Monday, June 07, 2004

Quintile Analysis is Silly

Brad Delong links to an essay called "The New American Economy: A Rising Tide that Lifts Only Yachts".

It turns out to be based on quintile analysis. That's where you divide the population by income and say things like "the top 20% is getting richer" or "the economy isn't helping the bottom 20%". Which is fine rhetoric, but silly economics.

Why is it silly? Because it wrongly implies that the top or bottom quintile is the same group of people each year as it was the previous year.

If you compare segments of the population based on what they SPEND rather than what they EARN, you find much less disparity. A big chunk of the people who are in the bottom quintile or who are "living in poverty" by any official definition are just starting out, are having a bad year, are spending down savings, or have outside help (or off-the-books income) that allows them to maintain a decent standard of living despite having little official income.

The top quintile and the bottom quintile are often the same families in different years. Most college students are in the bottom quintile a couple years before they graduate, and every salary earner is likely to be in the top quintile the year he sells his house. Given the fact that the same family passes through multiple quintiles over time, it is not at all clear that the rising tide doesn't in fact lift most of the boats. If it lifts you a lot when you're doing well, you have extra savings to cover the periods when you doing poorly or to help raise up the neighboring boats when they need help.


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