Economics, U.S. Economy

Obama’s inequality argument just utterly collapsed

President Barack Obama has a theory of the case, yes he does. For the past 30 years, the living standards of middle-class Americans have gone nowhere even as the overall U.S. economy has grown markedly. The Obama explanation: Wealthier Americans grabbed all the money. Time to raise their taxes for the sake of “fairness.”

– Here’s Obama in January 2009: “Middle class Americans have been working harder, yet not enjoying their fair share of the fruits of a growing economy.”

– Here’s Obama in Osawatomie, Kansas, last December: “Over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”

– And here’s Obama this week: “What drags our entire economy down is when the benefits of economic growth and productivity go only to the few, which is what’s been happening for over a decade now, and gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”

Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007.  (All figures are inflation adjusted.)

So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.

But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University. (Here’s an earlier, working-paper version.) The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss.

And all income levels got richer. Yes, the very rich did exceptionally well, mostly due to technology and globalization. Incomes rose 63% for the top 5%, 56% for the top 10% and 52.6% for the top 20%.  But everyone else made out pretty well, too. Incomes rose 40.4% for households between the 60th and 80th percentiles, 36.9% for the next quintile, 25.0% for the next, and 26.4% for the bottom 20%. There’s the “shared prosperity” Obama says he wants, right in front of his eyes. (Indeed, the study finds, income inequality has actually been shrinking since 1989, with the Gini index falling to 0.362 from 0.372.)

As the Cornell study concludes:

Income inequality increased in the United States not because the rich got richer, the poor got poorer and the middle class stagnated, but because the rich got richer at a faster rate than the middle and poorer quintiles and this mostly occurred in the 1980s. .. the apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals.

See, Piketty and Saez made lots of odd choices about what to measure and how to measure it. They chose to measure something called “tax units” rather than households, a move which ignores the statistical impact —  including economies of scale — of couples who cohabitate, kids who move back in with their parents after college, and senior parents who live with their adult children.

They chose to ignore the value of all government transfers — including welfare, Social Security, and other government provided cash assistance — received by the household.

They chose to ignore the role of taxes and tax credits.

They chose to ignore the value of healthcare benefits. In short, Piketty and Saez ignored a lot of stuff. Again, Burkhauser and his team;

 The apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals …  When using the most restrictive income definition – pre-tax, pre-transfer tax unit cash (market) income—the resources available to the middle class have stagnated over the past three business cycles. In contrast, once broadening the income definition to post-tax, post-transfer size-adjusted household cash income, middle class Americans are found to have made substantial gains.

So the tax and regulatory polices of the past three decades did not lead to stagnation for the middle class at the hands of the rapacious rich. Claims to the contrary — such as those made by Obama, the Occupy movement, and many liberal economists — never really passed the sniff test of anyone who lived through the past few decades. And now we know why: The inequality and stagnation alarmists were wrong. And so, therefore, is the economic rationale of the president’s class-warfare economic policies. Not that economics ever had much to do with them anyway.

 

James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

 Pethokoukis was the business editor and economics columnist for U.S. News & World Report from 1997 to 2008. He has written for many publications, including The New York Times, The Weekly Standard, Commentary, National Review, The Washington Examiner, USA Today and Investor’s Business Daily.

 Pethokoukis is an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! Champion.

Pethokoukis can be reached james.pethokoukis@aei.org or follow him on Twitter @JimPethokoukis

67 thoughts on “Obama’s inequality argument just utterly collapsed

  1. US income Gini indices over time

    Gini indices for the United States at various times, according to the US Census Bureau:

    * 1929: 45.0 (estimated)
    * 1947: 37.6 (estimated)
    * 1967: 39.7 (first year reported)
    * 1968: 38.6 (lowest index reported)
    * 1970: 39.4
    * 1980: 40.3
    * 1990: 42.8
    * 2000: 46.2
    * 2005: 46.9
    * 2006: 47.0 (highest index reported)
    * 2007: 46.3
    * 2008: 46.69
    * 2009: 46.8

  2. They also chose to ignore the massive wealth transfer of public employee retirement benefits.
    From a study on wealth income inequality stats based on Germany data.
    http://www.lisproject.org/conference/papers/frick-grabka.pdf
    Conclusion
    “Entitlements from old-age pension schemes—statutory, occupational, and private—represent a considerable source of wealth. For data-related reasons, however, empirical analyses of wealth inequality in Germany have failed to take this important component adequately into account. ”
    “This extended measure of wealth shows considerably (about 25 percent) less inequality than traditional analyses that refer only to financial and material assets (net worth). “

  3. good work, and, unsurprising, just like global warming “data”…carefully selected. Now here’s the next question…a what if…if it is true as it seems to be that much if not most of the gain for the middle and lower classes was at least “mediated” by the public sector…if not “provided” by government, how would they have done in this same period without those government programs and benefits? One would have to construct an alternate economy without all of those programs and without the tax burdens that make them possible, and see how all of us would have done. Tough one. Be ready.

