Rich and Poor, in Utah

May 25, 2005 | 62 comments
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In one of those weird internet odyssies–a series of clicked-through links led me to this article extolling(?) Utah’s lack of diversity, which led me to this report on income inequities–I discovered that Utah had the least income inequity of any state in 2000 and was second only to Indiana in 2002. I moved from Utah to Indiana in 2001, but could there be another explanation? Something Mormon?

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62 Responses to Rich and Poor, in Utah

  1. John T. on May 25, 2005 at 7:34 pm

    More interesting: Is there a Mormon reason for all of the Pro$ac consumption?

  2. Benji on May 25, 2005 at 7:52 pm

    Utah has the highest rate in the nation of family bankruptcies…LDS church = $30 billion in assets, $6 billion in yearly revenue.

  3. danithew on May 25, 2005 at 8:04 pm

    Is there any basis for the Utah-Pro$ac connection? I’ve been hearing that rumor for years but its starting to rankle without the presence of real supporting evidence.

  4. Jonathan Green on May 25, 2005 at 9:57 pm

    I don’t know, Adam, but that’s the best thing I’ve read about Utah in a long time. Thanks.

  5. lyle on May 25, 2005 at 9:59 pm

    John T: only if Mormon’s are somehow responsible for depression throughout the world; tough argument to make, let along prove, I would think. :)

    Benji: Wow…como se dice non sequitor? Got any other lunacies up your sleeve? Waddya want to bet Utah is also the highest in the nation in folks that pay their debts even after entering bankruptcy?

  6. Miranda PJ on May 25, 2005 at 10:13 pm

    Unfortunately, that study was engineered to create the results that it claims to have uncovered. One dramatic clue is the report’s misplaced focus an family income measurement instead of individual income. Several confounding variables impact family income levels and render it a useless and entirely manipulatable statistic. The women of the household in lower income families are less likely to work outside their home than their middle income and upper income counterparts. Lower income families are therefore at a severe statistical disadvantage compared to middle income and upper income families. Divorce is another confounding variable. It can turn one family that earns $100,000 per year into 2 families that earns $100,000 per year between them. This cuts the average family in half independent of the question of employment level. Other confounding variables include early retirement and spousal mortality.

    In short, Utah’s lower divorce rate and lower rate of women working outside their home is the probable explanation for its lower income inequality. I am not certain that either of these is a good thing.

  7. annegb on May 25, 2005 at 10:16 pm

    Studies, statistics do not reflect my experience in the diversity of my friends and neighbors. It is endlessly interesting and irritating.

  8. lyle on May 25, 2005 at 11:06 pm

    Hm… not sure a lower divorce rate is a good thing; nor women who focus on their families. Hm.. Alert the GAs…

  9. Christopher Phillips on May 25, 2005 at 11:18 pm

    There is a good overview of the Utah-Pro$ac connection here (scroll down to ‘Pro$ac-Mental Health and Mormon Women’s Self Perceptions’). The gist of the issue as I understand it is that there was a study that showed a higher usage of Pro$ac in Utah, but there have subsequently been numerous other studies that have offered other reasons for the correlation (i.e. more honest reporting, less self medication). You can find reference to the Pro$ac connection on a lot of anti sites, here is a reference to one of the studies that debunked it.

  10. yossarian on May 25, 2005 at 11:39 pm

    adam,
    I believe that there is something “Mormon” about the relatively small income gap between the rich and poor. I think it is partly due to the egalitarian nature of the church’s local structure (for the males anyway). As a longtime resident of both Utah (with one of the lowest levels of income disparity) and more recently of Alabama (with one the highest levels of disparity) I can tell you that the tolerance for income inequality is much more palpable in the latter (indeed Alabama’s tolerance for income inequality is enshrined in its constitution, which has the industrialized world’s most regressive tax system, taxing the poorest at amuch higher rate of disposable income than the richest).
    Obviously, cultural explanations go only so far, but I will say that culture is at least partially responsible for Utah’s success in graduating people from high school, less disease, etc. So why not income inequality? It is also worth noting that the other states that have lesser income inequalities are generally northern inland states that graduate high percentages of students from high school (Colorado, North Dakota, Iowa, Wyoming, Minnesota, Wisconsin) and low percentages of evangelical christians.
    It is also worth noting that according to the study referenced Utah also had the lowest level of income inequality in the period of 1978-80. This would probably indicate that there is something inherently egalitarian in Mormonism, which obviously there is. One only need look at the places where we attend church, zoned by geography rather than choosing a particular church to attend to see this.
    Typically, I am very hard on Mormon culture, but in this one aspect I give the members kudos. I guess there may be humanity in Mormonity after all.

