Society and Culture, Class Conflict

Income inequality myths: No, the rich didn’t steal all the money

The core argument of the Occupy movement and its Obamacrat friends is this: The rich stole all the money. That explains why over the past four decades, the income of the broad American middle class supposedly has stagnated even as the economy expanded. Why? Did you forget already? The rich stole all the money. And now it’s time to take it back.

And here are the numbers behind that claim, as calculated by the University of Chicago’s Tino Sanandaji (an absolute must-follow blogger, too): Between 1970 and 2008, real per capita GDP increased by 108 percent (based on national accounts data calculated by the Bureau of Economic Analysis). But according to economists Thomas Piketty and Emanuel Saez — favorites of inequality alarmists — the taxable income of the bottom 99 percent increased by just 12 percent. So the real GDP per person doubled but middle class incomes barely budged? Income inequality must be the culprit. The rich stole (nearly) all the money.

But, as Sanandaji points, Piketty and Saez dramatically underestimate income growth during the period, finding that real average taxable income for everyone grows by just 29 percent. His solution:

My simple method is combining the best income-distribution estimate (from Pickety&Saez) with the best income-growth estimates (from GDP numbers). This method shows that that between 1970-2008 the real per capita income of the “Bottom 99 Percent” grew by 80%, and the income of the “Bottom 90 Percent” grew by 60%.

Well, 80 percent is a lot more than 12 percent. But let’s look at things another way. From 1975-2009, real per capita GDP increased by 90 percent vs. 17 percent growth in real median household income, as measured by the Census Bureau. What happened? Again, the rich stole all the money. Yet if you make a couple simple adjustment for household size and a more accurate inflation measure, a different picture emerges, as Sanandaji illustrates:

 

 

These calculations are in line with new research from University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan, who find that “median income and consumption both rose by more than 50 percent in real terms between 1980 and 2009.”

Let’s sum up. Income inequality may have increased in recent decades, but a stagnating middle class has not been the result. And the 1 percent didn’t steal all the money.

 

18 thoughts on “Income inequality myths: No, the rich didn’t steal all the money

  1. This doesn’t alter the fact that wage stagnation in the Middle Class in the 21st century has resulted from a collapse in American manufacturing. The middle class will not recover until manufacturing recovers. When the ruling classes in this country made decisions back in seventies and eighties to concentrate efforts in banking, finance and services, that cooked our geese, as it were.

    Great powers must manufacture, or they do not stay great powers. Put it another way, the Chinese can back-engineer everything that Apple Computer makes, and do it cheaper.

  2. Thus just goes to show you that you can get numbers to say anything you want them to. Now test your numbers in the real world.

    Although, you are right about one thing: the middle class is not stagnant; it’s evaporating.

  3. A bit of a silly argument in my mind – what he shows is that income inequality is still growing, maybe just not at the rate at which others argue. As he says:

    “The “Top one Percent” took 25 percent of total growth, half of Pickety&Saez estimate. This is bad enough, so why exaggerate? Let me stress once more that I use their distribution numbers, just a different and more realistic figure for aggregate income growth. Underestimating total growth ironically also leads to an underestimation of Mhow much richer the top one percent became (5 times rather than 3 times richer). “

    It is not an argument about whether the money was “stolen” or not. This is an argument about how big the gap in inequality really is.

    If you want to get into the argument about whether this money was “stolen”, you need to discuss why income inequality has grown. One argument, for example, would be that tax policy caused a large portion of the redistribution. What do you see as the causes of this growth in income inequality?

  4. “This doesn’t alter the fact that wage stagnation in the Middle Class in the 21st century has resulted from a collapse in American manufacturing. ” Mr. Pethokoukis has provided evidence for his conclusions, section. You have provided mere conclusions.

  5. “The core argument of the Occupy movement and its Obamacrat friends is this: The rich stole all the money.”

    Mbwahahahaha!

    The actual claim (we assume a minimal capacity to read) of Occupy Wall Street is this: public policy favors the rich.

  6. 1. Tubby:

    GDP is *by definition* the total amount of earned income in the country, which is by design identical to total output.

    Subtracting capital deprecations and some other minor things you get National Income, what can be consumed, typically around 90% of GDP (though the 10% which mostly goes towards replacing capital cannot be consumed, it still income). National Income has grown at the same, or slightly faster, rate of GDP during 1970-2008.

    GDP or National Income have the advantage of covering almost all income, whereas the data you see by for example Pickety&Saez or in Wage estimates is 50% or even 40% of total U.S income. That can tell us what is happening to relative inequality, but not to growth.