    • My question was quite similar. Doesn’t that seem to feed the rationale for various transfers? That’s exactly what the left argues…we need all these welfare program’s because you would be worse off without them. I guess the missing data here has to do with mobility. Of the bottom 3 quintiles in 1979, how many of them would have still been in their same place in 2007, if not for the transfers?

    • I think the point is that the Democrats are claiming they’re correcting a perceived injustice that was largely corrected many years ago.

      For example, we are constantly told that the poor have insufficient access to health care, although state and Federal governments already spend something like $450 billion a year on health care for the poor and elderly poor.

      Over two-thirds of Federal spending is checks written to individuals. Wealth redistribution.

      Is two-thirds not enough? How much is enough taxation and spending? How much is too much?

    • Actually, the value of this study is that it gives the lie to Mr. Obama’s assertions that the policies of his predecessors/opponents created “inequality”, and therefore we must submit to even MORE government-directed wealth redistribution.

      This reminds me of the response some have, to those that back a return to Clinton-era tax levels … “how about we also go back to Clinton-era spending levels?” Those backing higher taxes conveniently forget that item of data in their rush to government-driven “equality”.

      And I’d take you up on that challenge … as long as the alternate economy is part of a society that does not send this message to their people from their school days onward …

      All you need to do is show up for work or go to school; we have experts who have the answers to your housing needs, your health care needs, your financial needs … no need to plan for your future or actively manage your career, since we can do a better job than you can; just trust us to solve those problems FOR you.

      … and instead expects them, from their school days, to be actively engaged in the planning/saving/deferred gratification and other prudent activities that put one in a position to better “roll with the changes”.

      Today, those that bought into the above message, and put their trust in government/union/deep-pocketed business and/or the mere possession of a college degree to assure their future, are the ones worse off.

      Those that didn’t buy into the message, and kept active control of their condition, are the ones better off today … and in many cases, ironically, are the ones who are going to be expected to pick up the slack for the rest, if Mr. Obama gets his way.

  4. While I think Obama’s plans for the economy are wrong and dangerous I cannot see the logic in saying because there are more earners in households today, due to adult wage earning children returning home, middle class families are doing better. It is too easy to argue that the reason those adult children are returning home is because their incomes have not kept up with growing costs. Sure, if in my family with 5 children all of us moved home to live with Mom and Dad the household income would be larger. However, that does not indicate in any way that individual wages increased.

    Including tax, transfer, and medical insurance when comparing wages between quintiles seems reasonable I do not agree that the household rather than the tax unit should be the measure. I would go further and say that the measure should be the individual. A family that typically had 1 wage earner will probably be wealthier if it had 2 or 3 or 4 but that does not mean that the original wage earner is earning more money.

    • Haven’t read the study, but pretty sure you are misinterpreting how it was conducted. The income of a household of 1 would not be equated to a household of five. What would be considered is the per person income of the household on average. So 100,000/5 or 20,000/1 would be equivalent income.

      The point of this interpretation of the statistics was to show that cost allocations are greatly reduced, thus increasing “income”, when the costs are shared. If the cost of trash service is divided between a family of 5 the individual cost allocation is significantly reduced for each member of the “household” from the total cost allocated onto each “tax unit”. This is the point of “economies of scale” referenced in the article.

      When my son moves out and rents a house/apartment his tax unit suffers from the increased cost of paying the full load for trash service. When he lived at home his proportion of the “households” cost for trash was much lower.

  5. The Dems will just either denounce the sources or selectively pick which part of the facts they want to be true. Never mind all the facts, they’ve made up their minds.

  6. Also, Taxes on the upper income quintile went up during the Bush Administration. Seems like the Obama administration cherry picks economic info to support discredited ideology.

  7. There is one other factor to take into consideration: income mobility. We should not assume that the people in the middle quintile in 1979 were the exact same people in the middle quintile in 2007.