  11. yossarian on May 25, 2005 at 11:43 pm

    Miranda,
    Last statistics I read said Utah women worked outside the home at a rate slightly higher than the national average. Egalitarianism is good, but the average income’s are not all that high in Utah, especially in the income per capita. This thrusts a lot of women into the workplace, whether they want to be there or not.

  12. Jack on May 26, 2005 at 12:20 am

    I hate to say this, But it’s also worth noting that Utah has one of the smaller (if not the smallest) minority populations in the country. No doubt this must factor into the equation.

  13. Benji on May 26, 2005 at 12:24 am

    lyle says:

    “Waddya want to bet Utah is also the highest in the nation in folks that pay their debts even after entering bankruptcy?” –

    Ah, our “pro-family” culture yields insolvent families, but hey, the check’s in the mail!!

  14. Jack on May 26, 2005 at 12:25 am

    I would say that the same holds true for the other states already mentioned–Colorado, North Dakota, Iowa, Wyoming, Minnesota, Wisconsin, etc. (relatively speaking)

  15. Jack on May 26, 2005 at 12:25 am

    My comment #14 had to do with a low minority count.

  16. rachel on May 26, 2005 at 1:19 am

    I was surprised that the minority population correlation was not discussed at the beginning of this thread considering the conclusions drawn by the research in one of these articles. I understood that she was saying the less ethnic divirsity a state is, the more likely it is to be economically egualitarian. Considering Utah is the least diverse…….. The way I see it this does not say anything too great about Utah or this country as a whole.
    It seems to me that we mormons love to draw conclusions that set us apart from others in a positive way. We don’t like it when connections are made ( depression, bankruptcy, bigotry….) which make us look bad. It is all human nature, and we are human. Everyone else on the planet falls prey to human nature as well. I think it would serve us well to start finding good things we have in common with people from other religions, state’s, countries… and celebrate God’s grace to all of us.

  17. Frank McIntyre on May 26, 2005 at 2:21 am

    Jack,

    Utah is about 10% hispanic, but has very few blacks. So if by minorities you mean black people then it, and most of the west, is probably lacking. I would not be surprised to find that states without large black populations have less income inequality since blacks tend to be poorer, so removing such a group has an obvious effect. I don’t know if this is the explanation or not.

    Regardless, it is always dicey to try to compare Utah to the nation and then posit the difference to be Mormonism. It turns out that there is a huge amount of variation across states that has nothing to do with Utah. States just vary a lot. As you noted, regions vary a lot too. So a more interesting question is how does Utah’s inequality compare to its neighbors?

    Yossarian,

    As for women working, I dealt with that in another post here, but basically Utah’s raw working population of women is slightly above the national average, but that is because we have a different age.racial mix. Controlling for a bunch of confounding factors, Utah mothers tend to work less. When they do work, they work part time or at home more often.

    Miranda,

    You pointed out that one gets different numbers depending on whether one uses family or individual income. If you wish to think about how much stuff people are getting, then family income makes more sense than personal, as this is typically the unit where consumption decisions are made. If you are looking at the potential opportunities facing an individual, then potential wages, rather than income, would be the preferable measure. After all, the fact that my wife would not be listed as earning any money is pretty much irrelevant to her consumption since we have a household income that we share. Nor is it particularly interesting to know that she is making no money from an opportunity perspective, because her potential wage is obviously much higher than zero.

    If one wishes to make inequality look large, then obviously using individual income will do that better than family income. But offhand I can’t think of any obvious benefits to using individual income. What exactly is it you hope to evaluate for which individual inequality is more informative than household inequality?

