The Obama Administration’s Questionable Economic Mobility Claims

Editor’s Note: This opinion piece first appeared on January 17, 2012 as a guest post on National Review Online’s domestic policy blog, The Agenda.

Last week, Council of Economic Advisors chair Alan Krueger gave a big speech on inequality at the Center for American Progress. The speech marked the second salvo in what is shaping up to be a major campaign theme for President Obama—the harm done by America’s high levels of inequality to the opportunities of the poor and middle class. It is understandable why the president and his advisors find this theme attractive. The likely Republican nominee is a former private equity captain worth as much as $250 million who likely pays a marginal tax rate of fifteen percent on the income he receives. Fairly or not, that does not exactly translate into voters viewing him as the guy they’d like to have a beer with (not that Romney would imbibe). But just as importantly, the more Obama can make the election about big-picture economic issues like inequality and mobility, the less flack he will take for the more immediate problem of a still sluggish economy.

I’ll be honest—I have a fair amount of sympathy for much of President Obama’s agenda. You can do some googling and figure out who I voted for in 2008. I am even open to the idea that our high levels of inequality are problematic—if not for the whole “99 percent” then for the bottom 50 percent. But I am exasperated by the Administration’s casual claim that opportunity in the U.S. for the typical American is on the decline. The latest attempts to justify this claim, in Krueger’s speech, have crossed the line from ill-supported to deceitful. The president’s strategy may prove successful, but it could have the shameful effect of unnecessarily raising Americans’ economic anxiety levels. That could further delay a full recovery from the Great Recession by discouraging Americans from spending money at pre-recession levels. Even worse, by talking down opportunity, the president could actually depress upward mobility.

The first salvo in the emerging campaign came on December 6 in the much-discussed speech in Osawatomie, Kansas. That speech was a litany of alarming assertions about the state of the middle class, with few hard numbers attached. In general, claims of rising economic insecurity are usually overstated, as I discuss in my recent essay for National Affairs, “Bogeyman Economics.” The president’s speech was squarely in that vein.

But it was a specific claim about declining upward mobility that set off my bad-numbers detector. As detailed in another essay I wrote for National Review Online, the president’s assertion that upward mobility from poverty to the middle class has fallen markedly was based on a model built on a foundation of untenable assumptions. He claimed that upward mobility fell from 50 percent to 40 percent between midcentury and 1980. When I subjected the claim to real-world data, I found no change in mobility over the period, consistent with the consensus from previous academic research.

It was a modest victory that my efforts apparently led the Administration to drop these numbers, though their absence from Krueger’s CAP speech was unnoticed for the most part. In their place, however, were two new sets of numbers. The first purported to show that the middle class has “shrunk”. Krueger presented estimates indicating that the percentage of American households who were in the middle class fell from 50 percent in 1970 to 42 percent in 2010 (see Figure 6). These estimates are direct descendants of the mobility estimates I earlier debunked. In determining how those initial mobility estimates were computed, I was surprised to realize that the Administration had defined “upward mobility into the middle class” in such a way that it did not count “upward mobility into higher-than-the-middle-class.” This…unusual definition had the effect of understating how many poor people become at least middle class, which is certainly the relevant figure.

Krueger’s claim of a shrinking middle class relies on the same peculiar definition. Specifically, “middle class” is defined as having a household income at least half of median income but no more than 1.5 times the median. I re-ran the numbers using the same definition and data source as Krueger and found that the entire reason the middle class has “shrunk” is that more households today have incomes that put them above middle class. That’s right, the share of households with income that puts them in the middle class or higher was 76 percent in 1970 and 75 percent in 2010—two figures that are statistically indistinguishable. For that matter, I am not discovering fire here; Third Way made the same point in early 2007 (page 7). A shrinking middle class is only a problem if it reflects fewer people reaching the middle class. That is clearly the impression the administration wants to give, but it is entirely dishonest to do so.

