There is large empirical economics literature that attempts to causally explain how different cultural traits affect economic output. The most import trait in the culture literature is generalized trust, which is “the subjective probability with which an agent assesses that another agent or group of agents will perform a particular action.” In a forthcoming paper, we argue that the trust literature is not worthy of your trust as it is beset by serious data and methodological problem that undermine its core results.
This post takes a different approach. Here, we want to see whether an immigrant-induced cultural difference on the Public Use Microdata Area (PUMA) level is related to earned income. Our idea is based on a figure from the congestion parameter in a wonderful recent paper by Michael Clemens and Lant Pritchett. The cultural difference measure comes from the Western Educated Industrialized Rich Democratic (WEIRD) scale, which measures how culturally different native-born Americans are from people in different countries based on their answers to 80 different World Values Survey (WVS) questions on morality, religion politics, social expectations, ingroup and outgroup attitudes, and child-rearing philosophies. The higher the score is on the WEIRD scale, the more culturally distant the respondents are from native-born Americans. For instance, Canadians have a cultural difference of 2.5 while Egyptians score a 24 (we adjusted the WEIRD Index to a 0 to 100 scale instead of their original 0 to 1 scale). Native-born Americans have a cultural difference of zero because they are not culturally different from native-born Americans.
We calculated the WEIRD scale measure for each PUMA as a population average based on the country of origin for the population. To construct this measure, we calculated the weighted average WEIRD score based on respondents from the ACS microdata for each PUMA. PUMA respondents who are from a country not included in the WEIRD scale are dropped from the sample entirely to remove the most severe issues with sample-selection bias. The WEIRD scale only compares the cultural difference between native-born Americans and citizens of 75 other countries, where the majority of immigrants in the United States came from during the 2013-2017 period. The earned income data come from the American Community Survey for those years.
Figure 1 establishes the simple relationship between logged income per capita in each PUMA and how culturally different the population of that PUMA is compared to native-born Americans. The shaded area in Figure 1 is the 95 percent confidence interval (CI). It shows a tight positive relationship between a PUMA’s cultural difference and income at the lower levels of the WEIRD scale. The 95 percent CI widens significantly in PUMAs with greater cultural difference and becomes difficult to interpret as there are fewer PUMAs where local culture was significantly different due to immigration. However, it is clear that immigration-induced cultural differences on the PUMA level are not correlated with lower income.
WEIRD Scale of Cultural Difference and Earned Income
The WEIRD scale has many of the data weaknesses that hobble the trust literature, including its reliance on the WVS, so it merely suggestively estimates the relationship between immigrant cultural distance from native-born Americans and income on the PUMA level. Figure 1 is not a causal relationship, by any means, but it does not show problems except when the CI is so vast as to be virtually meaningless based on a single PUMA data point with a WEIRD score of slightly over 6.
 We adjusted the WEIRD Index to a zero to 100 scale from their original 0 to 1 scale for ease of interpretation.
Americans often move between different income brackets over the course of their lives. As covered in an earlier blog post, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives, and over 11 percent of Americans will be counted among the top 1 percent of income-earners for at least one year.
Fortunately, a great deal of what explains this income mobility are choices that are largely within an individual’s control. While people tend to earn more in their “prime earning years” than in their youth or old age, other key factors that explain income differences are education level, marital status, and number of earners per household. As HumanProgress.org Advisory Board member Mark Perry recently wrote:
The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever.
According to the U.S. economist Thomas Sowell, whom Perry cites, “Most working Americans, who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%.”
While people move between income groups over their lifetime, many worry that income inequality between different income groups is increasing. The growing income inequality is real, but its causes are more complex than the demagogues make them out to be.
Consider, for example, the effect of “power couples,” or people with high levels of education marrying one another and forming dual-earner households. In a free society, people can marry whoever they want, even if it does contribute to widening income disparities.
Or consider the effects of regressive government regulations on exacerbating income inequality. These include barriers to entry that protect incumbent businesses and stifle competition. To name one extreme example, Louisiana recently required a government-issued license to become a florist. Lifting more of these regressive regulations would aid income mobility and help to reduce income inequality, while also furthering economic growth.
Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.
According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000 per annum) for at least one year.
How is this possible? Simple: the rate of turnover in these groups is extremely high.
Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.
Now consider the top 400 U.S. income-earners—a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.
HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:
Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover … But economic reality is very different—people move up and down the income quintiles and percentile groups throughout their careers and lives.
What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (the latter tends to fluctuate more)?
The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees and their heirs lost their top 400 status between 1982 and 2014.
So, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.
And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of U.S. income-earners, you’re still quite possibly part of the global top 1 percent.
“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since. Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”
Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.
Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%. He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.
In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.
Technology has also become cheaper, improving our lives in unexpected ways. For example, consider the spread of cell phones. There was a time when only the wealthiest Americans could afford one. Today, over 98% of Americans have a cellular subscription, and the rise of smart phones has made these devices more useful than ever.
