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The Rich Get Richer and the Poor Get … Even Richer?

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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.

About Dave Nalle

  • Dave Nalle

    What about those who live in compounds?

    I guess that would depend on how we file our taxes. But right now only one family is living inside the fence, so we’re a household.

    We do try to earn compound interest whenever possible.

    Dave

  • troll

    so – in your opinion median household income = median individual income

    in my opinion we have now entered la-la land

    in my opinion your numbers grossly underestimate the relative poverty experienced by the ‘lower half’ in our country

    if you’re going to be an international cutthroat pirate best to share the booty pretty equitably with your crew lest you end up with your own throat slit

    troll

  • Dave Nalle

    So – in your opinion median household income = median individual income

    No. All along I’ve been talking about household income. I don’t think I intentionally ever referred to individual income. All the figures in the original article are based on households, that’s for sure.

    Dave

  • Dave Nalle

    I did say person in #84 instead of household. Slip of the finger. Should have been household.

    Dave

  • troll

    so – anyone know the median individual income in the US – ?

    troll

  • troll

    how about the actual median indivdual income of the ‘lower half’ – ?

    troll

  • troll

    * And given the wealth of our nation, even 14% divided among half the population provides the people in the bottom half a median income of around $25,000 per person per year. It’s not a hell of a lot, but it’s certainly enough to live decently on or to raise a family if you combine two incomes.*

    Dave – this argument goes beyond slippery fingers

    troll

  • Alec

    You are right that the current fetish that some liberals have about “income inequality” sometimes paints and misleading picture of the economy, and right again to note that many analyses about the economy under-estimates the effect of income mobility in painting a static picture of “the rich” and “the poor,” but you are incorrect on the fundamentals. It is not true that “income is normally broken down into quintiles” – this is just one way of measuring incomes, and is not necessarily the best or the most accurate measure. You are dead wrong to say that the bottom quintile is made up of the elderly and others. Thanks to a strong lobby, Social Security, and a tax system which gives numerous breaks to seniors, a sizeable number of the elderly are actually better off than others, especially those who have sheltered or deferred much of their retirement income. And of course, since a considerable number of immigrants are paid under the table or otherwise derive income from “black market” or “grey market” activities, assigning them to one quintile or another is a matter of guesswork, not hard analysis. The point here is that there is not much point in making oracular pronouncements about who is benefiting the most from the present economy based on any single measurement, and certainly not from any data based on averages.

  • Dave Nalle

    so – anyone know the median individual income in the US – ?

    Yes, for individuals the IRS puts it at around $35K.

    how about the actual median indivdual income of the ‘lower half’ – ?

    That would be the $25K per household I calculated earlier.

    Dave – this argument goes beyond slippery fingers

    Let’s call it mental slippage then. I had been working with household figures all along, and then slipped mentally and began thinking in terms of individuals. My bad.

    I’ll see if I can dig up more detailed information on individuals, but they may not be as well documented.

    Dave

  • Dave Nalle

    In looking for answers to the last question I think I hit the motherload over at the census bureau. It’s an obscure directory page which focuses on income inequity. The page is here.

    One of the tables shows a very clear trend of individual wealth in the higher quintiles increasing while the lower quintiles decrease in wealth – very slowly in both cases. The data is only through 2001, though.

    This doesn’t invalidate my thesis that upward and downward mobility make the wealth changes of the quintiles somewhat irrelevant, but there’s lots of good data to draw all sorts of conclusions from.

    It also breaks the figures down by race, and I discovered that while the white poor are getting poorer, the black and hispanic poor are getting wealthier – i bet that’s also represented in them rising faster into other quintiles too.

    Dave

  • http://www.elitistpig.com Dave Nalle

    This page is also worth checking out. It shows median incomes by state broken down by number of household members, and the numbers are much higher than I’ve seen in other figures. Two earner families in the high 60Ks, single earner families around 40K.

