Consider the Evidence

Opportunity for upward mobility is key to the American dream. What does our government do to assist it?

A recent report (pdf) by the Economic Mobility Project attempts to answer this question. The report groups federal government spending into three broad categories: (1) expenditures aimed, at least in part, at promoting mobility; (2) expenditures on income maintenance, such as social security, health care, welfare, and housing support; (3) expenditures on public goods such as defense, environment, and transportation. As of 2006 about one fifth of federal spending — $740 billion, or 6% of GDP — was in the mobility-promotion category. Most of this takes the form of tax subsidies rather than direct expenditures.

The most striking of the report’s findings is how little of the federal government’s mobility expenditure goes to those with low incomes. This chart shows the estimated amounts that go to lower-income households (bottom two quintiles of the income distribution) versus middle-and-upper-income households (top three quintiles). In total, only about a quarter goes to the former group.

This seemingly-perverse distribution is not surprising. Spending decisions aren’t made by an omniscient policy czar seeking to maximize opportunity for upward mobility. They are a product of a political system characterized by clashing interests, ideologies, motives, and means.

Imagine, though, that we could move money around within the broad category of mobility-promoting expenditures — not increase spending, not take money from other areas of the federal budget, just shift funds from one type of (ostensibly) mobility-promoting program to another. What would help the most?

Let’s start with where to take the money from. By far the largest amount, about $240 billion, currently goes to employer-related work subsidies for pensions, health insurance, life insurance, and other fringe benefits. Surely some of this money could be better spent elsewhere, but I’m not sure it would be much.

A better target would be the $100 billion that goes to saving and investment incentives. The Economic Mobility Project report points out that almost all of this goes to households in the top fifth of the income distribution, and there is little evidence that it boosts saving.

I would favor also taking a large chunk from the roughly $160 billion currently spent on homeownership subsidies (after the current housing downturn abates). There is little indication that reducing or even fully removing the tax deduction for mortgage interest and property tax payments would lower the rate of homeownership in the United States. As the report notes, more than 80% of this tax break goes to the top quintile of households. And homeownership rates in several other rich countries are similar to ours despite the absence of a homeownership subsidy. Furthermore, homeownership’s contribution to upward mobility is ambiguous. On the one hand, it can help people accumulate assets. On the other hand, for those with low income it can be a risky and ineffective way of doing so, as this piece (written long before the recent downturn) rightly emphasizes. Moreover, homeownership discourages geographic mobility; it’s easier to pick up and move in search of better job opportunity if you don’t have to sell your home.

What would be more effective at fostering mobility?

1. Universal preschool for 4-year-olds and subsidized high-quality care for under-4s. Evidence is mounting that much of the inequality in cognitive skills and noncognitive abilities that exists when Americans finish formal schooling is there when they enter kindergarten (see here and here). The better we do at stimulating and supporting development in the early years, the greater the opportunity for mobility later on among those in the lower portion of the income and wealth distributions.

2. Improve K-12 public schooling by increasing teacher pay. How to improve elementary and secondary schools is one of the policy issues on which there is least agreement among analysts. My view is that the key deficit is in teacher pay. Higher pay will attract better teachers and help keep them in teaching for longer. In his book The Two-Percent Solution, Matt Miller offers useful suggestions for how to make this politically feasible.

3. Encourage lifelong learning. Just 28% of 25- to 29-year-olds have a four-year college degree. That percentage has increased over time, but at a relatively slow pace; it was 8% in 1950 and 19% in 1973. We need to accept that for the foreseeable future, a very large share of American adults will continue to have less than a college degree. They could benefit from assistance with learning new skills or upgrading existing ones. The Lifetime Learning Credit, enacted by the Clinton administration, gives Americans a 20% credit on learning and training expenditures up to $10,000 per year. I like Gene Sperling’s proposal (in his book The Pro-Growth Progressive) for a more generous credit of 50% of qualified education and training expenses up to $15,000 per decade.

4. Make college more affordable. The earnings of those with a four-year college degree tend to be substantially higher than of those without one, and a college education sharply increases the odds of economic success for persons from disadvantaged backgrounds (see here). College should be a financially viable option for all Americans.

Why isn’t this at the top of my list? While affordability certainly matters, it appears that the main obstacle to increasing the share of Americans with a college degree is the low rate of high school completion. James Heckman and Paul LaFontaine estimate the current rate of high school completion to be around 75% — considerably lower than the official figure and down by about 5 percentage points from a generation ago. And this is among non-immigrants. Drawing on their own research and that of others, Heckman and LaFontaine suggest that “The slowdown in the high school graduation rate accounts for a substantial portion of the recent slowdown in the growth of college educated workers in the U.S. workforce. This slowdown is not due to a decline in rates of college attendance among those who graduate from high school.”

5. Universal health care. The principal rationale for extending health insurance to all Americans is fairness. But doing so would aid economic mobility too — for some by eliminating the fear of losing Medicaid if earnings are too high and for others by removing the worry about losing health insurance or facing non-covered preexisting conditions when switching employers (see this, for example).

6. Expand the Earned Income Tax Credit. The Economic Mobility Project report rightly includes the EITC in the mobility-promoting category of government expenditures. By subsidizing earnings, the EITC increases the incentive for employment among those likely to earn relatively low wages. It is a very good policy. It would be even better if it were somewhat more generous, particularly for adults with no children.