  18. Paul Mortensen on May 26, 2005 at 8:57 am

    Frank:

    I’m surprised you didn’t note that Hispanic populations present a greater drag on income reporting than any other minority group (they earn about 58% of what the average caucasian earns). I would also assume that Utah lacks representation in the minority groups, namely Asians and Jews, who earn above average incomes. I think a telling statistic that is missing is hours worked. Numerous studies have substantiated the tie between hours worked and compensation so I would assume that if one examined hours worked one would find the distribution to be narrower than in other states. Maybe that’s the Mormon work ethic taking over.

  19. Adam Greenwood on May 26, 2005 at 9:32 am

    “In short, Utah’s lower divorce rate and lower rate of women working outside their home is the probable explanation for its lower income inequality. I am not certain that either of these is a good thing.”

    Yes. We all eagerly await the day when the divorce rates edge up and more women work outside the home.

  20. Adam Greenwood on May 26, 2005 at 9:42 am

    Only axgrinders would think that the very first thing that needs to be said about the (relative) lack of income inequity in Utah is (1) the old canard about Pro$ac consumption and (2) Utah’s high bankruptcy rate. This is not a site for ax grinding. Please refrain from further bitter hijacking of the thread. Comments will be deleted.

    Also, what do minorities have to do with it? Is it because minorities often earn less, on average? Is it because, as someone has suggested elsewhere, probably Russell Fox, folks are more willing to tolerate large income gaps if its folks not from their own ethnic group who are on the bottom side of the gap? I’m not sure to what degree the minorities in Utah are Mormon (if Hispanics are the #1 minority, then probably not to the degree one would think) would common membership in the Church (with its attendant quasi-ethnic overtones) partially bridge over the ethnic indifference gap?

  21. Frank McIntyre on May 26, 2005 at 10:05 am

    Paul, I’ve never studied racial differences in earnings. Do you have the equivalent number for blacks? Jews are a pretty small group in most places, so they would really have to be outliers to drive results. Do asians make more than white people? Which asians? I imagine there are a few states with a large asian population, but I would be surprised if there were many– enough to matter the way hispanics and blacks would.

    As for hours worked, controlling for hours worked would turn the statistic into a wage, as opposed to an income measure. I mentioned this above, and agree that it is often more important than personal income inequality. But there is still plenty of inequality left in the U.S. in wages, so I am clueless as to whether that would explain the state differences. I suppose I could take a look at some point though, since hours worked is available in the census.

    Last, I am not sure how much state policy affects inequality, other than by encouraging rich and poor people to migrate. Are these numbers adjusted for taxation or government transfers? Offhand I would guess they are not, since the EPI is doing the study, but they could be. Obviously, high school graduation matters, but I am not sure state governments can do much about that even. And it would take a long time to see the fruits of that labor, since current inequality is a function of high schoo lgraduation rates stretching back up to forty years.

  22. John T. on May 26, 2005 at 11:58 am

    No axgrinding intended. I thought it was an interesting point made in one of your referenced articles, possibly meriting its own thread. Maybe not.

  23. Nate Oman on May 26, 2005 at 12:04 pm

    John T: Thanks for the suggestion but it is, alas, not more interesting. Money is always more interesting than drugs.

  24. Mark B. on May 26, 2005 at 12:07 pm

    Not, Nate, as I sit here with a mid-spring (although the weather feels like late winter) cold. Any drug that could make me feel good today would be infinitely more interesting than an infinite amount of money.

  25. ed on May 26, 2005 at 12:52 pm

    These comparisons could be sensitive to how you define “inequality.” In the report you linked to, it was defined as the ratio of the average income in the top quintile of families to the average income in the bottom quintile. So a good way to get high “inequality” under this measure is to (1) have some very very high earners pulling up the average of the top quintile (e.g. New York), and (2) have some welfare families pulling down the bottom quintile. Utah has comparitively few of either, so it’s not surprising that they are low. Still, it’s not obvious to me why Utah comes out lower than other states like (say) Idaho or Maine.

    There are many other ways of defining inequality, and some may give quite different rankings.

  26. JKS on May 26, 2005 at 12:56 pm

    I’m from Seattle. We have a large Asian population here. We see large number of Asians in higher paying professions vs. in lower paying professions.

  27. Clark on May 26, 2005 at 1:18 pm

    Is the hispanic population here only 10% including illegal immigrants? I thought I heard a recent statistic that put the figure much higher.

