Income Inequality Revisited…For the Umpteenth Time

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” height=”159″ />Yesterday I received a phone call from a gentleman who wanted my thoughts on income inequality.  He had read a couple of left-leaning publications based on Census data on how bad income disparities have become in the United States, and their devastating effect on the economy.  Like a three day old meatloaf, he brought forth the usual proclamations about income inequality and served them up on a plate for me to pick at, including the following:

“The rich are getting richer and the poor are getting poorer.”

“The United States is no longer an economically mobile society.”

“Income inequality wreaks havoc on the economy.”

Then he asked me what the solution should be to solving  income inequality.  This is akin to asking a person, “So when did you stop beating your wife?”

I answered his question with a question of my own:  What is the purpose of measuring income inequality and do we need to eliminate it.  In order to decide whether something is good or bad and whether to “fix” it, we must know what problem we are trying to solve.

In solely comparing the wage income of the bottom 20 percent of earners to the top 20 percent of earners, it tells us nothing about the general welfare of people.  Why?  For many reasons:

  • Reported income does not include the value of transfer benefits received by the poor, including Medicaid, food stamps, education grants, cash assistance and subsidized housing.
  • Reported income is just that – reported income, and does not include unreported income from the underground economy, income from illegal activities and barter trades.
  • Reported income does not include employer-provided benefits, such as health insurance, that carry an implicit value.

Finally, the notion that people are “stuck” in their income quintile and will never rise out of it is simply false.  Census data shows that individuals who are in a lower income quintile at one point in time typically move up during the next Census.  For example:

  • Between 1996 and 2005, 58 percent of the lowest quintile households had moved to a higher quintile by 2006.
  • In 1996,

    more than 57 percent of the top 1 percent fell out of that category by 2006.

  • A Pew study found that two-thirds of today’s 40-year olds are in a higher income quintile than their parents (even when adjusted for the cost of living).

Add to that the fact that the income tax burden for at least half the population fell markedly over the past 25 years, but rose for the wealthiest.

  • In 1986, the bottom 50 percent paid about 6.5 percent of all federal income taxes.  They now pay less than 3 percent.
  • The top 1 percent pay nearly pay nearly 40 percent of all federal income taxes, up from 36 percent in 1986.

The bottom line is proponents of radical income redistribution (achieved usually through higher taxes and expanded government programs) often use income inequality numbers as the foundation for

their solution.  But there are better ways to improve people’s lives; namely, by removing barriers to engaging in the free market and allowing them to grow their income.

By the way, the meatloaf was cold.

Comments (7)

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  1. Kyle says:

    This is one of those issues that makes me feel ill. Not because I’m morally affronted, but because the redistributive bent of people who are unwilling (not unable) to make a better life for themselves literally turns my stomach.

    “The Gini coefficient!”
    “The top 1 percent!”

    These things are about as substantive in the hands of bleeding heart liberals as last nights primetime news coverage of Kim Kardashian’s weight gain since dating Kanye.

  2. Terry says:

    It’s really a shame the way things have developed. There are very few debates over important issues like this one. Both sides have thrown around “facts” so often, that the typical person doesn’t know who to believe anymore. In most cases, they just continue believing what they’ve always believed. When this country was young, people were quite literally, dying to get here. Thankfully, rarely does one have to risk their life to get here now, and we are still the most sought after country for immigrants.
    But all you hear about today is the plight of the poor, even though by nearly every quantifiable measure the people at the lower end of the economic ladder are much better off than they were 100, 50 or even 25 years ago. I remember when “poor” meant you may be living in a house with a dirt floor. Now it sometimes means you only have one color television and a limited cellular wireless plan.
    The dialogue in this country needs to shift so future generations have the same ability to achieve success as past ones. Sadly, we are not currently on that course.

  3. August says:

    In his recent book “Twilight of the Elites” Christopher Hayes explores the idea that inequality (however you measure it) reinforces its self by unleveling the playing field.

    Freakonomics and Alan Krueger supports this this idea by comparing income inequality to inter-generational mobility. (http://www.freakonomics.com/2012/01/19/is-higher-income-inequality-associated-with-lower-intergenerational-mobility/) Although it uses the Gini coefficient the international comparison still holds insight.

    I see inequality in the US as a problem, but I agree with a recent Hoover Institute publication that we should focus on leveling that playing field to rectify the situation (http://www.hoover.org/publications/policy-review/article/123566).

    “Rather than focusing on income inequality, policymakers should address the very real impediments to achieving equality of opportunity, particularly for the youngest and least-skilled workers among us. We believe such efforts should begin with fixing our k-12 education system, which is failing to train many young Americans to be competitive in today’s global labor market”

  4. seyyed says:

    The question is not whether there is growing income inequality in the U.S., but rather the best steps to fix it. Both sides of the political aisle have different proposals that want to acheive the same end result

  5. Joe says:

    When I was young the rich were those with wall to wall carpet,.a new car and enough money to go on vacation. Now adays thamks to television we are decieved into thinking we deserve a fancy house without working for and saving for it. There will always be those that through their efforts or possibly ideas.raise above the rest of society.As to education I don’t blame the schools as much as a society that lawds a athlete for getting a touchdown over a student that just completed a difficult science project. If you really want to change the possibilties of American youth , change what we celebrate in our schools starting in kindergarden quit spending large amounts on physical athletics and more on mental athletics.

  6. Marcie says:

    Great post!

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