Mobility vs. Movement

Point of conceptual clarification. As far as I can tell, income mobility studies don't actually study mobility in the sense of the ability to move. They study actual movement in incomes. Mobility is a dispositional term. If I have been immobilized, I am prevented from moving. If I am immobile, but not immobilized, then I could have moved, but didn't. If I sit in my chair all day, my measured physical movement for the day will be low, but I may also be a spectacularly mobile person, able to run marathons, climb sheer rock faces, swim channels, etc. What we are interested in normatively from economic measures of mobility is whether there are structural barriers to upward movement, especially for the less wealthy, not the average deviation from parents' earnings. Can people earn more if they try? Once the average income reaches a certain threshold of material comfort, we should expect people's labor market choices to reflect preferences for many things other than income. So relatively low measured mobility (generation 2's income highly correlated to generation 1's) could indicate that people are fairly well satisfied with their parents' level of income and are optimizing on other margins. The better off people become materially, the less you ought to expect actual measured intergenerational movement in average income to reliably indicate the opportunity to move. 
I have an extraordinarily interesting job that probably pays about 1/3 of what I could get on the labor market doing (for me) much more boring things, and so here I am happily foregoing twice what I actually make not to be bored(So: what are my really real wages?) It turns out that this choice keeps my income in the neighborhood of my Dad's at my age, I'm guessing. (I, however, don't have a wife and three kids to support!) I am incredibly grateful to be at liberty, both economically and socio-culturally, to make this kind of tradeoff between income and satisfaction.  And I'm sure I'm not alone. 
The opportunity to make this kind of tradeoff in the labor market is largely a function of education. I think our current system of public schooling does create a structural barrier to upward movement for many of the least well-off, which is why we should scrap that system and replace it with a market in education as a matter of justice. But that's a matter of particular barriers to upward movement, which are what we should focus on, not some meaningless-by-itself average.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center

20 thoughts

  1. Will,
    I’ve been a regular reader and have often enjoyed your viewpoint. I recently got my Merchant Mariner’s license (within the last two years) and have taken advantage of the nomadic existence that this career affords, going out and working for weeks or months at a time and staying with friends in major port cities in between.
    Because of the tight labor market (which union sailors experience in a much more direct way than most workers, since you can see the jobs available each day on a big board and the people you are competing with to get those jobs in the same room with you) I have been somewhat concerned about how to proceed with my career and have considered finding a shore job to get me through, as well as just banking money and waiting it out. But on the other side I have a unique ability to “do as I please” and let my spending track exactly with my earning.
    Reading this article has just convinced me that I will do as I have been roughly planning and spend the month of March working sporadically on Oahu and surfing or drinking things with umbrellas the rest of the time. I’m doing my part for the stimulus, dammit!
    Just so you know that not only are you moving discussions on liberaltarianism, you are having effects in the real economy, too (small though my response may be). Thanks, I’ll drink a toast to you (and Kerry) in Waikiki.

    1. Ok well for some reason this facebook connect thing doesn’t display my current profile pic. It’s me holding a bunch of shit I bought in the past month or so. Granted used snowboards probably don’t do much to stimulate output, but a laptops and bass guitars do.

  2. A major cause of restricted spending is uncertainty created by constant government intervention. Until these waves of change are over, most people will hold off on spending. The anxiety is a valid reaction to uncertainty caused by constant changes which make financial decisions too iffy. In a large sense, it’s the uncertainty within government as to the correct course to take which is causing the cut-back in spending — it’s a chain-reaction of uncertainty.
    All this intervention is also a reason why capitalists aren’t investing — it’s basically the same principle — until you clearly know the rules — how you can win, what can cause you to lose — you most likely won’t play.

    1. Very, very true. All these goofy government efforts remind me of Atlas Shrugged. In and of themselves they are bad enough, but add the uncertainty and moral hazards they create and they are stewing a big enough pot to cook us all.
      My investment advice is guns and ammo. They lose little value and if things do get dire, you can use them to procure all sorts of goods and services.

  3. I have managed to save 5-6 months expenses up, and it’s sitting in a couple of banks, earning meager interest. Mentally, however, I generally fall into the “I could always save more” category, and struggle with how and when I want to purchase things.
    The Glaeser article pushed me over the edge – I went out and bought that XBox 360 I’ve been jonesing for (I’ve wanted to play Halo 2&3 for a while now), and some other stuff. Because, at the end of the day, if I, as a high-end software consultant/programmer/architect can’t find work for 5 months, the extra $600 or so I spent will not amount to a hill of beans.
    Basically, at this point, in order to “do my part” based on the Glaeser article, I have to pretty much commit myself mentally to spending every cent I make each month until the recession lifts. This is quite hard for me, but these are the kinds of sacrifice one has to make in these dark times!
    Now I just have to figure out what to buy – I like my car, live in an apartment and already have a nice TV, stereo, etc. I suppose I could get some furniture, but I don’t think I’ll derive much utility from it at this point. The only things that pop into my head are hiring an editor to spruce up my novel, and maybe a new(ish) tri-bike.

