SOCIAL MOBILITY AND THE DEMAND FOR REDISTRIBUTION: THE POUM HYPOTHESIS [*].("prospect of upward mobility")

This paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they, or their offspring, may make it up the income ladder. This "prospect of upward mobility" (POUM) hypothesis is shown to be fully compatible with rational expectations, and fundamentally linked to concavity in the mobility process. A steady-state majority could even be simultaneously poorer than average in terms of current income, and richer than average in terms of expected future incomes. A first empirical assessment suggests, on the other hand, that in recent U. S. data the POUM effect is probably dominated by the demand for social insurance.

"In the future, everyone will be world-famous for fifteen minutes"

[Andy Warhol 1968].

INTRODUCTION

The following argument is among those commonly advanced to explain why democracies, where a relatively poor majority holds the political power, do not engage in large-scale expropriation and redistribution. Even people with income below average, it is said, will not support high tax rates because of the prospect of upward mobility: they take into account the fact that they, or their children, may move up in the income distribution and therefore be hurt by such policies. [1] For instance, Okun [1975, p. 49] relates that: "In 1972 a storm of protest from blue-collar workers greeted Senator McGovern's proposal for confiscatory estate taxes. They apparently wanted some big prizes maintained in the game.

The silent majority did not want the yacht clubs closed forever to their children and grandchildren while those who had already become members kept sailing along."

The question we ask in this paper is simple: does this story make sense with economic agents who hold rational expectations over their income dynamics, or does it require that the poor systematically overestimate their chances of upward mobility--a form of what Marxist writers refer to as "false consciousness"? [2]