profit sharing plan for employees.

Now the IQ quiz.

Q. What will happen in the US when Obamacare kicks in for companies with 50+ employees?

Does This Look Like We're Headed in the Right Direction?

The President is patting himself on the back for reducing the unemployment rate again. But only because he continues to  incent more people to drop out of the workforce. Does this really look like we're headed in the right direction?

Trickle On

In order to divert conversation from Obamacare, Democrats and the media (I repeat myself) have decided to latch on to some old buzzwords -- "Income inequality" and "Trickle Down economics" -- the idea being that we are somehow worse off when a relatively small number of high producers enjoy hugely disproportionate success.

At the risk of allowing economic facts to intrude on frothing rhetoric, consider this.

1. In 2010 companies launched by entrepreneurs backed by venture capital generated more than 20% of US GDP. 
2. In 2010 companies less than five years old generated more than 100% of all the new jobs that year (the older ones collectively lost jobs).

So if you're in the job market, you'd better hope that the activities of a very few productive people "trickle down" to you.

Poverty and Globalization

Mark Perry notes that economists Maxim Pinkovskiv and Xavier Sala-i-Martin published this paper at the National Bureau of Economic Research.  Using parametric methods to estimate the income distribution for 191 countries between 1970 and 2006 they show how dramatically the level of abject poverty ($1/day threshold in constant dollars) has declined since 1970. That's 250MM fewer people living on $1 per day. You may not see this too many places because it runs counter to the media mantra that free trade and globalization have hurt the poor. Does it look that way?  

Economic Questions for the New Year

If government spending is counted in GDP and financed by debt, what exactly is the meaning of the debt:GDP ratio?

If economic growth is achieved by producing more with fewer resources, how does devoting more and more land to producing energy from corn, wind-farms and solar-farms produce economic growth?

If the only manufacturing plants that are allowed to operate in the US are those that produce near-zero emissions and China has no such requirement, why is anyone surprised that manufacturing has moved to China? And what exactly should we expect if the US begins taxing carbon emissions?

Half the Country Doesn't Pay Income Tax-- Again

The Internal Revenue Service just released new 2011 data on individual income taxes. 

Once again, half the people in this country pay 97% of the income taxes, while the other half essentially pays nothing ( which Mitt Romney was pilloried for saying last year). Is it any wonder, then, that half the country thinks of government spending as a Free Lunch?

And just 5% of us pay over half the total tax bill. I can't recall . . . did the President bring that up in his rant about "income inequality"? 

Table 1. Summary of Federal Income Tax Data, 2011
	Number of Returns*	AGI ($ millions)	Income Taxes Paid ($ millions)	Group's Share of Total AGI (IRS)	Group's Share of Income Taxes	Income Split Point	Average Tax Rate
All Taxpayers	136,585,712	8,317,188	1,042,571	100%	100.0%
Top 1%	1,365,857	1,555,701	365,518	18.7%	35.1%	> $388,905	23.5%
1-5%	5,463,429	1,263,178	223,449	15.2%	21.4%		17.7%
Top 5%	6,829,286	2,818,879	588,967	33.9%	56.5%	> $167,728	20.9%
5-10%	6,829,285	956,099	122,696	11.5%	11.8%		12.8%
Top 10%	13,658,571	3,774,978	711,663	45.4%	68.3%	> $120,136	18.9%
10-25%	20,487,857	1,865,607	180,953	22.4%	17.4%		9.7%
Top 25%	34,146,428	5,640,585	892,616	67.8%	85.6%	> $70,492	15.8%
25-50%	34,146,428	1,716,042	119,844	20.6%	11.5%		7.0%
Top 50%	68,292,856	7,356,627	1,012,460	88.5%	97.1%	> $34,823	13.8%
Bottom 50%	68,292,856	960,561	30,109	11.55%	2.89%	< $34,823	3.13%
*Does not include dependent filers.