  4. I haven’t lost my job, but I can’t think of much that I want right now. Is there anything in terms of investment goods that it’s a good idea to spend on?
    (By investment goods I mean ones that make money. Not art, or jewellery or other things that merely cost money to ensure and may, possibly, one day, be worth more than you sold them for).

  5. Eurokrize
    Eesti-von Raivo Pommer–
    L’euro poursuit son repli ce mardi face au dollar. Vers 18h45, un euro s’échangeait ainsi contre 1,32 dollar, après voir touché 1,3168 dollar, au plus bas depuis le 11 décembre. Lundi soir, un euro valait 1,3362 dollar. Les cambistes spéculent sur une probable baisse des taux européens à l’issue de la réunion du Conseil des gouverneurs de la Banque centrale européenne (BCE), ce jeudi à Francfort.
    Face au ralentissement économique, l’institution présidée par Jean-Claude Trichet devrait opter pour un nouvel assouplissement monétaire. La majorité des économistes parient sur une baisse de 50 points de base du taux directeur européen, qui serait ainsi ramené à 2%.
    La tendance baissière de la devise européenne est par ailleurs renforcée par les craintes sur la dette de plusieurs gouvernements de la zone euro après que l’agence de notation Standard & Poor’s a placé la note de la dette à long terme de l’Etat espagnol sous surveillance négative. Cette dernière pourrait ainsi perdre son rang “AAA”.
    De son côté, le billet vert a été soutenu par les propos de, Ben Bernanke. Le président de la Réserve fédérale américaine qui a estimé mardi que son institution disposait encore “d’outils puissants” contre la crise.

