The United States, in our popular mythology, is a classless society. Blessed with England’s Protestant work ethic and unburdened by its rigid class structure, Americans were free to work as hard as they pleased and reap whatever benefits came their way. Abraham Lincoln, as we all know, was born in a one room log cabin and became our greatest president ever.
And it’s this very example that Wells Fargo used to frame a nine-page report on income inequality and class mobility in contemporary America. Examining both how real the problem is, the challenges it poses, and possible answers to the problems, Wells Fargo doles out advice only megabank economists are capable of giving. But it’s not that their thoughts are necessarily wrong or bad, just that they demonstrate how hard it is for those at big banks to maintain perspective.
Just as Occupy Wall Streeters chanting about economic injustice must look nutty to bankers — in Wells’ defense, they come off as sympathetic to the movement — bankers’ logic looks a bit strange to us. Wells Fargo’s report illustrates how we can all look at the same problem, but our biases and sympathies can cloud our judgement.
First, the report.
Wells acknowledges income inequality as a very real phenomenon, but they stop short of calling it a problem. “Rising income inequality, while alarming at first glance, is not necessarily problematic for economic growth and social stability if rising income inequality is accompanied by high economic mobility,” they write.
For a litany of reasons, the Wells economists opt to examine intra-generational economic mobility, not inter-generational mobility; that is, they look at how economically mobile individuals are in comparison to their peers, not their parents. The one obvious reason, I suspect, that Wells opted not to look at inter-generational mobility is because it might demonstrate a terrifying downward trend in the last decade.
From a data set of 5,000 families from University of Michigan study on income dynamics, Wells narrows this data set down to 500 families — just 10 percent of the data set, specifically, the families that reported income every year. This already raises some issues; 500 families isn’t quite a representative data set, if you want to talk about the entire United States.
They find that, despite what you’ve heard, the top quintile of American families has seen their share of wealth diminish between 1980 and 2009. But the data set they use to demonstrate this is only 100 families (that’s if we’re being generous, assuming they split their small data set into their own quintiles — which would be problematic for its own reasons — but the upper quintile data set could be much smaller than 100 if they assigned families to the quintiles they fell into in the larger data set)! And by looking at intra-generational family income in such a small set, they can really prove very little about just how economically mobile an average American family is.
Thirty years is a long time. It’s likely that a lot of the top quintile in 1980 were mid-career professionals, who have worked their way up the corporate ladder and earned a nice salary; they’ve likely retired since then, and might appear to have lost a lot of their income.
They acknowledge, though, that economic mobility has declined in recent years, and while it’s not gone, it’s not thriving either. They also admit that it is troubling how immobile those in the bottom quintile are — they’re basically flatlining through the last three decades, much like the second quintile. Wells Fargo attributes this, like most do, to the pressures of globalization — which is itself a weasely argument because corporate profits and CEO pay have gotten better in the same period.
The policy recommendations that Wells Fargo has up its sleeve are the real head scratchers. To wit:
“Rather than redistribute income, the more economically optimal solution to address declining economic mobility for lower-income workers should comprise reforms to education, better essential nutrition for children born into poverty, more interactive preschool and child care experiences and improved financial literacy for all income groups.”
That’s all true, but where does Wells Fargo think we will get the money for the programs they list? Perhaps we will need to raise some revenue for this. But from whom will the government get this revenue? To raise taxes on the rich, we’ve learned from everyone who is rich, amounts to a redistributive wealth policy. So now we’re back at square one.
As if this weren’t fun enough, Wells Fargo tops off the report with a lovely “Let them eat cake” moment. Pointing out that taxes are low on capital gains (15%), but that the wealthy see the most benefit from this tax break, Wells Fargo recommends that financial literacy might help the poor work their way out of poverty. Think about that for a moment and your head will spin. If only the poor could learn to take advantage of a tax code that benefits the rich!
Marie Antoinette would be proud.