7. Wage insurance. Proposals for wage insurance (such as this and this) have in mind the same type of incentive as that created by the EITC. Imagine a program that provides a subsidy of 50% of the drop in hourly wage experienced by a person who loses her or his job and then takes a new one that pays less. This would increase the financial incentive to return to work even when, as is often the case, doing so means accepting a pay cut. It also would reduce insecurity and stress among those who fear their current job is at risk.

8. Boost income maintenance. The Mobility Project report does not count most income maintenance programs as part of the mobility budget. This is because those programs “are not aimed at increasing the private ownership of assets, the acquisition of additional ability or education, or additional work or saving.” But researchers have identified low income during childhood as an impediment to cognitive development and later economic opportunity (see here, here, and here). Thus, even if income support programs such as TANF, Food Stamps, and unemployment insurance are not mobility-enhancing for their adult recipients, they may improve opportunity for upward mobility among their children.

With the imposition of time limits on TANF receipt beginning in 1997, the danger of long-term benefit dependence has been substantially lessened. Thus, TANF benefit levels could be increased with little or no adverse employment effect. The same is true of unemployment benefits, which are limited to 26 weeks.

9. Job placement assistance and public employment as a last resort. The mid-1990s welfare reform signified a policy choice to emphasize employment as the chief route out of poverty. Yet compared to countries such as Denmark and Sweden, whose policies also express a societal preference for employment, we do relatively little to help people find jobs. Public job placement programs have tended to be underfunded and not well coordinated with employers in local labor markets. Placement assistance is no panacea, but we could do better. Beyond this, anyone jobless for more than a year should be offered a temporary “public works” position assisting with neighborhood beautification or performing other socially useful tasks. To encourage recipients to move on to private-sector or regular public-sector employment, the wage level could be set at or just below the minimum wage. Neither of these programs would cost a lot of money. Both would enhance upward mobility among the most needy.

Which political party is better at improving living standards?

A commonplace view is that Democrats favor policies that boost the well-being of the poor while Republicans’ policy preferences are more conducive to economic growth and rising incomes. Debates about high vs. low taxes, generous vs. stingy social programs, and heavy vs. light regulation of business often are framed in terms of a tradeoff between compassion and growth. Should government do more to assist the poor? Or should it intervene less, thereby helping the economy to grow more rapidly?

For the most part this debate is a battle of rhetoric and assumptions. Many on the right assume that lower taxes, less regulation, and less generous social policies must be good for economic growth. Some on the left accept this assumption but argue that growth will fail to trickle down to the poor. Others dispute the assumption.

Evidence can help. There is a great deal of it that is potentially relevant. Here is one piece. Using tax records and surveys, the Congressional Budget Office has compiled good data on household incomes from 1979 through 2005 (here). The presidency was held by a Republican from 1981 to 1992, by a Democrat from 1993 to 2000, and by a Republican since 2000. The following chart shows average rates of income growth (adjusted for inflation and with taxes subtracted) for each of the five quintiles (fifths) of households during these three periods.

Income growth for each of these groups, from the poorest to the middle to the richest, has been faster during Democratic administrations than Republican ones.

Does this prove that Democrats are more effective than Republicans at promoting income growth? No. A government’s ability to affect income growth is limited, Democrats controlled one or both houses of Congress during Republican presidencies and vice-versa, and each of these periods has idiosyncratic features (see here, here, and here, for instance). Still, the data offer reason for skepticism about the notion that policies favored by the right are better at raising living standards.

Nor is this peculiar to the American context. Here is a counterpart chart showing income growth in the United Kingdom over the same period. The Conservative party held the government from 1979 to 1997; the Labour party has held it since. The data are from the Institute for Fiscal Studies (here).

Incomes of the richest fifth increased slightly more rapidly during the years of Conservative government, but most British households have fared as well or better under (New) Labour.

“Today’s problems have less to do with the size of the economic pie than the way it is divided.” This, according to a New York Times article, is what Hillary Clinton’s economic advisers believe. I’m certain John Edwards’ economic team would agree with the statement, and I suspect Barack Obama’s would too.

Is this a sensible view? That’s a large question, but here is one way to think about it. The solid lines in the following chart show trends since World War II in inflation-adjusted incomes of families at the 60th, 40th, and 20th percentiles of the income distribution. The data are from the Census Bureau (here).

From 1947 to 1973, incomes at each of these three levels grew at an annual rate of about 2.7%. That was approximately the same as — actually slightly faster than — the rate of growth of the economy as a whole; GDP per capita during that period grew at a rate of 2.5% per year.

Since 1973 incomes in the middle and lower portion of the distribution have increased much less rapidly: 0.8% per year at the 60th percentile, 0.5% per year at the 40th, and just 0.3% per year at the 20th. Is this because the economy as a whole has failed to grow? No. The annual growth rate of per capita GDP since 1973 has been 1.9%. Instead, it’s because most of that economic growth has gone to those at the top of the distribution.

The dashed lines in the chart show what incomes at the 60th, 40th, and 20th percentiles would have looked like had they grown at the same 1.9%-per-year pace as the economy since 1973. The difference is striking. Incomes for a very large swath of the American population would be much higher — $15,000 to $30,000 higher — if economic growth since the mid-1970s had been distributed more equally.

Some will respond that the heavily skewed distribution of post-1973 economic growth contributed to that growth. In other words, the pie would now be smaller if those below the top had gotten more of it during the past generation. If you believe that, see this post.