In our industrial and social system, the interests of all men are so closely intertwined that in the immense majority of cases a straight dealing man who by his efficiency, by his ingenuity and industry, benefits himself, must also benefit others. Theodore Roosevelt
There continues to be a great deal of muttering from the left and alarmism in the media about a trend towards growing ‘income inequality’ between the rich and poor in America. Most of this originates in a series of studies by Isaac Shapiro at a left-wing think tank, the Center for Budget Policy Priorities, which has as its main objective fighting any tax reductions and redistributing income from the rich to the government. Shapiro’s work is mainly analysis of figures on household income from the Congressional Budget Office, which show a historic trend of income increasing in all income groups, but by a larger percentage in the higher income groups than the lower ones.
Income is normally broken down into quintiles, and between 1979 and 2002, Shapiro shows a 5% rate of income increase for the bottom quintile compared to a 48% growth in income for the top quintile. Basically his figures show that the more you earn, the more your earnings increased during that period. Shapiro’s conclusions seem alarming. Though everyone gained in income, the gains for the rich are so dramatically higher than for the poor that one has to be concerned. Of course, this analysis of income for huge income groups rather than individuals, and over a period of 23 years, is ridiculously simplistic and overlooks key, obvious factors which definitively invalidate it, especially as an argument against tax cuts.
First off, it’s a gross analysis over a long period of time, and it’s also based on data which is several years old. It doesn’t include the most recent data, and by taking so many years together it overlooks year-to-year trends in income growth which are very significant. If you examine the trends on a yearly basis what immediately leaps out is that the greatest growth in income disparity happened not in recent years as Shapiro implies and as the media has made an issue of, but in the very beginning of the period, in the 1980s, when taxes were at a historically very high level and economic growth was slow.
In the 15-year period from 1979 to 1994 the bottom quintile gained only 2% while the top quintile gained 28%. The next six years — the time of the high-tech boom — showed the greatest economic growth and saw the poor gain 8.1% and the top quintile gain 12.7%, much closer together. The most recent era — the Bush era of recession and tax cuts — also shows slowing growth in disparity than the 80s and early 90s, with both rich and poor losing income. The bottom quintile is down 8.5% in the last five years, and the top quintile is down 3.3% in the last five years, again a relatively close ratio. Overall during the 23-year span the ratio of income growth between the rich and poor is 9.6:1, but in the first 2/3 of the period, from 1979 to 1994, that ratio was 14:1 and, in the last five years, it was only 2.6:1. So the trend that everyone is alarmed about is actually a trend which has been declining in recent years and is only looks like a dramatic trend because of the rate of growth in wealth disparity in the beginning of the period studied.
What those who are alarmed about income disparity have latched on to is the single biggest comparison between rich and poor over 23 years, but because of how Shapiro presents the data, most who have looked at the issue miss the fact that the rate of growth in disparity is decreasing rather than increasing. The rich are actually getting rich less quickly relative to the poor than they were 20 years ago.
The next problem with the analysis of this data is that it is looking at statistical groups rather than changes in the income of individuals over the period studied. What it completely ignores is the fact that the people in the bottom quintile in 1979 are not the same people who are there 20 years later. The reality is that most of the bottom quintile is made up of the elderly, recent immigrants, and young people just entering the workforce. The last two groups move up in income rapidly and are overwhelmingly not in the bottom quintile after only a few years have passed while the first group die off also leaving the bottom quintile.
A study by the House of Representatives shows that the bottom quintile has the highest level of upward mobility of any group. In a 10-year period, 86% of the people in that quintile will have moved up one or more income brackets. What’s more, the top quintile has the highest level of downward mobility. In a typical 10-year period, 35% of the people in the top quintile will have dropped down at least one bracket.
Factoring in economic mobility totally destroys the Shapiro thesis that the rich get richer and the poor get poorer. Let’s assume that people in the top and bottom quintiles only rose or dropped one quintile in income over the 23 year period studied, which is ridiculously conservative. Based on the percentages who moved up and down, that means that, on average, the 86% of the poor who moved up actually increased their income by 274%, while 35% of the rich decreased their income by 46%. So using those figures you can adjust Shapiro’s percentages for upward and downward economic mobility and you end up with the poor gaining 236% on average, and the rich actually 27% on average. That’s pretty damned far from the rich getting richer and the poor getting poorer. Everyone is getting richer, and as a percentage the poor are probably rising farther and faster than anyone.
When people look at data they usually see what they want to see. In the world of groups like the CBPP, groups matter more than individuals so the upward movement of individuals is less important than the fact that 18-year olds working at McDonald’s aren’t earning much more now than similar first-time workers were 20 years ago. Never mind that the 18-year old they looked at 20 years ago is now earning 3 times as much and in some entirely different profession.
There are some other good sources for analysis of this subject. Take a look at the overview of income mobility from Daniel Drezner, and the article from March 23rd on Economic Trends. The Heartland Institute also has a look at the subject from a different perspective, and another good article can be found at the Heritage Foundation. Those last two are right-wing think tanks as suspect as the CBPP in their own way, so look at the original data for yourself and draw your own conclusions. For the source data on income growth during this period, take a look at the tables in this Census Bureau PDF, and for trends in income mobility look at this House of Representatives Joint Economic Study.