March 10, 2008
WSJ: The Inequality Myth
Interesting op-ed in today's Wall Street Journal: The Inequality Myth, by Brad Schiller:
The annual release of census data on household incomes provides the foundation for the "two Americas" thesis. The latest figures tracked changes in incomes all the way back to 1967. Two observations grabbed the headlines. First, the data indicate that the top-earning 20% of households get half of all the income generated in the country, while the lowest-earning 20% of households get a meager 3.4%. That disparity has widened over time: In 1970, their respective shares were 43.3% and 4.1%. These income-share numbers buttress the popular notion that the "rich are getting richer while the poor are getting poorer."
The second observation in the Census reports relates to the well-being of the middle class. The median household income in 2006 was $48,201, just a trifle ahead of its 1998 level ($48,034). That seems to confirm middle-class stagnation.
While there is some substance to these fears of widening inequality and middle-class stagnation, the situation is not nearly as clear-cut. Demographic changes in the size and composition of U.S. households have distorted the statistics in important ways.
First, we can easily dismiss the notion that the poor are getting poorer. All the Census Bureau tells us is that the share of the pie consumed by the poor has been shrinking (to 3.4% in 2006 from 4.1% in 1970). But the "pie" has grown enormously. This year's real GDP of $14 trillion is three times that of 1970. So the absolute size of the slice received by the bottom 20% has increased to $476 billion from $181 billion. Allowing for population growth shows that the average income of people at the bottom of the income distribution has risen 36%.
They're not rich, but they're certainly not poorer. In reality, economic growth has raised incomes across the board. ...
To understand what's happening here, envision a line of people queued up for March Madness tickets. Individuals move up the line as tickets are purchased. But new people keep coming. So the line never gets shorter, even though individuals are advancing.
Something similar happens with the distribution of income. People keep entering the distribution line from the bottom. Even though individuals are moving up the line, the middle of the line never seems to move. Hence, an unchanged -- or even receding -- median marker could co-exist with individual advancement. The people who were at the middle marker before have moved up the distribution line. This is the kind of income mobility that has long characterized U.S. income dynamics. ...When you look at the really big picture, it's apparent that living standards are rising across the entire spectrum of incomes. Just since 2000, GDP has risen by 18% while the population has grown by 6%. So per capita incomes have clearly been rising. The growth of per capita income since 1980 or 1970 has simply been spectacular. Some people would have you believe that all of this added income was funneled to the rich. But the math doesn't work out.
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