  6. Catastrophe Eastern
    von Raivo
    Eastern Europe’s woes are not unmanageable. But they are not being managed. The result could be catastrophe
    AMID the wreckage of Latvia’s retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as “Nasing spesal”. Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country’s economic problems as “nothing special”.
    Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country’s rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search of work, leaving rural villages and small towns depopulated.
    Click here
    The central assumption, in Latvia and many other countries in or near the EU, was that convergence with rich Europe’s living standards and other comforts was inevitable. Lending in foreign currency went from 60% of the total in 2004 to 90% in 2008. Why pay high interest rates in the local currency, the lat, when the cost of a euro loan was so much cheaper? In a few years Latvia would surely join the euro anyway. Similarly, worries about financing the inflows were dismissed: Swedish banks would no more abandon their subsidiaries in Latvia than they would pull out of, say, southern Sweden.
    Last year tested those assumptions nearly to breaking point. First, Latvia’s housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.
    The big cuts in social spending that the package entailed led to vigorous public protests. Now the government has resigned. At a time when strong leadership and public trust are needed more than ever, the country’s squabbling and discredited politicians look hopelessly out of their depth. Latvia is an economic pipsqueak, with just 2.4m people. But the rest of the region is watching nervously, fearful that more bad news from the Baltics could bring others crashing down too.
    It is easy to be pessimistic. This is indeed the worst economic crisis since the collapse of the communist planned economies and the wrenching process of privatisation, liberalisation and stabilisation that followed. The main ex-communist economies are likely to contract by 3% this year, according to Capital Economics, a consultancy. Yet the picture is not uniform. Only a few countries have needed an IMF bail-out. One is Latvia, whose economy is set to contract by at least 12% this year, and whose credit rating has just been downgraded by Standard & Poor’s to junk. Another is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. It received $25 billion in October and faces a contraction of up to 6%. A third is Ukraine—chaotically run, corrupt and badly hit by the slowdown in its main export market, Russia. Ukraine’s IMF deal brought it $4.5 billion in November. But a second tranche of $1.9 billion is stuck; the deal is unravelling as politicians squabble over spending cuts. Its economy is likely to shrink by 10% this year. Other countries with IMF packages agreed or pending include Belarus (a Russian ally which is still expected to see growth this year), Georgia (which was bailed out after last year’s war with Russia) and Serbia.
    Most other countries in the region are faring much better, though. Poland—by far the largest economy of the new EU members—is nowhere near collapse. Unlike its central European neighbours, it is big enough not to depend chiefly on exports to the rest of the EU. By European standards, its public finances are in fairly good shape. Its debt-to-GDP ratio is below 50%. Growth will be negligible, or slightly negative, but nobody is forecasting a big decline. Some Polish firms and households have taken out foreign-currency loans—but the figure is around 30% of all private-sector lending, compared with twice that in Hungary.
    The second-biggest economy, the Czech Republic, is in good shape too. Its economy may shrink by 2%, but it has a solid banking system and low debt. Its neighbour Slovakia is in better shape still: it managed to join the euro zone this year. Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe’s currency union, rather than just the indirect benefit of being due to join it some day.
    Farther afield, the picture is very different. For the poorest ex-communist economies, the problem is not financial meltdown. They lack much to melt. Their exports are raw materials, agricultural products and people. In six countries, money sent home by foreign workers counts for more than 10% of GDP (in Tajikistan and Moldova it is more than 30%). Outsiders who agonise over the Latvian lat or Hungarian forint are rarely bothered with worries about the somoni (Tajikistan), leu (Moldova) or manat (Turkmenistan).
    That highlights an important problem. Outsiders tend to lump “the ex-communist world” or “eastern Europe” together, as though a shared history of totalitarian captivity was the main determinant of economic fortune, two decades after the evil empire collapsed. Though many problems are shared, the differences between the ex-communist countries are often greater than those that distinguish them from the countries of “old Europe” (see table).
    They range from distant, dirt-poor despotic places to countries in the EU that are not just richer than some of the old ones, but have better credit ratings, sounder public finances and stronger public institutions. In almost any contest for good government, stability or prosperity, Slovenia (under a sort of communism until 1991) looks better than Greece, which invented democracy and was never communist.
    The thirst for capital
    Historical and geographical quibbles aside, what the ex-communist countries have shared over the past decade is a mighty thirst for capital. Having missed out on decades of growth and integration with the outside world, almost all (a few oddballs in Central Asia aside) are trying to catch up. Money from abroad has come in from borrowing on the bond market, from foreign direct investment or from selling shares. Most often it has come through bank loans.
    At one extreme is Russia, which enjoyed huge external surpluses thanks to its wealth of raw materials. But its big companies borrowed lavishly on the strength of that, creating a potential short-term debt problem. Russian corporate borrowers have to pay back around $100 billion this year. At the other extreme lie countries such as Slovakia. They attracted billions from foreign car manufacturers, drawn by a skilled workforce, low taxes and decent roads in the heart of high-cost Europe.
    Countries that relied chiefly on foreign direct investment are the least vulnerable now. The new factories may shut down. But it is harder for that capital to flee. Those that rely on foreign investors buying their bonds, such as Hungary, are the most vulnerable: their fortunes vary with every twitch of a trader’s fingers. In the middle are those that rely on lending from foreign banks to their local subsidiaries. That looked solid in the boom years, as Western banks scrambled to win market share by offering good terms to borrowers and lenders in the fastest-growing bit of Europe. It is still highly unlikely that any Western bank will pull the plug on a subsidiary anywhere—even in troubled Ukraine.
    But nerves are jangling. The ex-communist countries have survived the first phase of the crisis, thanks to their own policies and some external support. The second phase, in which the rich world is turning stingier and possibly more protectionist and lenders are scurrying to safety, may be harder. The ex-communist economies must repay or roll over a whopping $400 billion-odd in short-term borrowings this year. Coupled with the lazy but easy lumping of nearly three dozen countries together, that creates the region’s biggest danger: contagion (see article). In other words, failure in one place sparks a disaster in another, even though it may be far away and have the same problem in a far more manageable form.