    Dave

  • Alec

    Dave – The census sources you cite are indeed very useful references. But a few cautions: You do realize that when you talk about median individual incomes and household incomes that you are comparing apples and oranges? But also let me give you an example of how rises in income can mask larger problems. In California, we are beginning to see the decline of the middle class as the industries that previously fed the economy decline or wither away (aerospace, manufacturing, banking and big retail). So take a family where both the husband and wife have been downsized or laid off from successive jobs, receiving a lump sum buyout at one point, severance at another. They later sell their house, which had appreciated in value, and cash in their IRAs. The temporary bulge in their income move them up in the wealth quintiles, but in reality, they are falling further behind. In addition, since they are older workers, their ability to make up for their loss in earnings – and earning power — over time has declined sharply, and they must compete with immigrants and younger workers in a tight labor market.

  • Howard

    Hang in there, Dave. Your post makes the very interesting point that the poor of yesterday may not be the poor of today. I learned, probably before you were born, I could never win an argument with those who believe in a redistribution of wealth. While I had none as a youngster, I could see an opportunity to acquire a little wealth for myself.

    The economic system established in the United States is unique. That makes it relatively new and the subject of necessary “tweaking.” Excesses in business operations do occur and our government (read that the voting citizens) was established to protect society from, among other things, those excesses. So we, hopefully, talk about tweaking a marvelous system, not destroying it. Your post addresses the perceived problem of disparity in levels of income of individuals or households.

    In the redistribution of wealth arguments, just how much redistribution would satisfy the opposition? The truth is always, “all of it.” When one feels he is “entitled” to a part of the earnings of another man, he has adopted the tenants of a thief. A mugger doesn’t take just 15% or 40%. He has admitted to himself and the world he is a thief so he takes 100%. “Tax cuts” are the reduction of taxes paid out of a man’s earnings. In my 77 years of life, the chorus of “increase the tax” has been constant. They will never cease until the tax is 100% and to every man is distributed enough to provide for his needs. That economic system has been tried and found wanting. Please leave this one alone.

    Howard

  • troll

    the issue has little to do with the redistribution of wealth through the tax system…the issue is how labor is valued and compensated from out front

    the invisible hand of what the market will bear does not lead to a just system of distribution…and without justice there will be no peace

    troll

  • http://www.elitistpig.com Dave Nalle

    Dave – The census sources you cite are indeed very useful references. But a few cautions: You do realize that when you talk about median individual incomes and household incomes that you are comparing apples and oranges?

    Yes, Alec. We discussed this for a series of about a dozen posts right before you pointed it out.

    But also let me give you an example of how rises in income can mask larger problems. In California, we are beginning to see the decline of the middle class as the industries that previously fed the economy decline or wither away (aerospace, manufacturing, banking and big retail). So take a family where both the husband and wife have been downsized or laid off from successive jobs, receiving a lump sum buyout at one point, severance at another. They later sell their house, which had appreciated in value, and cash in their IRAs. The temporary bulge in their income move them up in the wealth quintiles, but in reality, they are falling further behind. In addition, since they are older workers, their ability to make up for their loss in earnings – and earning power — over time has declined sharply, and they must compete with immigrants and younger workers in a tight labor market.

    This is the point at which they need to move to Arizona or North Carolina or Texas or somewhere that has much lower cost of living and virtually no unemployment, where they are virtually begging for experienced managers and people with skills.

    Back in the 1950s and 1960s the average American moved once every 3 years in pursuit of better job opportunities. That has now slid to once every 7 years because people have become complacent and are willing to sacrifice quality of life and income for convenience. Their drive and ambition is lower than it was 40 years ago.

    As for California, it’s probably the single worst place in the nation to live if you’re in the middle class. Others here on BC have commented on this in other threads – ask Steve S. about it. Because of the insanely high housing prices and long commutes your options there are very limited unless you are poor and willing to live a very reduced lifestyle or super rich.

    Dave

  • http://www.elitistpig.com Dave Nalle

    Wow, troll. Nice socialist cliche there. Here’s a clue. Justice is not forced or imposed equality. From each according to his ability, to each according to his needs is a formula for oppression, not justice.

    Justice means everyone being given an opportunity to work hard and do well for their efforts without unfair persecution or impediments to success. However, if someone is not terribly bright or ambitious or makes bad decisions, it is not justice to hold down those who work harder and make better decisions so that the failure-prone individual can move forward.