  28. lyle stamps on May 26, 2005 at 1:41 pm

    JKS: I’m in Philadelphia. We have a large Asian population here. We see huge numbers of Asians in low paying professions vs. small # in graduate school/good paying jobs.

  29. Frank McIntyre on May 26, 2005 at 1:46 pm

    Clark, that is just the census figure. I don’t know how much adjustment would need to be made for illegals. But the 10% figure I used would be what is reflected in the inequality study in question, since they also use survey data.

    Utah is 1.7% Asian. The U.S. is around 4%. So that is not likely to drive much difference in inequality.

  30. Mark B. on May 26, 2005 at 1:47 pm

    Ed,

    For Maine, look at the Bushes and others along the southern end of the coast, and compare them to the loggers in the North woods. That alone could account for some substantial disparity.

    Lyle and JKS,

    In NYC there are large numbers of Asians working in groceries (Koreans), newsstands (Pakistanis) and restaurants (Chinese), whose children are attending Ivy League universities. That suggests that the relatively low earnings of the parents’ generation are being replaced by children’s wages that are much higher.

  31. Frank McIntyre on May 26, 2005 at 1:52 pm

    Here is a link to the census info on percentage white. Greener is whiter, in this case. As you can see, Utah is not in the upper tier of whiteness, it is clumped in the second tier with about 15 other states.

  32. N Miller on May 26, 2005 at 2:01 pm

    JKS,

    I find that interesting and would like to know how you derived that information. I went on an Asian speaking mission in Canada and have since made it a hobby to study the Asian people. I have worked with many educated, successful Asian businessmen, but definitely, they were the minority in high compensation business ranks. Rather, there were more middle class families and even more poor Asian families who would live together, just trying to find ways to survive. Although the Asians may be better off than many other minority groups, they are much smaller both in populations numbers and in the highly compensated demographics. Where the comparison in this post is about the top and bottom compensations, I would say that Asians affect the bottom more than the top, but in any case is probably negligible in that the number of Asians out there are very few compared to the rest of the population.

  33. Paul Mortensen on May 26, 2005 at 2:19 pm

    Frank:

    The corresponding figure for blacks is 78%, for Jews it’s 107%, and for Asians (not Pacific Islanders) it’s 101%. The national studies I’ve seen (which happen to emminate from your alma mater) indicate that the Asian population has reached a critical mass in only 1 state– California– which is also a state where the Hispanic population has an even larger impact. I have seen more localized studies on income and in cities like San Fran, Seattle, Vancouver, and Toronto the higher incomes earned by Asians makes a real impact.

    Your statement that there is plenty of inequality left when controlling for hours worked I find highly suspect. I know Alan Blinder of Princeton examined the issue two decades ago and discovered that the ratio, in terms of wages, between the top fifth of earners and the bottom fifth of earners was only 2:1. That seems entirely reasonable when you also control for experience.

  34. maria on May 26, 2005 at 3:07 pm

    Frank (#29):

    Not that I have anything really insightful to add to the statistical discussion, but I just want to point out that, I, along with many others, find the term “illegals” to be very offensive.

  35. Paul Mortensen on May 26, 2005 at 3:13 pm

    RE #34:

    Would you prefer “fugitives from the law”? After all, unless a foreigner carries with them a visa one is here illegally.

  36. N Miller on May 26, 2005 at 3:25 pm

    Maria,

    What would you rather them be called? I think “illegals” is a term that most – if not all – can understand. Perhaps you can give us insight on a less “offensive” term. Truth told, if they crossed the border without appropriate authorization, they “illegally” crossed the border.

    That being said, I know of a couple of “illegals” in my stake, good, hard-working people, but they still aren’t here legally. (That and my parents were able to sell a car to them via a cash-all transaction [cold, hard cash, not a check!]. It’s nice to know some people still use cash.)

  37. Frank McIntyre on May 26, 2005 at 3:26 pm

    Paul,

    Wage inequality in the mid 90′s between the top 90 and the bottom 10 was running about 5:1. This number would get smaller as you:

    1. Move back in time through the 80′s
    2. Control for things (like experience, education, ability, beauty, height, etc.)
    3. Look at 80-20 gaps instead of 90-10 gaps.

    If one is wishing to point to a number and say that it is an index of unfairness, then certainly we wish to compare two people who are otherwise the same (which is, of course, rather hard to do). But if we just wish to know how far apart different people in society are in terms of their current earning potential, we prefer a raw number without controlling for much of anything. It all depends on the use to which one is putting the number.

