David R. Henderson  

Krugman Discovers Life Cycles

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I was about to write a post on Paul Krugman's excellent recent post on taxes, but commenter Matthew Lesich on Steven Landsburg's blog beat me to it. Still, comments often get lost and so I'll make the point anyway.

In criticizing Mitt Romney's claim that 47% of Americans don't pay income taxes, Krugman points out that although this may be true in a particular year, it's not true over the life cycle. Krugman writes:

This work [of the Hamilton Project] makes a crucial point: even aside from the fact that there are other taxes besides the income tax, even aside from the larger point that lower-income working Americans are hardly grifters, the fact is that the vast majority of Americans do pay income taxes at some point in their life:

He then presents a striking table showing that the age at which the highest percent of Americans pay income taxes (almost 80% of them) is the early 50s.

This makes sense. Think about students who work at jobs over the summer. Even those who make good money for 3 months pay little or no income taxes. Or think of people who retire and get Social Security and whose other income is, say, $10,000, typically not enough to put them in a federal income tax bracket above zero. They may own their homes outright and may have $100,000 or more sitting in a low-interest bank account. They don't pay federal income taxes either.

But here's the interesting thing that explains the snarky tone of my title for this post: This same life-cycle reasoning applies to income. After all, it's income that results in income taxes. Yet, even though I have probably read at least 70% of Krugman's popular writing over the last 12 years--and probably over 80% of what he has written on income and taxes--I can't recall his ever discussing the life cycle of income. I think he talks about high-income people as "the rich," thus not making the distinction between income and wealth. If he had talked about income over the life cycle, he would have noted that the data at a point in time show more inequality than exists over the life cycle.

So here's my challenge: prove me wrong. Provide a link to something in the popular literature in the last 12 years--NY Times, etc.--that has Krugman pointing out that there's a life cycle to income. It has to be in the context of the discussion of the controversial topic of income inequality and not just in the narrower context of technical economics, consumption functions, etc. If someone provides me a certifiable quote, then I will do something that probably some of you would love to see me do: write another post in which I apologize to Krugman. And not just the mealy-mouthed politician's non-apology apology--"If I have done wrong, then I apologize"--but a real apology.

Game on.


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CATEGORIES: Income Distribution



COMMENTS (28 to date)

I had exactly the same reaction. My money's with you, David. Maybe we could call it, Henderson's Difficult Idea.

egd writes:

One major point that Mr. Krugman misses is that politics change over the life cycle as well as income.

Assuming a self-interested (and not very forward-thinking) voter, when he is young and a net beneficiary he is more likely to vote for politicians that will increase his benefit. But when he is older and a net payer he is more likely to vote for politicians that will decrease his burden to government.

Krugman isn't really disagreeing with Romney, he's just pointing out that people's self interest changes as they age. I don't think anyone seriously disputes that people vote differently as they age.

F. Lynx Pardinus writes:

@egd Do you have a source for your assertion of how and why politics change over the life cycle?

Paul Crowley writes:

Is it something you've discussed?

The IRS code used to recognize something like this, 'income averaging' was used when a person’s income for the current year exceeded 140% of the average taxable income in the preceding three years. Repealed in 1986.

Actually, now that I think about it, Krugman has on a number of occasions denigrated the idea of income mobility;

Multi-year measures of inequality, it turns out, aren’t much lower than single-year measures. How is that possible, when many people change income quintiles? Because they’re usually moving short distances on the income scale. A lot of people move from, say, the top of the second quintile to the bottom of the third quintile or vice versa — but such moves are trivial in terms of their true income position.

The above is just one example.

Jim writes:

This article may fit your criteria. Krugman published an article in The American Prospect titled "The Rich, the Right, and the Facts: Deconstructing the Income Distribution Debate" on 12/9/2001. The section titled "The Conservative Response 3: Income Mobility" mentions that lifetime income fluctuates, and Krugman argues that the level of income mobility in the U.S. is low, so that, while considering its impact, the distribution of average lifetime income remains unequal.

Sample quote:
"America is not a static society. People who have high incomes one year may have lower incomes the next, and vice versa. In the two hypothetical villages that I described earlier, one would not necessarily suppose that the same people (or their children) occupied the same positions in 1977 and 1989. And economic welfare depends more on the average income you earn over a long period than on your income in any given year. So there are some risks in drawing too many conclusions about the distribution of economic welfare from statistics on the distribution of income in any one year."