    Theoretically, if the people in the bottom 3 quintiles in 1979 ended up in the top 3 quintiles in 2007, and those in the top 2 quintiles moved down to the bottom 2, we might mistakenly conclude that the rich got richer and the poor got poorer when the opposite is true: the poor got richer and the rich got poorer.

    Studies that track individual taxpayers have shown that income mobility is far greater than most people think — shocking even.

    • Bingo! In 1979 I was going to college on $360 a month GI Bill, was married and had one child. I was the 1%, just the bottom 1%. Since then, I have completed two more degrees and am now in the top quintile. This mobility allows anyone to change their station if they want to. My fear is that if the government starts deciding what is fair, the result will be to lock people into their respective strata with no chance at improving.

    • Great post. Please see mine above. I’d add that that is actual income mobility which does not even slightly capture the opportunity for income mobility. There are vast swaths of Americans who don’t want to rise socio-economically because of the work involved. They’d rather be whatever, 3rd grade teachers, making $25,000 to $50,000 a year (including investment income and house appreciation). But if you want to be a lawyer or a doctor or executive, education and entry level jobs are inexpensive and abundant. Can you imagine what an eager kid in some muddy thatch-rooved village in Malawi could do if he had the resources of merely “Smallville, KS”? The American Dream is more than alive and well – it’s even coddling often enough.

  8. Under the broader definition of income which considers transfers, does it mean that with out those transfers, middle class American’s would not have made substantial gains? That is to say, did the middle class only make gains because of transfers? If so, then my question is what would have happened if those transfers were never received? Doesn’t that seem to imply that the middle class would be even worse off, and the gap wider today, if it weren’t for transfer payments?

  9. Don’t like the author of this piece much, but I love the story, however incomplete.

    It is what has always been intuitively correct to me despite the political speeches. Indeed it is the essence of capitalism that I learned as an economics major in college. It is ok for the rich to get richer, as long as the poor also get richer.

    Socialism teaches it is ok for the poor to be poorer as long as everyone gets poorer. You need only look to the modern history of centrally planned economies that attempt to control income distribution to see this.

    • And where did you learn its ok to start off a comment by taking a gratuitous swipe at the author, and then pat yourself on the back for being wise enough to intuitively agree with said unlikeable author’s premise? Is that supposed to emphasize how firmly you believe in your own opinions, that contrary to the author’s general unlikeability, you still agree with him because it confirms your own beliefs?

  10. Diana Furchtgott-Roth of the Manhattan Institute has also refuted the myth of increasing income inequality. In order to reduce the impact of the considerable redistribution of wealth that is already occurring under the current highly progressive U.S. tax policies, she cleverly examines trends from 1985 through 2010 in expenditures by quintiles of household income. There is no evidence of increasing inequality as measured by the ratio of expenditures in the top quintile of income to expenditures in the bottom quintile of income over the 25 year period.

    http://www.manhattan-institute.org/html/ir_2.htm

  11. The idea that Obama’s statements are predicated on some study that can be debunked is ridiculous. Obama’s statements are predicated on the idea that he needs to (and will) gin up class hatred because class hatred is a base function of both the Democrat Party and Alinskyite theories and he can be re-elected no other way. Nice try, but there isn’t a single Obama supporter that will look at the above post and change their mind about the evil rich. And there isn’t a single conservative that will read the above post and not know that already…intuitively if not factually.

  12. What Obama knows, better than most people, is the communities he was a community organizer in. Well, if that community was relying on a community organizer to pick them up by their bootstraps and get equality, they’ll never make it. Meanwhile, people outside of that community have been working hard and making a living, without the Obama’s of the world, until Obama gets real power and then messes the whole system up.

    In his case, it’s not his inexperience that’s the problem, it’s the wrong experience that’s the problem.

  13. Bacon is $7.99/lb and gas is over $4.00/gal. I wish more “mainstream” or “academic” economists would address the real underlying issue – the value (or lack) of money and our broken monetary system.

  14. David Frum comments: “The cost of health benefits has rather notoriously exploded since 1979.”

    Is it correct that the 36.7% growth figure cited by Pethokoukis attributes as income the value of government benefits like health care? Is my understanding correct?

    MARCU$

  15. Additionally, the problem with this is that it looks at economic strata as if they were fixed groups of the same people who never move up or down, just get richer, stay the same or get poorer. “The rich got richer”? Hardly. Other people, younger people, got richer and moved up through the levels. The rich of the 1980s are 20 to 33 years older–or in many cases, dead. The rich measured in 2010 are mostly the lower and middle of 1980. The middle are the same, in general–from lower strata, and also from higher.