    Maria,

    I guess I would reserve my offendedness to the fact that people are not allowed to work than to what particular phrase we use to describe the people so treated. Do you (and your “others”) have a preferable short and reasonably accurate way of describing people who are illegally in the country and/or working illegally?

  38. Nate Oman on May 26, 2005 at 3:35 pm

    Frank: Perhaps you could use “extra-legals” or perhaps “supra-legals.” I personally prefer the term couragous-resisters-of-unjust-immigration-laws, CRUILs (pronounced “cruels”) for short.

  39. Frank McIntyre on May 26, 2005 at 3:40 pm

    Nate, is that like Krull? Because any chance to tie in not-very-good-science-fiction/fantasy to immigration law has to be a winner!

  40. Paul Mortensen on May 26, 2005 at 3:59 pm

    Frank:

    Even a 5:1 ratio seems perfectly reasonable to me. You also didn’t mention controlling for risk acceptance. If I invest $2,000 today– half in a stock index fund and half in passbook savings– at the end of 20 years what would the value ratio be between the two investments? You guessed it– 5:1. 37% of those in the top quintile own an equity stake (not in the form of stock) in a business while fewer than 6% in the bottom quintile can say the same. Market economies reward those willing to take risk (and lose it all) with higher incomes.

  41. Frank McIntyre on May 26, 2005 at 4:18 pm

    Paul,

    Why do you think there is more risk at the top than at the bottom? Have you seen something to indicate that? And if risk were the explanation, then the safe ones would be in the middle, while the risk takers would be at the top and the bottom ends. But I don’t think this is the case. Those at the bottom end don’t look like they are normal people who took a risk and lost, they look like people with little human capital.

    But as long as we’re tallying up things to keep track of, one should also add in compensating differentials, since rewarding or pleasant jobs are in higher demand, they get paid less. I am not sure whether this would cause a rise or a fall in inequlaity, though.

  42. DavidH on May 26, 2005 at 5:55 pm

    I am one of the “others” who is uncomfortable with the term “illegals”, because it takes one aspect of a person’s life — noncompliance with current immigration law — and uses it as the sole descriptor of the person.

    While I am a citizen of the United States, I suppose I could be called an “illegal” because I have parked my car illegally on more than one occasion (and might even do so in the future), and may have even exceeded the speed limit (by no more than 5 MPH, of course), from time to time. If people continually insisted on calling me an “illegal” as my sole descriptor or nickname, at some point I would take offense (this is not an invitation to call me that).

    Of course, Frank meant no offense, and simply shortened Clark’s reference to “illegal immigrants” to “illegals” in responding to Clark’s question.

    I leave to Nate, and others, coming up with more appropriate terminology.

  43. Clark on May 26, 2005 at 5:56 pm

    Nate, extra-legals always seemed confusing to me. It always sounds like they have *more* laws not less. i.e. extra as more not beyond. Same with supra. Also, considering how much easier it is to enter from Mexico than from say China, ought we not say “maker-user-of-unjust-immigration-laws” rather than “courageous-resister-of-same”

  44. Jonathan Green on May 26, 2005 at 6:05 pm

    Frank, could you explain how “Those at the bottom end … look like people with little human capital” is acceptable economist speak, and not the Brave New Worldesque identification of the poor with subhumans that it sounds like to me? Are people with “little human capital” best employed as raw material for Soylent Green?

  45. Nate Oman on May 26, 2005 at 6:15 pm

    Jonathan: Not fair. Frank is making a point about the causes of income differentials rather than the normative significance of the same. It might be that the best way to understand economic jargon is to read economics literature rather than dystopian novels.

    An analogy to your comments might be: German sounds an awful lot like the language spoken by the Nazi’s in Hogan’s Heroes. Should I therefore conclude that when you use German words in your work that you are claiming that early modern printers were all Nazis?

  46. Frank McIntyre on May 26, 2005 at 6:41 pm

    Clark,

    I agree that extra and supra seem like bizarre replacements. What would be the point to call someone “beyond” the law, when the whole point is that they are in conflict with it? David Hasslehoff, now there was a man beyond the law, what with KITT and all.