From a lengthy 2001 article in The American Prospect, Krugman pooh poohs the mobility argument;

There is considerable income mobility in the U.S., but by no means enough to make the distribution of income irrelevant. For example, Census data show that 81.6 percent of those families who were in the bottom quintile of the income distribution in 1985 were still in that bottom quintile the next year; for the top quintile the fraction was 76.3 percent. Over longer time periods, there is more mixing, but still not that much. Studies by the Urban Institute and the U.S. Treasury have both found that about half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade, and that only 3 to 6 percent rise from bottom to top or fall from top to bottom.
roystgnr writes:

I suspect that even if we were forcibly turned into a egalitarian utopia wherein income disparities were determined solely by how much of your government-issued stipend got lost in the couch cushions, Krugman would still curry favor by lamenting how unfair it is that twenty percent of families who start in the top or the bottom quintile are still there after a whole decade.

Dan Hill writes:

Wasn't it Churchill who pointed this out (and a long time ago since he's been dead a while) when he said something like "if you are not a socialist in your twenties you have no heart, if you are not a conservative in your forties you have no brain".

Krugman obviously never got the memo.

egd writes:

@F. Lynx Pardinus:

I don't have a source for the "how or why", because my comment assumes the self-interested voter. It's only correct insofar as voters cast ballots in their immediate self interest.

David R. Henderson writes:

@Patrick R. Sullivan,
Maybe we could call it, Henderson's Difficult Idea.
Great line, Patrick.
Your 4th comment, though, where you quote the following from Krugman, makes me think an apology might be close. Here’s the quote:
There is considerable income mobility in the U.S., but by no means enough to make the distribution of income irrelevant. For example, Census data show that 81.6 percent of those families who were in the bottom quintile of the income distribution in 1985 were still in that bottom quintile the next year; for the top quintile the fraction was 76.3 percent. Over longer time periods, there is more mixing, but still not that much. Studies by the Urban Institute and the U.S. Treasury have both found that about half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade, and that only 3 to 6 percent rise from bottom to top or fall from top to bottom. [emphasis mine]
He does pooh-pooh it, as you say, but that’s an empirical judgment. At least he makes the point. In my mind, if half the people have shifted out of the top or the bottom in ten years, that’s a lot of mobility.

Bob Murphy writes:

What a cool post idea. I definitely want to be David R. Henderson when I grow up.

In my mind, if half the people have shifted out of the top or the bottom in ten years, that’s a lot of mobility.

Now don't go wobbly on me, David.

It's not what's in your mind that counts, it's what's in Krugman's. And his concession occupies only a tiny portion of the American Prospect piece. He only raises it to knock it down (and he knows he couldn't ignore it and not be laughed out of the conversation).

Btw, there still could be a lot of mobility that isn't captured by movements from one quintile to another. Someone who was just in the bottom fourth quintile and managed to move to the very top of that same quintile wouldn't get counted.

And, someone who moved from the very bottom of the lowest quintile to the very top of the second lowest would only be credited with moving one quintile, yet would have moved from 'desperately poor' to 'middle class'.

David R. Henderson writes:

@Bob Murphy,
What a cool post idea. I definitely want to be David R. Henderson when I grow up.
Aw, shucks. Thanks, Bob. :-)
@Patrick R. Sullivan,
Now don't go wobbly on me, David.

It's not what's in your mind that counts, it's what's in Krugman's. And his concession occupies only a tiny portion of the American Prospect piece. He only raises it to knock it down (and he knows he couldn't ignore it and not be laughed out of the conversation).
Good point, but it depends on your priors. I was pleasantly surprised to see that he acknowledged the point. But you’re right that he does it dismissively. So maybe apology not quite due yet.

Pat writes:

Also, Krugman is not fond of paying attention to forward looking taxpayers when it comes to arguing for stimulus.

Mike W writes:

Studies by the Urban Institute and the U.S. Treasury have both found that about half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade, and that only 3 to 6 percent rise from bottom to top or fall from top to bottom.

"Only" 3 to 6 percent rise from bottom to top or fall from top to bottom?

To my mind that's a lot of mobility...does any other system provide that kind of opportunity?

Also bothersome about Krugman's analysis is that it uses pre-tax income. According to IRS data, in 1980 the top 5% accounted for about 21% of income (AGI) and the bottom 50% for about 17%. Their respective shares of income tax were about 37% and 7%. In 2007 the top 5% accounted for about 37% of income and the bottom 50% about 12%. Shares of income taxes in 2007 were nearly 61% for the top 5% and less than 3% for the bottom 50%.