    Something that would illuminate this would be to see the median age of people at the various income strata by year. Only if it went up year by year, so that in 2010 the median in each income stratum would be about 30 years higher than the median in each stratum in 1980, would it mean that incomes were stagnant and the same people were losing, staying the same, or gaining stratum by stratum. If the median in each group is less than the difference in the years being compared, or the same, then in fact, that would demonstrate that income was not static, and “the rich” didn’t get richer alone, but people from lower strata gained and thus were elevated into higher strata.

  16. Inflation adjusted? Based on what exactly, BS inflation numbers our government gives us?

    Almost every middle class family now has 2 income earners. It wasn’t like that 50 years ago. If individual income has grown then the middle class should be far richer than the middle class of 50 years ago…..which the middle class is not.

    Healthcare included makes the numbers extremely misleading. I work for the big evil insurance companies. Trend for the last decade plus is 13% or higher every year. This study is giving middle class people a 13% raise every year just to keep the same benefits they had the year before. That doesn’t make you richer in any way shape or form when it comes to real life. You are simply getting 13% just to keep pace.

    I am not for Obama or his class warfare, tax the rich, blame the producers, but let’s be honest here. The middle class has a much harder time these days then when our parents were in our shoes. Most of our parents would even agree with this. They agree not because of numbers from a study but because they have witnessed how much harder it keeps getting over the last 50 years. If you don’t see it, then you aren’t paying attention.

    • Thank the Federal Reserve–and politicians of both parties for spending beyond our means and covering the bill with borrowed money. The USD has been 95% debased since 1914 when Congress figured out that it could spend borrowed money as easily as tax receipts.

    • rend for the last decade plus is 13% or higher every year.

      And for that 13% a year, we get continue to get higher life expectancy, cures for more diseases, and better health longer into old age. Yes, yes, the industry is not perfectly efficient, and there are indeed lying, thieving, greedy bastards involved (just like there are in every industry), but the underlying value has certainly increased IMMENSELY.

      2 obvious points:

      1) average USAGE of health services has gone up tremendously – this has cost, and people seem to think it has benefit as well (they keep doing it, despite the cost).

      2) the treatment for a heart attack 50 years ago was monetarily extremely cheap: pine box, 6′ hole in the ground. Treating stuff instead of dying from them is expensive.

      Whether we are getting our money’s worth from the increasing cost of healthcare does NOT change the fact that it is added benefit and value that most of us get from our place of employment as part of our pay, and that should be included when you look at how much people are being paid.

  17. PLEASE READ THIS.

    But this is the most ludicrous cognitive dissonance in politics and economics today – it’s profoundly absurd. That is, these table don’t even slightly capture how well the poor have done over the last 30 years. Studies show people move up one quintile every 9 years. So over 30 years whoever was making $15,000 in the lowest quintile is making $50,000 30 years later. [All in constant dollars.] So they have not gotten just 27% wealthier as per these tables – THE POOREST HAVE GOTTEN 333% RICHER. Please forgive the brief use of capital letters for emphasis. Republicans have to stop letting Democrats deceive with the use of wage level tables. It’s a disservice to Reagan and Reaganomics.

  18. Actually I understated it. If that 4th highest quintile is no longer merely $50,000, but 40% higher as indicated above, the poorest who made $15,000 30 years ago are making $70,000 today. That is THE POOREST ARE 466% WEALTHIER TODAY THAN 30 YEARS AGO.

    There is a reason the poorest around the world leave the their homelands toward a difficult new culture and language, often at risk of life and limb to come to the USA … ask anyone … I remember a reporter asked this American of Mexican origin what he loved about the USA … Trabajo!

  19. Mr. Pethokoukis,

    I just finished your essay on Obama’s Inequality argument. Thanks for bringing the data to light and drawing attention to the Cornell Study.

    I have often compared ecoonomic status to an atomic mushroom cloud. One begins at the bottom and when one reaches the top (regardless of the criterion used to define “rich”) there’s no place else to go. The only alternative is to become “richer”. Thus, the mushroom cloud expands exponentially at the top, giving apparent, nt actual credence to Obama’s argument of predation by the greedy, soulless rich.