    DavidH,

    I think you are over-analyzing. Illegal is not who the person is, just a way to designate one of two groups. If I were talking about traffic crimes, then an illegal would be someone who broke the traffic law. If I were talking about reading, an illiterate is not who the person is, it just means they don’t know how to read. LIkewise, “white” is not, to me anyway, who I am, it is just a description of skin tone.

    Jonathan,

    Typically, “little human capital” refers to how much time the person has put into activities that make their wages go up, the two most obvious observables ones being education and work experience. These are both a kind of capital in that investing in them today raises wages tomorrow. So what I mean is not nearly as interesting as it sounds. People at the bottom end have less education and less work experience; less experience being either because they are younger or because they have been bouncing in and out of the work force more. Consequently, they get lower wages.

    I have not read Brave New World since about the first Bush administration. What is Soylent Green? Do they really use people to make it? I totally don’t remember that. I guess I better go read it again. Maybe I can cull some quotes about human capital from it for my office door.

  47. Jonathan Green on May 26, 2005 at 7:00 pm

    Nate, I wasn’t taking potshots at Frank, just asking for an explanation of the term, so I can understand what he’s saying, and that “human capital” is not equal to “human potential,” which is the best synonym I could come up with on my own. Us Betas require some extra explanation sometimes, you see. Not that I would want to be an Alpha, though–you guys have to work too hard.

    Frank, thanks for the explanation. The answer to your question is: “You’ve got to warn everyone and tell them! Soylent green is made of people! You’ve got to tell them! Soylent green is people!”

  48. CarrieH on May 26, 2005 at 10:52 pm

    Frank,

  49. CarrieH on May 26, 2005 at 11:01 pm

    Hmmmm. Apparently, pressing “enter” even without having my cursor on “make comment” can make a comment.

    Anyway.

    Frank,

    Oh please!! You would not call people “illegals” for breaking traffic laws, or even for murdering thousands of people. No one would understand what you were saying. The only people who are regularly called “illegals” in the U.S. are people from Latin America who are here without papers. I wouldn’t quite say that I find it an offensive term in and of itself (although I do find it borderline racist), but I much prefer the term “undocumented.”

  50. Frank McIntyre on May 27, 2005 at 1:02 am

    CarrieH, I actually study illegal work in lots of countries, not just the U.S. and not just immigration laws, but minimum wage law and payroll evasion. So I probably think about it a little differently than most people. Yes, I would be willing to use illegals to describe any sort of illegal activity as long as the context made clear what kind of illegality we were discussing. Perhaps among some of those you associate with the use of language is different, or even, as you put it, borderline racist. I don’t know anybody like that.

    Why is undocumented better than illegal, other than being vaguer? Or is vagueness it’s primary virtue?

  51. Scott on May 27, 2005 at 1:07 am

    Alright, so you’re blog sucks. I wrote a comment and since Email is not designated as required I didn’t include it and when I went back my text was no longer in the comment field and now I’m complaining instead of watching you all react to my comment. Ok, just had to get that out there.

    I think that “illegals”, while hardly the most offensive in a long list of alternatives, is a fairly undescriptive name because it does not clearly denote that the infraction is against immigraiton law. I do think that “illegal immigrant” or “illegal resident” (for seasonal workers) are suitable and quite accurate.

    While “violator” wouldn’t be appropriate for the traffic analogy, “traffic law violator” or “illegal driver” (if they didn’t have a license, which is quite similar to a visa) are perfectly fine.

    “illegal immigrant” makes it clear what the infraction is and as opposed to the alternatives proposed, is very understandable and recognizable.

    “undocumented” is a bad term because it masks the real issue of having no respect for law and pretends that what really matters is a piece of paper.

  52. Scott on May 27, 2005 at 1:09 am

    and I suck because I can’t even spell your. We’re even I guess.