    Contagion could happen in many ways. One is if depositors lose confidence that their savings are safe. So far, Western-owned banks have enjoyed rock-solid credibility: more so, in many cases, than governments or other public institutions. But that confidence could be undermined. If only one foreign bank pulls the rug from under one local subsidiary, leaving depositors stranded, it will cloud perceptions of banks’ reliability across the region. The most dangerous kinds of bank runs would be those in which depositors try to pull out either their foreign currency, or local currency which they would then attempt to convert into hard currency. In some countries that could overwhelm the ability of the central bank to support the financial system.
    Another weak point is where shareholders take fright. If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing (see chart).
    For now, the most likely source of contagion is collapsing currencies. The paradox is that for countries with floating exchange rates, an orderly depreciation would in normal circumstances be a good way of cushioning an external shock, such as the slump in export markets now hitting the ex-communist economies. It stokes competitiveness and, along with lower interest rates, it lays the foundations for a return to growth. Governments with sound public finances might also consider running a looser fiscal policy to counteract the downturn.
    Propping up the currency
    For most of the countries in the region, such a textbook response is out of the question. Some have currency boards, or pegged exchange rates. In the Baltic states these have been the centrepiece of economic policy for more than 15 years. Abandoning them would not only bankrupt big chunks of the economy that have borrowed in euros. It would also be a huge psychological blow to public confidence in the whole idea of independent statehood. These countries have suffered the most painful part of being in the euro zone—the inability to devalue and regain competitiveness—without getting all the benefits.
    Countries with floating exchange rates have a bit more room for manoeuvre. Their problem (a big one in Hungary, a lesser one in Romania and Poland) is that falling exchange rates may bankrupt the firms and households which have, in past years, taken out unwise loans in foreign currencies, chiefly euros and Swiss francs. That was, in effect, a convergence play. If you believed your country was heading for the euro zone some time in the next few years, then why not take advantage of the low interest rates there, rather than suffer the higher ones in your domestic currency?
    What seemed a minor risk back then now looks painfully mistaken. For those earning forints or Polish zloty, the big swings in exchange rates in recent weeks have sent the size of both loans and repayments spiralling upwards. The zloty has dropped 28% and the forint 22% against the euro since the middle of last year. If the East Asian crisis of 1997 is any guide, these and other currencies may yet have further to fall.
    This risk of a currency collapse will limit these countries’ options. So far many big central European countries have cut interest rates heavily to try to boost their economies—Poland’s central bank cut its policy rate again this week. But currency weakness will limit their room for manoeuvre. The Czech, Hungarian and Polish central banks issued a co-ordinated statement this week hinting they might intervene to support their exchange rates. But that route is tricky. Russia has blown half its reserves in a series of unsuccessful attempts to try to prop up the rouble.
    Spending and tax policies would be another way of dealing with a downturn. But these are constrained, too. Those countries with a chance of joining the euro are scrambling to cut their budget deficits to get them in line with the 3% of GDP target set by the EU’s Maastricht treaty. Yet that aggravates the problem. The danger for Latvia and Ukraine is a downward spiral, where cuts in public spending damage the economy in a way that helps to entrench the deficit.
    So far, the economic crisis has not translated into populist or protectionist politics. It is the east European countries that have been demanding that the rest of the EU stick by the rules of the single market. Their development over the past decades has been thanks to the free movement of capital, goods and labour. They would like a lot more of it: in a contest to subsidise industries, rich countries always win.
    But that stance will not hold indefinitely if things get worse. Willem Buiter, a prominent economist, believes it is only a matter of time before some of the ex-communist countries introduce capital controls. That, in theory, would allow them to concentrate on stabilising their economies without worrying so much about the external value of their currency. If voters find the economic pain of adjustment unbearable, politicians can pass laws that will make foreign-currency borrowings repayable in local currency. That would be met with fury by the foreign banks, who would in effect see their loan books expropriated. But it could happen.
    Against that background, what can be done? The east European countries are, belatedly, co-ordinating their approach within the EU, holding their own mini-summit on March 1st. They want to embarrass countries such as France for what they see as its protectionist approach to the crisis. They are supporting each other: the Czech Republic and Estonia were among those contributing to the Latvian bail-out.
    But even co-ordinated local efforts are unlikely to make much difference, given the scale of the problem. The real lead, and the real money, must come from outside the region. That brings into play a slew of political problems. Having trumpeted their free-market principles in past years, and dismissed the stodgy approach of countries such as Germany and France, the new EU members from eastern Europe are now turning to old Europe in the hope that it can hurry up the flow of EU structural funds to counteract the downturn, bail out or prop up over-exposed banks in places like Austria, and stretch the rules of the European Central Bank to let it provide support to countries outside the euro zone. The case for such measures is strong, and it is in the interest of all Europe that contagion is contained. But that does not mean that it will happen.

  7. “One of our volunteers was passionate about the Portland, Maine, store. He teamed up with another volunteer and created the business plan,” said Van Allen.The organization proactively began looking for space in April. Once the board of directors approved the proposal in July, “it started progressing like a freight train,” said Van Allen. Julie Porter of Weichert Realtors, Points East Properties and Brian O’Brien of The Norwood Group helped the Habitat chapter secure a three-year lease thrift savings plan in early September of 2,800 square feet of retail space and 4,000 square feet of warehouse space at the former Holmwood’s furniture store at a “serious discount” said Van Allen. “We jumped at the opportunity. Where else could you find such a great retail space with a warehouse underneath on such terms?”

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