The second new line of evidence Krueger presented centered on a chart he called the “Great Gatsby Curve” (see Figure 8). The chart plotted ten OECD countries according to two variables: the countries’ overall economic inequality in 1985; and a measure of economic immobility indicating the tendency to have an income similar to one’s parents. The chart demonstrated that countries with higher inequality also tend to have more immobility; of the countries included, the U.S. had the highest level of inequality and the second-highest level of immobility. Krueger also noted that American inequality has risen since 1985, and the correlation between inequality and mobility would suggest that mobility has also declined. Krueger used the overall relationship between the two variables—represented in the chart by a “best fitting” line, or the straight line that comes closest to passing through all the points—to make what he called a “rough forecast” for “today’s children.” He predicted that in the next generation, the increase in inequality will cause immobility to rise substantially.

But the forecast is so rough that it is uninformative. Each of the points in the Great Gatsby chart represents an immobility estimate taken from independent earlier studies. It is very difficult to get comparable estimates of immobility for different countries. One needs measures of income defined in a common way across countries. Ideally, one would have multiple years of income data for each generation, and the analyses would use real data, as opposed to model-based estimates, on adults and on their parents when they were children. This last requirement is perhaps the hardest to meet. Many governments do not conduct studies tracking children’s income as they grow older (or have only started to recently), so researchers must estimate childhood income using an algorithm obtained from a separate data set and compare the result against actual adult-child income.

Because of these technical difficulties, for some countries—particularly the United Kingdom—researchers estimating immobility come up with widely varying estimates. Building a Great Gatsby chart then requires choosing an immobility estimate to represent the country. Different scholars choose different estimates, with the result that their best-fitting lines differ. In the version I trust the most, there is a relationship between inequality and immobility, but it is entirely driven by three countries—the United States, Italy, and France. In particular, the estimates of immobility for the United Kingdom range widely across different versions of these charts.

Admittedly, all of the charts like this that researchers have created show a relationship between inequality and immobility. There is one other big problem with them, though, particularly when a researcher is estimating future mobility, as Krueger did. If one believes that inequality diminishes opportunity, one should look at how inequality experienced in childhood affects mobility between childhood and adulthood. Krueger’s immobility data are, for the most part from people who were in their 30s during the 1990s, so they should be matched with inequality data from the 1960s, when those people were children. But instead they are matched with inequality data from 1985. Cross-national differences in inequality were much bigger by 1985 than they were in the 1960s (see Figure 1.1), so it is likely that the relationship across countries between childhood inequality in that decade and immobility experienced by the 1990s is weaker than the Great Gatsby chart suggests; that is, if countries had relatively similar inequality levels when the 1990s adults were children, then inequality would be a less salient factor in explaining mobility differences thirty years later.

More to the point, all of this means that Krueger’s prediction of immobility for “today’s children” is not so much a projection of what today’s children will experience as adults as it is an estimate of what today’s adults have already experienced. And we don’t need a prediction of that at all—we can instead estimate how much mobility today’s adults experience and then compare it against past generations. With the same figures I used to debunk the Osawatomie claims, I have found that immobility as measured by household income actually declined between the generation born in the early 1960s and the generation born in the early 1980s.

As I wrote in National Review a couple of months ago, America has an upward mobility problem. Indiana Governor Mitch Daniels, Ways and Means Chairman Paul Ryan, and presidential candidate Rick Santorum agree. The Administration could do a lot of good by elevating the importance of this fact in 2012. But they can do it without needlessly scaring the middle class into doubting their own security. A 2005 Journal of Politics article by political scientist Dan Wood and his colleagues found that presidential optimism or pessimism in public speeches between 1978 and 2002 had a detectable effect on consumers’ sentiment about the economy and unemployment, which in turn affected economic growth. So the president’s strategy is likely to hinder recovery from the Great Recession. In fact, there is reason to believe that Americans are more generous when they feel they are doing well than when they feel they are at risk, in which case the Administration’s strategy is doubly counterproductive if it wants to help the bottom.

Worse than any impact on middle-class anxiety or even on the strength of the recovery, however, is the message the president is sending to those struggling to pull themselves out of poverty. The data indicate that it is no less true today than it was in the past that poor children can make a better life for themselves. To be sure, it is no more true than in the past, either, a fact that should discourage complacency. But by arguing—against the evidence—that opportunity is on the decline, the president needlessly dampens the hope of those who wish to transcend their disadvantages.