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.
Lane Kenworthy 
“I would favor also taking a large chunk from the roughly $160 billion currently spent on homeownership subsidies… 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.”
I don’t blame you for being confused about this, since so many others are too, but you would probably like to learn this important fact: the home- mortgage- interest deduction is NOT a subsidy to owner-occupied housing. Why? Because landlords of rental housing also get to deduct mortgage interest and property taxes (as business expenses). The mortgage- interest and property-tax deductions do not discriminate between “owners” and renters. HOWEVER, a different feature of the tax code does subsidize “ownership.” That is the exclusion of imputed rental income. (One who owns a home could, in theory, rent it out for cash. Instead he just lives in it. The hypothetical rent he “pays” to himself arguably should be taxed as income). There are good reasons for the imputed-rent exclusion (it would be very difficult to estimate imputed rental values accurately, and it’s hard to make people pay taxes on accounting gains in actual cash they may not have), but as any real economist (or accountant) who you may ask about the problem will confirm, the exclusion of imputed rental income is the chief tax subsidy to owner- occupied housing– the mortgage- interest deduction has nothing to do with it.
“What,” you ask, “would be more effective at fostering mobility?”
“1. Universal preschool for 4-year-olds and subsidized high-quality care for under-4s.”
You realize that “high-quality care” is a propaganda term for “care provided by unionized teachers at enormous expense,” don’t you? Worse, even your sources (go look at Heckman again) agree that the best thing we could do for kids would be to facilitate their being raised in intact homes by attentive parents. Schemes to substitute one-size-fits-all care by bureaucratic school staff for parental care are likely to exacerbate kids’ problems, not ameliorate them. Heckman likes to rely on the Perry Preschool Project (from 1962, when the population of the US was 85% white) for the notion that intensive preschool will boost poor kids’ achievement. He omits to discuss the flaws in the Perry project which make its uniquely-positive results dubious. Also, states like Georgia and New York implemented universal preschool more than a decade ago and have seen NO significant improvement in social outcomes.
Instead of preschool schemes to get kids away from their parents, you should be advocating tax relief and divorce reform to promote stable families for kids to grow up in.
“2. Improve K-12 public schooling by increasing teacher pay.”
Contrary to your “view” there is no evidence at all that teacher pay is the problem with public schools. Consider teachers in California, who earn almost $60,000/school-year on average, equivalent to full-time wages of $75-80,000/year. Yet California’s NAEP scores are abysmal. Comparisons like this show the same pattern at every level of magnification. You can predict NAEP scores by parents’ income, or by the race of students in a school, but you cannot find any meaningful correlation between teacher salaries and student academic performance, except for one: schools with lots of unruly kids and slow-learners tend to be staffed with teachers having less seniority and therefore lower pay under union rules, because more senior teachers get first pick of schools and naturally choose to work in the nicer ones. If you wish to fix the public schools you don’t need to pay teachers more, you just need to discard the union rules which: prevent paying teachers for performance; prevent hiring capable teachers with degrees in something real (e.g., English, or math) rather than “Education;” prevent replacing incompetent teachers; etc.
“3. Encourage lifelong learning. Just 28% of 25- to 29-year-olds have a four-year college degree.”
See the answer to point #4.
“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.”
When we all have college degrees, who will drive the trucks which bring groceries to our supermarkets? Really, your proposal seems uninformed, if not fantastical. Only about 1/6 of the population are really smart enough to earn and utilize a college degree. To subsidize college attendance for manifestly unqualified applicants will have only ill effects: it will waste a ton of money; and it will harm those kids who spend time in college and either drop out or graduate with worthless “feelgood” degrees– kids who could have learned trades and gotten respectable jobs, but who will be disappointed and frustrated instead.
“[The] main obstacle to increasing the share of Americans with a college degree is the low rate of high school completion.”
Subsidizing college won’t fix the high school graduation problem, which is substantially caused by school boards trying to implement the fantasy that every high-school student belongs on the college-prep track, even if that means he will drop out of high school! Want to help young people? Bring back vocational courses in high school. Do you realize that “business skills,” and “shop,” and “home economics” classes have been eliminated from high school? Those classes used to prepare many kids for work and all kids for more self-reliant lives. Which do you think will be more useful to some perfectly normal, average, 100 IQ kid– learning how to fix a car, or flunking Algebra II?
“5. Universal health care.”
It would take too long to discuss this, but I don’t think you’re right. There was more mobility in America before 1965 than there is now.
“6. Expand the Earned Income Tax Credit.”
You advocated single-payer health coverage to remove an implicit tax on mobility. EITC eligibility phaseouts impose a very stiff marginal tax burden on workers whose earnings grow. Why is that okay?
Anyway, the EITC operates as a subsidy to employers, not workers. It distorts the whole market in subtle but pretty damaging ways.
Some businesses, like janitorial services or various restaurants, are based on large amounts of low-skilled labor. These businesses compete on price to sell a commodity good/ service. Their prices are determined by the local subsistence wage which is their minimum cost for labor. Competition prevents any of these businesses paying more than the subsistence wage.