    1. According to the Bureau of Economic Analysis, total Wages and Compensations were $8.1 trillion in 2008, which represents a real per capita growth of 98% since 1970.

    I ask you to look yourselves, instead of protesting based on a vague feeling that this must be wrong.

    http://www.bea.gov/iTable/index_nipa.cfm

    This should be obvious if you think about it for a second, since economists know that the share of national output going to labor (labor-share) has been flat at around two thirds for a century.

    The claims about wages being stagnant come from the same faulty sources as taxable income and median household income (biased inflation measures, smaller households, not including benefits, small income base used to draw inference about aggregates).

    2. I don’t include the Obama-years of declining median income, since as the President points out it is expected by most economists and by the CBO to be temporary. However, given that the analysis goes to 2008, I am puzzled by the claim that I am “ignoring the last decade of essentially stagnant incomes”. I exclude 2 years for which there is data, not a “decade”.

    3. “Thus just goes to show you that you can get numbers to say anything you want them to. Now test your numbers in the real world.“

    In the real world, I see middle class people driving better cars than 1970, living in about 20% bigger and better houses than 1970, buying clothing, appliances, toys, at incomparably higher levels, get better health care, live longer, and traveling more. The median household in 2009 had more than twice the net worth of the median household in 1970, according to the Federal Reserve.

    Objective measures of consumption have gone up, for both the poor and middle class.

    http://www.nd.edu/~jsulliv4/Five_decades_7_2011.pdf

    Share of poor people who own things, between early 1970s or 1980s and now:
    Car: 60% to 69%
    Dishwasher: 19% to 35%
    Washer: 60% to 65%
    Dryer: 39% to 56%
    Stereo: 30% to 64%

    • Tito: Citing stats on the percentage of people with different items doesn’t prove that income went up – there are multiple factors which could contribute to them having those items that they did not have in the past – mainly technology innovation that lowers the cost of items, outsourcing to foreign countries which, again, can lower the cost of items, and, probably most importantly, the availability of credit that wasn’t there in the 1970s.

      In particular, the availability of credit whereby credit card companies target lower income people has exploded and can explain a great deal of the ability of the poor to live at a higher level than in the past. In addition, if one looks more closely at credit, what you’ll see is that middle class families have increasingly used credit and gone into debt to make up for the lack of income growth. If we look at the recent housing boom, for instance, we see that people were living well above their means using their houses as ATMs.

      Secondly, the argument of this blog post is in the title “Income inequality myths: No, the rich didn’t steal all the money” – and this blog post and the data you post does nothing to prove this. It’s simply arguing that the gap isn’t as big as others say – fine, we can agree that different people with different agendas have different numbers. But that doesn’t suddenly make the inequality gap go away. And it doesn’t answer the question as to why the income gap has grown – I’d argue it was tax policy that, in particular, favored those who get most of their income via long term capital gains. You may make a different argument, but you haven’t presented it here.

      Finally, the article cited as the basis for saying that the income gap hasn’t grown clearly shows that it has – again:

      “The “Top one Percent” took 25 percent of total growth, half of Pickety&Saez estimate. This is bad enough, so why exaggerate? Let me stress once more that I use their distribution numbers, just a different and more realistic figure for aggregate income growth. Underestimating total growth ironically also leads to an underestimation of how much richer the top one percent became (5 times rather than 3 times richer).”

      Note that last sentence carefully – it points out that the method of calculating the wealth gap favored by those on the left underestimates how much richer the top one percent become during the time period.

      So all you’re really saying is that you don’t believe the gap is as big as others argue – but you haven’t made it disappear by using a different calculation.

      • Inthewoods:

        “Note that last sentence carefully”

        I wrote the sentence, so you really don’t have to read it back to me.

        People have looked carefully at the data, credit is not the explanation. Regarding the middle class, we know from Federal Reserve data that net worth have doubled, which obviously would not have happened if they just borrowed more.

        “all you’re really saying is that you don’t believe the [inequality] gap is as big as others argue”

        No, that is *not* what the article says. The article explains that even using the exact same inequality data calculated and cited by the left, you still cannot explain why GDP grows while median income appears to stagnate.

        The current lazy conventional wisdom of the left mixes the two issues (rising inequality and absolute growth in middle class income). The explanation is miss-measurement of middle class income.

        Inequality went up, and so did middle class incomes, though of course less than they would have with no rise in inequality.

        • I think you’re splitting hairs. You agree that inequality has grown (you say that the top 1% captured 25% of total GDP – which you also note is “bad enough”), but you argue that the middle class didn’t see total stagnation in income. So let’s say I give it to you and say fine, middle class income increased. Inequality has still grown by your own calculations.

