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Ask Dr. Dollar

Dollars & Sense - September 1, 2000

Dear Dr. Dollar

In your May/June issue, there were two articles that illustrate the idea that the rich are getting richer -- "Economy Sets Records for Longevity and Inequality" and "A Rising Tide Fails to Lift All Boats." An alternate conclusion may be that it is the moderate and lower income people who are getting richer. The "new economy" billionaires and millionaires who were not in the top 1% in 1977 are migrating upward at the expense of some who were there in 1977. I would expect that most people who have earned technical college degrees have moved to higher income groups. That gives us all hope that this is still the land of opportunity for those willing to invest the time and effort.

Larry Harrington

One can always hope. But reality does not offer much basis for optimism. There is simply no evidence that the large increase of inequality in the distribution of income has been accompanied by a large increase of social mobility, by more and more people changing places in the income hierarchy. Certainly there is some shifting around, and the fortunes made off of information technology in the 1990s give anecdotal support to the idea that today's very rich were yesterday's "moderate and lower income people." Yet, whatever opportunities exist in the United States today, they are by far the greatest for those who start off wealthy.

A look at the people on the Forbes list of the richest people in the country begins to tell the story. In an amination of the backgrounds of people on the 1997 list, United for a Fair Economy found that 42% of those in this select group inherited sufficient wealth to place them there. Another 6% started with inheritances of $50 million or more, and 21% came from at least "wealthy or upper class backgrounds." The remaining 31% of the Forbes elite did reach their positions without any apparent head start, indicating some significant mobility but no startling turnover of those at the top. The best way to get to the top is to start at the top.

Broader based studies lead to similar conclusions. Looking at the incomes of fathers and their sons, Daniel McMurrer and Isabel Sawhill of the Urban Institute report, "An adult son whose father's income was ... at the 95th percentile [i.e., below only the top 5% of the population] would have a 76 percent chance of being above the median [among the top half of the population], including a 42 percent chance of being in the top 20 percent.

Yet McMurrer and Sawhill also argue that over the long run there has been a decline in the effect of parents occupational status on that of their offspring. They attribute a large part of this greater mobility to increasing access to higher education. Of course the role of education is not as large as it might appear on casual observation, since one of the ways that parents' position gets transmitted to their children is through the education that the children receive. It is no secret that the rich have great advantages when it comes to access to the "good schools."

In fact, it appears that the education gap between the rich and the poor may be increasing. In the mid-1990s, Business Week reported: "Kids from the top quarter [of the income hierarchy] have no problem: 76% earn bachelors degrees today, vs. 31% in 1980. But less than 4% of those in bottom-quarter families now finish college, vs. 6% then." It seems that higher education may be less a way for people to rise up than it is a means for those at the top to secure their positions.

The trend towards greater inequality in the United States began to appear in the late 1970s and became firmly established in the 1980s. Using 1980 as dividing line and looking at the distribution of income before and after this point, we see some interesting shifts. After 1980, there was more movement out of the middle-income group, both upwards and downwards. Yet people were also more "secure" in extreme positions after 1980. For example, in a five-year period in the 1980s, 27.6% of people in the high-income category moved to middle-income, while in a similar five-year period before 1980, 30.8% had shifted from high to middle. At the bottom, before 1980, 35.1% of those in the low-income category shifted to middle-income, but after 1980s only 24.6% shifted up.

When all is said and done, there is no evidence to support the Horatio Alger myth that by hard work and perseverance many people go from rags to riches. Some do make it, of course, and their success keeps the myth alive. The social mess of rising income inequality, however, cannot be swept away by a myth.

Arthur MacEwan

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