Now, suppose rising rents or gasoline prices push up the minimum subsistence wage. Ordinarily this would force low-wage businesses to pay their workers more. At the same time, they would raise prices. That would promote the consumption of substitutes and entice (capital) investment into more labor-efficient methods. Ultimately, total output would increase–a rising tide which would lift all boats.
Instead of allowing this process to play out, though, our beloved Federal government steps in. It raises taxes, then subsidizes (only) low-wage workers so their employers will not have to pay them more or raise prices.
Those artificially-capped prices then deliver false signals to the economy, causing it to veer off course.
Goods/ services from low-productivity producers seem cheap, but consumers really pay for them twice: once at their nominal price, then again through the tax system. (The portion laundered through the EITC includes a hefty surcharge for transaction costs.)
Not only do the actual goods/ services cost as much or more in the end, but the low nominal prices protect inefficient (low-wage) incumbent suppliers from competition by discouraging the entry of more efficient suppliers.
(Note how cleverly EITC is structured. To get the subsidy, you must work for a low wage. So unlike welfare, EITC doesn’t drive up wages by competing with business for workers. At the same time, EITC rules fence more-efficient higher-wage employers out of this large Federal subsidy program.)
EITC’s effects reach beyond the obvious interference in labor-intensive sectors of the economy. EITC discourages quality improvements in many businesses.
Suppose every fast-food sandwich would cost 20 cents more if there were no EITC. Hypothetically, it takes about the same amount of labor to prepare each sandwich, though some have better ingredients. If the price of the crummiest sandwich increased 20% from $1.00 to $1.20, while the price of the tastiest one increased only 10% from $2.00 to $2.20, people would choose to enjoy the tastier one more often. (Note that eliminating EITC would leave at least 30 cents more in every sandwich-buyers’ pocket (not 20 cents, because of EITC’s overhead costs). People who continued to buy the cheapest sandwiches could spend their surplus on something else instead.)
The whole EITC program is nothing but rent-seeking by low-wage businesses and their corporate clients.
(Also, non-minimum-wage businesses benefit from EITC at taxpayers’ expense.
(Many businesses buy services from low-wage suppliers (janitorial services are the obvious example). The EITC holds down the price of those services by transferring part of their cost to income-tax payers. So businesses which buy low-wage services effectively transfer part of their costs to taxpayers at large.)
If we really want to boost the income of low-wage workers, raising the minimum wage is the way to go.
“7. Wage insurance.”
Actually, I almost agree with you on this one. If we could figure out how to set up a wage-insurance plan that wouldn’t end up as a subsidy to low-wage employers I could support it.
“8. Boost income maintenance.”
The empirical evidence is that higher welfare payments or longer unemployment-insurance payouts just discourage job seeking. HOWEVER, you could advocate a national- basic- income or negative- income- tax plan.
“9. Job placement assistance and public employment as a last resort.”
Can you get public-sector unions to go along? (They have always been stridently opposed to workfare schemes that give participants any real work experience.)
Anyway, if you fix basic education and provide a basic income, you won’t need to fund a useless job-placement bureaucracy or workfare.
Sounds like a lot more than $100 Billion.
1. What’s your evidence that increasing teacher pay will do much more than just increase the salaries of currently-existing teachers? (Which might be a good goal in and of itself, but wouldn’t be likely to improve teacher quality). See this article, for example.
2. “College should be a financially viable option for all Americans.”
Right now, college graduates earn more. But it’s a fallacy to think that if everyone were given a college degree, we’d all suddenly earn more and no one would work at any menial jobs any longer. Instead, if everyone goes to college, then a college degree will be the equivalent of what a high school degree used to be — except that it will have wasted 4-6 more years of the average person’s life, plus cost more in tuition money. And then employers will still find ways to put people in menial jobs, for which people will now be “overqualified.” See http://www.johnlocke.org/acrobat/pope_articles/the_overselling_of_higher_education_report.pdf (I once knew a guy who had an anthropology degree from Brandeis, whose job was overseeing a loading dock at a large bookstore.)
As to why college has a high earnings premium these days, I like to think of it this way: In an era when fewer people went to college, it was perfectly respectable to enter the workforce as a high school graduate. Now, to do so marks you as being in the bottom 20 or 30%. So it’s a framing issue — it’s not that college has a high premium, it’s that failing to go to college has a higher penalty. But it’s not good to have a world in which failing to go to college has a high penalty. There are many, many people out there who really don’t like the world of school, and it’s simply unjust to force them to spend several years and tuition money getting a degree just so they can have a credential to enter the workforce. Am I wrong?
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Hey, nice graph!
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While this list seems very sensible, you don’t include any policies to directly promote asset-building in an inclusive manner, e.g., IDAs or universal capital grants. You did include policies of this kind in EGALITARIAN CAPITALISM. Have you changed your mind?
Stuart:
This was partly an oversight; I meant to say something about them in the context of discussing college affordability. But I actually have become a bit more ambivalent about asset-building policies. Not negative, just ambivalent.
Lane