Treasury's Income Mobility Report Blows Away 'Mediocre Bush Economy' and Other Myths

It's hard to overstate the importance of the study released today by the Treasury Department ("Income Mobility in the U.S. from 1996 to 2005"; press release; full study PDF).

That's because it provides documented evidence of more, not less, economic mobility than in previous eras. Beyond that, taken in combination with an independent report I covered last week, it demonstrates beyond any reasonable doubt that the first four-plus years of the Bush economy were exceptional.

Tuesday's read-the-whole-thing feature editorial at OpinionJournal.com provides a great overview (bolds are mine), plus some tantalizing details:

..... you may have heard that the U.S. is becoming a nation of rising inequality and shrinking opportunity. We'd refer those campaigns to a new study of income mobility by the Treasury Department that exposes those claims as so much populist hokum

..... (The study shows) beyond doubt that the U.S. remains a dynamic society marked by rapid and mostly upward income mobility. Much as they always have, Americans on the bottom rungs of the economic ladder continue to climb into the middle and sometimes upper classes in remarkably short periods of time.

The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.

Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.

Also encouraging is the fact that the after-inflation median income of all tax filers increased by an impressive 24% over the same period. Two of every three workers had a real income gain--which contradicts the Huckabee-Edwards-Lou Dobbs spin about stagnant incomes.

..... Only one income group experienced an absolute decline in real income--the richest 1% in 1996. Those households lost 25.8% of their income. Moreover, more than half (57.4%) of the richest 1% in 1996 had dropped to a lower income group by 2005.

..... The key point is that the study shows that income mobility in the U.S. works down as well as up--another sign that opportunity and merit continue to drive American success, not accidents of birth. The "rich" are not the same people over time.

The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s.

..... The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn't remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.

..... As the Treasury data show, we shouldn't worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.

The impressive mobility and income statistics in the report collectively remind us of three points that Old Media and too many politicians want us to forget:

• First, that those on the bottom rungs of the economic ladder typically don't stay there very long, i.e., being irretrievably "stuck in poverty" is largely a myth.
• Second, since the poor are not the same people from year to year, and since the poor who replace the ones who just moved up are either new workforce entrants or people who have fallen from greater heights, it's likely that they too will make or remake their way up the economic ladder in a relatively short period of time.
• Third, the rich are also not the same people from year to year. To the extent that they still exist, high punitive tax rates single out different people each year, "rewarding" their newfound success with confiscatory tax bills.

The 24% real income increase cited by the Journal should relegate the "stagnant incomes" myth to the economic waste heap once and for all (but it won't).

Today's Treasury study also provides a great deal of satisfaction when compared to similar data for the years 1987-1996. Just look at these two charts:

(Sources: "Income Mobility in the U.S. from 1996 to 2005," issued Nov. 13, 2007; "Income Mobility in the U.S.: evidence from Income Tax Returnsfor 1987 and 1996," issued May 2007)

Here are the salient points:

• Every base-year income group in 1996, with the exception of the lowest quintile and by a relatively insignificant amount, made greater progress during the subsequent nine years than did their 1987 counterparts.
• The median income gains during the most recent nine years studied were over double the gains seen in the nine years before that (24.2% vs. 11.1%).
• The average American has made far more economic progress during the past 9 years than he or she did during the nine years before that.

Oh, and there's one more question to address: Is it possible to estimate whether most of the remarkable progress during the past 9 years occurred in the earlier Clinton years or the later Bush 43 years?

Yes it is.

Last week, the Conference Board ("about" page here) released a study on discretionary income that was covered by yours truly (NewsBusters; BizzyBlog). That study and a previous comparable version reported that the following percentages of American households had discretionary income (technically, "those whose spendable income exceeds that held by households with similar demographic features") in various recent years:

– 1997/1998 - 52%
– 2002 - 52.1%
– 2003/2004 - 51%
– 2006 - 63.5%

Though the years involved don't align perfectly, the fact that the entire percentage increase in households with discretionary income has taken place in the last few years makes it reasonable to conclude that most, and perhaps all, of the income mobility that occurred from 1996-2005 (the years in the Treasury study) took place in the final few years. Certainly no one can credibly claim that the majority of the mobility improvement occurred before 2002. Further, though things can certainly change quickly in this volatile world, broad economic statistics reported since the Treasury study give us no good reason to believe that things have changed for the worse since.

Treasury's mobility study, combined with The Conference Board's discretionary income data, shatter yet another myth. It's a myth Old Media propagates and will continue to propagate day-in and day-out, despite the overwhelming evidence just cited: That, as far as the average American is concerned, the Bush 43 economy has been mediocre, nothing special, or worse, and that it has paled in comparison to the Golden Era of the 1990s.

Now you know better.

Cross-posted at BizzyBlog.com.