Unfortunately, progress has been uneven. In those areas of the economy where competition is hobbled, such as education, housing, and healthcare, prices continue to increase.
Still, the percentage of the population classified as living in relative poverty has decreased over time. Why then do three quarters of Americans, including Senator Sanders, believe that the poor are “getting poorer?”
A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer. Fortunately, in the real world, the pie is not fixed. U.S. GDP is growing, and it’s growing faster than the population.
Poverty remains a pressing issue, but Senator Sanders is incorrect when he says that the poor are becoming poorer. In the words of HumanProgress.org advisory board member Professor Deirdre McCloskey,
The rich got richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university, and respect.
According to Gallup, more Americans think of themselves as “have-nots” today than at any point since Gallup began posing the question almost thirty years ago, while fewer Americans see themselves as “haves.” (Please see Emily Ekins’s earlier post for an in-depth analysis from a different angle). But do Americans actually have less in 2015 than in 1988? Let’s dig into the data to see whether Americans might have more than they realize.
2015 is the first year when Americans spent more money dining out than they spent on groceries. Let’s examine why that might be. In 2015, U.S. GDP per person (adjusted for inflation) reached an all-time high. At the same time that average personal wealth is rising, many necessities like food are going down in price. As a result, spending on the basics takes up a smaller and smaller share of an American’s personal disposable income—dropping from 39% in 1988 to 32% in 2013. This means that Americans have more money left at the end of the day, which they can then choose to save, invest, or spend on luxuries like dining out.
Not only are Americans wealthier on average, but they are also working less. The average American worker in 2015 works 30 fewer hours in a year than her counterpart in 1988, and yet is almost $18,000 dollars richer in real terms.
HumanProgress.org advisory board member Mark Perry recently pointed out that today’s young Americans may actually be the luckiest generation in history, based on what they can buy with earnings from a summer job. And increases in real wealth do not capture technological advances, which also contribute to rising living standards. The quality and variety of available goods is improving across the board. Almost no one had a cell phone in the United States back in 1990, but today they’re ubiquitous—and more useful, with an app for just about everything.
In many ways, Americans have more today than ever before: more leisure time away from work, more disposable income left after basic expenses, more choice in what they buy, and more advanced technologies at their fingertips. Of course, there are still people who live in genuine need. The Great Recession and various growth-retarding policy decisions have done great harm, especially to the poor. Still, if the many positive trends that we are seeing continue, then hopefully more Americans will come to count themselves among the haves instead of the have-nots. To learn more about improving living standards in the United States and beyond, pay a visit to HumanProgress.org.
"In the last decade, the average income of the bottom 90 percent of all working Americans actually declined," Obama said on April 13. "The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each."
Politi-Fact, partly on the basis of my own research, generously rates the president's claim as "Half True."
The truth is that the President's source, Thomas Piketty and Emmanuel Saez, refer only to pretax, pretransfer income reported on individual tax returns (as opposed to being sheltered inside a corporation or IRA or simply unreported), and they have no data on the bottom 90%. Worst of all, they leave out transfer payments, which amounted to $2.3 trillion last year — 44% as large as all private wages and salaries ($5.2 trillion). The data also excludes refundable tax credits, which added about $170 billion to low and middle incomes in 2009 according to the the Joint Committee on Taxation (the EITC, child credit and Obama's "making work pay" credit). And the Bureau of Economic Analysis estimates that gross income reported on tax returns is about $1 trillion less than actual income.
As for the top 1%, my research shows that top investors report more capital gains and dividends when those tax rates go down, which is why they paid such a big share of income taxes (up to 40%) in 1997-2000 and 2003-2007. Raise the tax on dividends and capital gains to 23.8%, as Obama hopes to do by 2014, and somebody else would have to pay the taxes now paid by the top 1%. Using income reported to the IRS to measure actual living standards is foolhardy at best.
Rand Paul, after setting the newswires alight with his controversial stance on the Civil Rights Act, is busy touting his "moderate" credentials.
Moderate, in this case, being a euphemism for "laughably timid."
In a recent interview with a Kentucky radio station, Paul rejected the charge of his political opponent that he was opposed to farm subsidies. Not true, sayeth Paul. He is "much more moderate than that."
According to an article in yesterday's Lexington Herald-Leader, Paul's less-than-radical view on farm subsidies is that, well, maybe dead people should not receive them:
Let's just agree that we will get rid of subsidies for dead farmers first," he said.
After that, Paul said, the government should restrict subsidies to farmers who make more than $2 million a year.
Paul said 2,007 farmers last year whose income was greater than $2 million received subsidies.
"Let's agree that maybe we can cut them out," he said.
Despite his "ideologically pure" stance on the CRA, Rand Paul can compromise on issues of freedom when he wants to, for example on drug laws and gay marriage, as Tim Lee points out. And now, apparently, he is to the left of Barack Obama (who favored a $500,000 adjusted gross income limit) when it comes to farm subsidies. Paul's choice of when to be ideologically pure is curious indeed.
HT: Don Carr at the Environmental Working Group