Mark writes:

To your point, the problem is the deliberate confusion of "income" with "wealth". It's why Obama keeps calling people who make more than $200,000 a year "millionaires and billionaires" and wants to raise their taxes.
There is a huge difference between these two cases which Krugman and the progressives refuse to acknowledge:
1) Self employed contractor, married with two kids approaching college age. Made $300K last year (but with income that can easily vary 30% a year), pays 12.4% SS tax up to $106K, new Medicare tax of 3.8% of all income,owns a $500K house with a $300K mortage. Business just started prospering but not long enough yet to accumulate large personal savings. In Krugman world this is a "millionaire and billionaire" for tax purposes who if they object to more taxes wants children to die according to the President.
2) Single person inherits $16 million. Buys $1 million home for cash. No SS tax. Invests $15 million in tax free munis. Income $300K a year tax free. Pays 35K to attend Obama fundraiser. Not a "millionaire and billionaire" for tax purposes.
Conclusion: The very wealthy are protected. They're coming to get their money from the rest of us.

andy weintraub writes:

Would that Krugman would consider life cycles when discussing the distribution of income.

Pave Low John writes:

I have no idea about anything Paul Krugman may have written or said about income mobility over a taxpayers lifetime, but I know Thomas Sowell has mentioned it on a couple of occasions (usually on those interviews he does with Peter Robinson on NRO, the "Uncommon Knowledge" series).

I have yet to actually buy anything in print from Sowell, but if anyone knows of any articles or chapters he may have written, that might provide some illumination on the subject.

Pave Low John writes:

Here are two links, one by Sowell, one by AEI, that shed some light on income mobility:

http://news.investors.com/ibd-editorials-viewpoint/011110-517702-how-media-misuse-income-data-to-match-their-preconceptions.htm

http://www.aei-ideas.org/2011/10/tracking-the-same-households-over-time-shows-significant-income-mobility/

Pemakin writes:

Question: do longer life expectancies, more years in retirement and higher percentage of the population getting college level education lead to rising Gini coefficients? I would think so, but I have never seen it in the discussion of income equality.

Bradley Calder writes:

In the interest of science I might go searching the NYT archives, but the incentive you're offering is a bit perverse, I don't really wanna see you apologize to Paul. Though I think you might just have some of his supporters (a vast number of people) searching around now. Overall, interesting strategy.

Michael Hamilton writes:

I've been trying to make a similar point to my friends for years.

What I do is draw up an Excel sheet that has 47 rows. The first cell in row 1 has a value of $20,000, and the first cell in row 2 (and all the way down this column) is equal to the cell above plus a certain percentage.

This allows me to make a simple thought experiment:

Imagine a country in which every worker starts out making $20,000 per year, paid by the state, and begins work on January 1st of the year in which he will turn 18. He will be guaranteed a job and will receive a raise of X percent each year until he retires on December 31st of the year in which he turns 65. In this country there is no inflation, and the population remains constant.

If you assign a small percentage increase, say 3% per year, the Gini coefficient is pretty small. If you assign a larger increase, say 6% per year, the country is suddenly wracked by horrible inequality, at least according to the Gini coefficient. Even in a completely egalitarian society where every worker can expect a guaranteed pay increase and will, indeed, receive the exact same pay as every other worker, there will be inequality in proportion to the annual increase in pay each worker receives. [If the friend doesn't understand the lesson at this point I set pay growth to zero percent each year]

What this means in a real society is that the extent to which human beings are able to improve their skills and become more productive over the course of their lives, the more we should see an "inequality" effect that is likely illusory.

And to think, this is only one problem associated with taking inequality data at face value.

David R. Henderson writes:

@Michael Hamilton,
Wow! That’s simple and clever, a beautiful combination. I’m lazy. Care to share it by e-mail? If so, I’ll figure out a way of providing you mine.

Bob Murphy writes:

@Mark at 7:40pm. Awesome comparison. I knew about these possibilities but haven't seen someone spell it out so succinctly as you just did.

Michael Hamilton writes:

@David Henderson.

Sure. It's not a pretty spreadsheet, but I'd be glad to send it along.

Whoever moderates the comments should be able to pull my email address.

Pat writes:

Michael Hamilton,

Good comment. I try to explain it to people by pointing out we all want our salaries in the prime of our careers to be unequal to our first salary. So why would it be bad for my salary now to be unequal to someone who is exactly the same in every way as I was when I got started?

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