  53. Paul Mortensen on May 27, 2005 at 8:27 am

    Frank Re #41:

    There is an implied assumtion in you response that must be true for your conclusion to hold. You assume that those willing to assume risk are only willing to take one shot at the apple and will either end up in the top or bottom depending on the result. Indeed some will fail the first time and give up but most risk-takers do it over and over again and in so doing are rewarded more often. The 37% figure also fails to count the number of individuals that have “cashed out” by either selling a successful business or taking their companies public (remember holding stock did not count as an equity stake in the study I reviewed) so the actual ratio of “risk takers” is actually higher than 37%. It is also highly likely that the 6% that do show up in in the bottom quintile are there as transients– meaning that their business is just having an off year and their income will be higher in coming years. People who work for salaries and wages assume very little risk– the only risk they assume is that of the economy as a whole. As you move up income quintiles the percentage of individuals with an equity stake in a business increases. So I see strong evidence that willingness to accept risk is the overarching factor impacting income and/or wealth.

  54. Frank McIntyre on May 27, 2005 at 10:10 am

    Paul, any time we type in these little boxes we are going to be using lots of implied assumptions. So in that respect you are absolutely right.

    But no, risk does not explain the difference. You have in your head a model of a bunch of risk takers who are largely at the top because of repeated success. But if the game is so often repeated that they largely all do well, then that is no longer risky. So presumably you are assuming that the people at the bottom are just morons, because, since they are already at the bottom, they have very little to lose by taking these risks you postulate. Yet they observably, by your model, don’t, since they are all at the bottom. So theoretically, that is not a very appealing explanation (though it could happen).

    The more obvious problem is that empirically we do not observe the income movement that risk implies in order for it to be risk. Long term studies of income mobility do not show much movement between the top and the bottom. Those at the top don’t move down all that often. When they do it is very rarely to the bottom. Those at the bottom very rarely move up to the top. If these people at the high end take all this risk but only rarely end up at the bottom, well that isn’t all that risky now is it?

    And as for equity vs. salaries, those taking a salary face a risk of layoff which would be a far greater loss in lifestyle than if a rich guy loses 20% of his stock portfolio. The fact that rich people own stock is because they are investing wealth they accumulated, typically through higher earnings in salary. Also, you talk as if those owning equity are entrepreneurs in their own business. But typically they are just people who bought stock in a random company. What survey are you citing and which number is it using?

  55. Paul Mortensen on May 27, 2005 at 2:30 pm

    Frank:

    The article from which I’m pulling my statistics is “Changes in Household Wealth in the 1980s and 1990s in the U.S.” in Edward N. Wolff, Editor, International Perspectives on Household Wealth, Elgar Publishing Ltd. He uses source data from the CPS and the Fed’s SCF reports. I am highly critical of the article but I typically find it most useful to beat such authors (and others of their ilk) over the head with their own product.

    If the market does not reward individuals based on risk then what does it reward? You also want to separate risk from personal development while I do not. I don’t think those at the bottom are morons. Rather, I think they are either the most risk averse in society or the least capable of assesing risk (as for the breakdown I don’t have any opinions). Investing time and money in education carries with it a component of risk. One educates themselves in the hope (not assurance) that said education will provide greater economic rewards in the future. I love the Simpsons episode where the family goes to the newly opened “Barnes & Noble” and when they split up Bart announces that he’s going to go and tease all the Ph.D.s working there (so true, so true).

    I think you also ignore the learning/experience component associated with risk. Those who take risks learn from the success and/or failure of the endeavor. As they gain more experinece they will learn how to reduce the risk and enhance the probability of success associated with each subsequent endeavor. There are also those who do take an initial risk and fail and elect never to try again. Implicit in my conclusions is the assumption that the likely success of any individual risky endeavor is less than 50% (depending on which survey you trust the actual likelihood of success is between 3% and 27%).

    Regarding income mobility, there is much more movement between quintiles than you imply. While movement between top and bottom over a 20 year time period is limited (about 5% move from the top to the bottom and vice versa), there’s a lot of movement among the other income tiers. It is interesting to note that the shift from top to bottom and bottom to top appears to be equal.