          So why did this happen? You and James seem to think that those on the left are just discussing income inequality in isolation. Rather, they argue that income inequality was increased by government policy, and that the top 1% have and are continuing to drive policy that continues this trend.

          • First There is a Gap. Per capita and GDP is not manipulating. That in fact gives you an Accurate picture, But there is some factors to consider. 10 banks hold 70% of the money. which means only a hand full get to make loan decisions. The regulations make it better to just sit on the money and invest other places rather than small business or even homes. New regulations put a huge burden on small banks. Small business typically get loans from small banks.Small business creates jobs. Due fears of obamacare many companies are cutting people down to part time or freeze hiring altogether. keep in mind these corporations have stock holders many use the companies in retirement accounts which many in the median income use . So they have to keep profit margins. The other issue is how are you going to change law when many of the lawmakers are benefiting? The problem can be not blamed on one thing or even one party. Redistribution or tax heights usually Doesn’t yield much Revenue due to tax loopholes. The current tax system is so complex, it would be near impossible to fix it all. I think we need to spit the banks to spread risk. Then we really need to consider simplifying tax code. some of these problems of course have been around while others are new problems. And revisit the Dodd frank act if it is truly hurting small banks it either needs to be adjusted or dumped.

  7. Real Median household wealth was $40.000 in 1970 and $88.000 in 2009 (after the crash).

    http://www.federalreserve.gov/pubs/oss/oss2/83/bull1284.pdf
    http://www.federalreserve.gov/pubs/feds/2010/201006/index.html

    No one is denying that it’s bad that manufacturing jobs were lost, and I at least believe strongly that a lot of important measures of social capital and the culture are worse now than 1970.

    But it is ridiculous to claim that the middle class has had no income growth in a period where national income doubled, and the share of income going to the rich increased by about 10 percentage points. That is not mathematically enough to eat up all growth.

    And indeed, once economist such as University of Chicago’s Bruce Meyer, Northwestern University Robert Gordon, the Minnesota Fed and (partially) the CBO look at this puzzle, they all find that standards measured miss between 40-60% real growth for the median and perhaps 80% for the middle class broadly defined.

    This is lower than the 90-110% per capita GDP growth (depending on period), because of rising inequality. But it is also higher than the 0-10% claimed by the media and liberals.

  8. Tino, you cannot argue with the willfully blind and intentionally ignorant. However, I applaud your efforts at illumination, but there are some dim people who like the dark.

  9. Your post misleads and distorts the facts yet again, James.
    You’ve inflated the figures on income growth over 30-40 years by multiplying them by the positive price changes for key goods/services (GDP deflator), giving an artificially higher figure than what peoples’ paychecks actually show. The fact is, these price changes have only made it harder for these families to shore up their eroding standard of living. You are doing something that’s like adding the costs of the things that I buy to the amount of money that I make. It’s ridiculous, when you think about it.
    Per capita GDP is the measure of GDP/person. The growth here does nothing to dispel the fact of inequality, since most of that growth has gone to the richest folks.
    Even with these graphs, there’s still the fact that incomes have barely risen relative to productivity for over 30 years:
    http://stateofworkingamerica.org/charts/productivity-and-real-median-family-income-growth-1947-2009/
    http://gulzar05.blogspot.com/2011/02/widening-income-productivity-growth-gap.html
    http://globalguerrillas.typepad.com/globalguerrillas/2011/10/journal-why-the-us-middle-class-is-broken.html
    http://www.worldwidehippies.com/2011/12/03/the-productivity-tax/
    Your point on inequality being a myth, pathetically constructed as is shown in your posts, still doesn’t hold a candle to the fact that most Americans have not seen their standards of living go up, even though the economy overall has been growing, explaining the GDP deflator spiking up incomes well above how much they’ve actually grown.

    • Correction:
      The final link of my previous comment includes an article explaining how getting off the gold standard was why productivity and wages have diverged. This isn’t true at all, since currency has no bearing on inflation in a domestic economy. As Adam Smith said,

      “The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. That this is really the foundation of the exchangeable value of all things, excepting those which cannot be increased by human industry, is a doctrine of the utmost importance in political economy.” The Wealth of Nations, 1776.

      Currency devaluation affects suppliers, what is lost in purchasing power is also lost in the price level of goods/services. So nothing changes in a domestic marketplace.

      The reason why incomes and productivity have diverged have been three-fold, in part:
      1) Globalization
      2) Technological advance
      3) The decline of labor unions: over a third of American private sector workers were unionized in the 1950s; over 20% of all workers were unionized until the 1980s, fewer than 7% of private sector workers and fewer than 12% of all workers in America are unionized today.

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