    The great thing about a relatively open labor economy is that everyone eventually finds the niche that fits their abilities, their drive and their willingness to accomodate themselves to deprivation.

    Dave

  • troll

    communist cliche Dave – you know…’the withering away of the state’ and all

    not looking for a fascist/totalitarian socialist state here to institutionalize injustice – that’s what we’ve got already under the silk glove

    as for the rest of your comment – nice sentiment

    troll

  • http://jpsgoddamnblog.blogspot.com JP

    Baronius, you and I see this differently – you refer to “taking” in horror that the government collects taxes. Taxes are part of the social contract, in exchange for services etc. The commandment you refer to about coveting, and moral arguments against greed, apply just as well if not more to CEOs who collect far more than their fair share compared to the people they employ.

  • Nancy

    And is it justice, Dave, when greedy CEOs & executives can shaft thousands of employees who have worked hard for the company all their lives, by getting the courts to simply ‘cancel’ their retirement contracts, a la the airlines – and then award themselves big bonuses & retirement benefits? Is it justice when CEOs & executives can lie to employees that everything’s hunky-dory with their ENFORCED company investments, while they themselves are bailing out on the sly in order to save their own millions? Is it justice to send the jobs of millions overseas to save operating money – and having displaced all these lives, to then award yourself big, fat bonuses with obscenely humongous golden parachutes, because you CAN, and because corporate law is so written at this juncture that none but the biggest, most major stockholders (all of whom are fellow corporate hogs) can object to all this self-aggrandizement at investors’ expense? Is it justice when the very persons who are most able & supposed to defend ordinary working citizens from this kind of gross abuse, the congress & administration, are in fact the ones most closely bedded with these abusers & miscreants, and the ones who most brazenly aid & abet the abuse by looking the other way, or even defending it?
    It’s not, and you know it’s not, and it never will be.

  • Dave Nalle

    And is it justice, Dave, when greedy CEOs & executives can shaft thousands of employees who have worked hard for the company all their lives, by getting the courts to simply ‘cancel’ their retirement contracts

    That’s certainly not justice. But when things like this and the Enron debacle happen, the people involved should be punished. It’s not fair to punish everyone who is successful just because they fall in the same income bracket with the criminals. That kind of practice in warfare is prohibited under the geneva convention. Imagine if we started locking up all african americans because a disproportionate number of black teens commit crimes. That’s exactly the same type of excessive and unfair reaction. It’s like the Nazis killing 1 in 10 french villagers at random whenever a partisan killed a nazi soldier. The innocent should not have to pay for the sins of the guilty just because they fall into the same class of people.

    Dave

  • troll

    this chart shows the concentration of wealth in the hands of the ultra rich over time clearly

    and see here (pdf) pg 7 where it is estimated that median income of all one person households in 2003 was about 22Gs (including money and alternative income) well below Dave’s 35Gs

    troll

  • troll

    here’s another pdf of interest…measures are presented to address the question ‘are the rich getting richer’ (1947 – 1998 data)

    troll

    ps in order to avoid a pointless argument – the 22G figure that I pointed out in #121 undoubtedly underestimates individual median income overall

  • Alec

    Dave – Re: the idea that some Californians just need to pick up and move to Arizona or North Carolina. Your citation of “the average American” moving once every three years in the 1950s and 1960s is an overstatement, but also fails to take into account the age of the people moving. Younger people without deep roots or responsibilities have an easier time of moving than do older people. And the great postwar migration of people into California was again of younger people, veterans and others, who largely stayed put (or limited later moves to the Western states).

    Also, the problems that California is experiencing may soon envelope other states. There are systemic problems here, not just issues of people not taking advantage of opportunities.

    Troll – The table you link to absolutely DOES NOT “show the concentration of wealth in the hands of the ultra rich over time clearly,” but only shows how useless some tabular data is without context. First of all, as Dave and I have variously suggested, you cannot assume that the richest families in 1947 are the same richest families of 2001 (or even of 1948 for that matter). Without taking income mobility into account, it is pointless to keep harping about some monolithic group known as “the rich.”

    Also looking at this table alone you cannot see the unprecedented post WW II economic boom in America or the influence of unions which saw large and steady increase in the earnings of American workers and the development of a prosperous middle class.