    Working for a salary is imminently less risky than working as an entrepreneur. Suppose worker A eans an annual salary of $50k. Lets assume that A performs a job that is not industry specific and that A is paid at a market rate. Even if A is laid off A should be able to secure another job paying $50k. Yes, there are costs associated with finding a new job but unless the economy is contracting those costs are minimal. A’s situation is much less risky than B’s who is an entrepreneur. B has pegged his risk profile, at the very least, to a specific industry and, more likely, to a small segment within that industry. B must now deal with the risk associated with the industry in addition to the risk associated with the economy as a whole. A’s risk function would look something like A(E) where E is the risk profile of the entire economy. B’s risk function would look something like B(i(E)) where E is the risk profile of the entire economy and i is the risk profile associated with the specific industry in which B engages. Banks understand such risk profiles as well. Suppose A earns a salary today of $50k but last year A earned $40k. A goes to the bank to get a mortgage. Which figure is the bank going to use to determine if they will issue the mortgage? $50k. Suppose B is on pace to earn $60k in the current year but last year B only earned $40k and and the year before that $50k. Which figure will the bank accept for the mortgage? Most likely $50k not $60k or $40k (I know this from experience). The bank knows that the income stream for B is much riskier because if the business fails B will have a more difficult time replacing that revenue stream. The bank treats A’s current income as a perpetual cash flow and recognizes that it is inherently less risky.

  56. Seth Rogers on May 27, 2005 at 3:09 pm

    I’ve wanted to say this for some time about the Mormon-Bankruptcy correllation.

    Bankruptcy for non-businesses is largely due to astronomical medical bills and an American health system incapable dealing with the skyrocketing costs. If anyone in your family comes down with something terminal, chances are that a bankruptcy is in your future. Really nice insurance is currently the only way to avoid this (which most Americans don’t have).

    With this in mind, I would suggest looking at Utah’s health care system rather than religious values if you want the real reason for a higher bankruptcy count.

  57. Frank McIntyre on May 27, 2005 at 4:23 pm

    So are you claiming 37% are majority holders in a firm, ie, entrepreneurs? Or that 37% own some stock? The two are completely different, but you seem to be making an argument that sounds like the former, even though that seems less likely to be true.

    “If the market does not reward individuals based on risk then what does it reward?”

    All sorts of stuff. You seem set to call everything “risk”. And so, by that way of thining, then sure, the difference is “explained” by risk. The most problematic element of your approach is that the actual risk is essentially nonexistent. Suppose you offer me a simplified version of the choice you say these people face. EIther:

    1. A 90% chance of being wealthy (make $100,000/yr), with 10% possiblitity of one year where you are poor (making $10,000/yr for one year), or:
    2. Don’t take the “risk” of 1, and just be poor ($10,000/yr) for sure.

    Who in their right minds would take 2? The question is not one of risk aversion, since 1 dominates 2 completely, it is one of motivation, entrepreneurial ability, access to capital, making good decisions, etc.

    The risk profile stuff is fine, but not really relevant to the difference between the poor and rich. Few rich people are so undiversified that they would end up poorer than a poor person should things go badly. And if a poor person loses their job, they have to give up not just the fancy car, but much more basic things.

  58. Frank McIntyre on May 27, 2005 at 4:28 pm

    Seth, we had a thread on bankruptcy a while back which you should peruse.

    But you should know that the claims that bankruptcy is caused by medical problems is largely wrong. The median bankruptcy in Utah is for about $20,000 in debt. The median bankrupt person in Utah only owes a few hundred dollars to medical instutitions when they declare, based on their filing. Thus, although many bankrupt people have some sort of shock, and many of them have some medical bills, it is not likely that medical bills are the driving force.

    As best I can determine, they get the high numbers by asking people what the causes of their bankruotcy was, then if any of the listed factors was medical, this is counted a s a medical bankruptcy. Never mind if the health issues only explain a couple thousand dollars of the debt burden.

  59. Miranda PJ on May 27, 2005 at 6:48 pm

    Of Frank, unless you decide that you want to convert me by the sword, I fear that we’ll never agree on revisionist claims relating to how enlightened things were in early Islam.

  60. Frank McIntyre on May 27, 2005 at 8:22 pm

    I’m sure I have no idea how enlightened the early Islams were. Perhaps you have me confused with a less philistine, yet more violent, Frank.

  61. Paul Mortensen on June 3, 2005 at 11:51 am

    Ranking sins or, to use a better term, establishing a moral hierarchy was one of the first lessons taught to immortal man. God gave Adam and Eve two distinct yet conflicting commandments and they had to choose which was the more important law to obey. Failure to uderstand this basic priciple is intellectually and spiritually lazy.

  62. Paul Mortensen on June 3, 2005 at 11:52 am

    oops wrong thread. thought I was in another tab on my browser.

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