    There is an interesting corollary to this at the bottom of that mushroom cloud. Liberals are quick to point out that the U.S.poverty rate has remained constant at about 16% of the population. This, they surmise, is clearly an indication that the “War on Poverty” has failed and that more funding and government intervention is needed. In fact, the reason for the stable poverty rate is evinced in the Cornell data and your analysis; lower economic classes are actually successfully moving up and out of poverty They are then replaced by new workers entering the economic cycle at the lowest level(presumptively these are new immigrants and young workers leaving the protective umbrella of their parents’ household).

    If poverty were increasing, the percentage of the population in poverty would actually be growing. The fact that it remains relatively flat even with new incoming participants is a sign that the capitalist economic engine is actually working just fine.

    The Obama administration is economically so unsound and illiterate that arguments like yours are akin to shooting fish in a barrel. The real key to necessary change, however, is in getting this information out to the general public through the gantlet of a sycophantic press.

  20. Unfortunately, the media will ignore this and economically-ignorant voters will continue to buy into the politics of envy. I will link to this from my Old Jarhead blog.

    Robert A. Hall
    Author: The Coming Collapse of the American Republic
    All royalties go to help wounded veterans
    For a free PDF of my book, write tartanmarine(at)gmail.com

  21. Obama and the Dem class warriors know that their target audience is a bunch of dumbsh*ts who have no prayer of understanding either the data cherry-picking that Piketty and Saez did–nor its refutation. Get the media to repeat it all endlessly for a decade, appeal to laziness and envy, and you have your re-election formula.

    Face it: 53.6% of the voters in this country are either too lazy or too stupid to identify a con man when he is stealing them blind. Obama’s election was the only cultural indicator that any rational person needs to conclude that this country’s prime is in its wake. There is just no saving the place when morons will vote for a charlatan like Obama.

    • PDQ,

      You make a persuasive argument for the failure of the electorate to act in their own best interest. However, after talking with lots of middle class people (some professionals, some well-paid managers/technicians, some small business owners…..)who admit, ashamedly, that they voted for Owedumbo in the last election, I think the blush is off the rose and this clown is going to have a very difficult time getting the vote of moderates/independents. He is now know for his racism, his radicalism, his sellout to the radical environmentalists, his pattern of serial lies, his abandonment of any pretense of being a uniter, and for his utter lack of any skill or reasonableness in international relations.

      If Romney (I am pretty well convinced that he will be the Republican nominee)and the Republicans can paint an accurate picture of this idiot’s failures, excesses, falsehoods and fraternization with radicals, and get the message out in spite of the shameless pandering of the mainstream media, this treasonous creep will have to go back to Chicago and get his old job back…..community rabble-rouser.

      That said, if the Republicans offer no comprehensive, cogent view of how they will return America to prosperity, liberty and greatness, they may be seen by the electorate as an angry mob of privileged reactionaries. They will be called racists whatever they do. I recommend that those of us who intend to work to defeat BO and turn out his radical associates simply ignore the ranting and raving of the race-baiting left. We have work to do, and there has never been more at stake.

      • The view I think that the GOP needs to be selling for the long-term good of the nation, though, is a hard sell … because the only rational plan does not involve them having a “plan” that they execute from the top down.

        The rational plan is to return responsibility and decision-making authority back to individuals, instead of trying to solve their problems FOR them … i.e. getting the Federal government out of the socio-economic engineering business, including health care and education.

        Especially when so many are conditioned to think that the funding and experts makes the government better than they are with respect to solving these problems, the idea that we will elect someone that will do LESS for us is alien to many voters … even though it is the rational path forward.

  22. One point that is usually neglected in these discussions is that we live in a country where the percentage of the population that has reached retirement is growing dramatically. A great proportion of “retired” folks end up in the middle quintile, no matter where they may have ranked during their working years. It’s fairly obvious that their income growth will trail the working population. Anayses that remove the retired from the calculation, indicate that middle income growth for the working population is greatly underestimated.

  23. Mr. Pethokoukis,

    JIMMY P! I’m a great fan of the Kudlow show.

    Great stuff, but on Kudlow you never hit this note. You’ve got to thwart Bernstein and the African-American ex-Clinton guy (who seems cool and definitely does well for himself on Kudlow). I just forget his name. Keith Boykin? Something. Also when he points to 30 consecutive months of job growth you have to hit back in devestating rebuttal that Obama spent $400,000/job created, funds that must be paid back later which will tend to cost 2-3 jobs for everyone he created with this temporary stimulous. That is the waste itself.

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