    One thing that is interesting, and unexplained, is the jump in the top quintile’s share of income beginning in the early 1990s or the decline in incomes of the second fifth over the same period.

    Lastly, redistributing wealth does not redistribute productivity, jobs or earning ability. It is little more than a futile “feel good” gesture that will create far more harm than good.

  • troll

    correction – try this link for the pdf of interest

  • Baronius

    Dave, what if Nancy is right?

    All my life I’ve been a fan of capitalism because I believe it’s the best system for generating wealth. It provides goods and services, employment and investment, wages and dividends for billions of people.

    But if Nancy is right, and the whole thing is just a front for the rich to exploit the poor, then count me in. Because that would be cool too. I mean, if money is made off the backs of the poor, why didn’t anyone tell me? OK, Bill Moyers said so a bunch of times, but I just couldn’t stay awake. So I figure that I’ve put in my time (I helped cover up the Fla election) so I’ve earned it. Please put in a call and get me a factory in Michigan and an account in the Caymans. I’ll do my part to aid multinational corruption.

    Thanks.

  • troll

    Alec – quite true that statistics abstract from the ‘real’…and true again the composition of {the rich} changes over time as does the composition of {the poor}…and true again the process of wealth/capital concentration is cyclical

    but this: *Without taking income mobility into account, it is pointless to keep harping about some monolithic group known as “the rich.”* – doesn’t follow

    *One thing that is interesting, and unexplained, is the jump in the top quintile’s share of income beginning in the early 1990s or the decline in incomes of the second fifth over the same period.*

    the change in the data collection techniques in ’93 pointed out in the pdfs above might explain this

    *Lastly, redistributing wealth does not redistribute productivity, jobs or earning ability.*

    sure it does as ‘outsourcing’ shows in graphic fashion

    troll

  • http://www.elitistpig.com Dave Nalle

    this chart shows the concentration of wealth in the hands of the ultra rich over time clearly

    Yes, I linked to that chart earlier. It does seem clear that the top two income groups are advancing and the bottom three are declining – by very small amounts. But it’s not an accelerating pattern and it hasn’t been caused by any recent tax cuts. It’s a trend that goes back 30 years or more and it’s very gradual.

    And the point remains that upward mobility exceeds downward mobility and that more than counterracts the trend you point out. In addition, the GINI is a relative figure, so while relative wealth may go down, absolute wealth for everyone is going up, which means that the poor are more likely stable in wealth rather than declining.

    and see here (pdf) pg 7 where it is estimated that median income of all one person households in 2003 was about 22Gs (including money and alternative income) well below Dave’s 35Gs

    You do understand that this report you link to uses alternative methods of figuring income? I can go to that report and find even higher figures than those I quoted earlier, as well as lower ones, depending on which of the various methods of classifying people and defining income they’re using.

    here’s another pdf of interest…measures are presented to address the question ‘are the rich getting richer’ (1947 – 1998 data)

    This confirms what I said all along, that everyone is gaining wealth, the rich are just gaining it faster and more, which is why it’s good that the poor are moving up into higher income brackets on a regular basis.

    Dave

  • http://www.elitistpig.com Dave Nalle

    One thing that is interesting, and unexplained, is the jump in the top quintile’s share of income beginning in the early 1990s or the decline in incomes of the second fifth over the same period.

    My assumption has been that this was the result of the tech boom. In any economy where there is rapid growth people benefit from that growth proportional to the level of wealth they already have. Those who have money make money fast in a good economy. Those who don’t have money just stay stable or benefit very moderately through trickle-down and wage inflation. Thus the gap between rich and poor grows. Not at the expense of the poor, but because the rich can benefit more from a strong economy.

    Dave

  • http://www.elitistpig.com Dave Nalle

    But if Nancy is right, and the whole thing is just a front for the rich to exploit the poor, then count me in.

    As far as that goes, Nancy may be right to a certain extent. The poor exist to be exploited by everyone else. But so long as the system allows the poor to advance out of poverty through hard work and enterprise, then the exploitation is relatively innocuous. When it comes down to it, in a capitalis system everyone exploits everyone else all the time or is trying to.

    Dave