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. These numbers are good for the literate voters, but as noted we need to find easy to understand metrics for the economically illiterate.

    The “Thanks Obama” stickers on gas pumps everywhere is probably the best place to start (the legacy media can’t respond effectively to Samizdat), while GOP candidates should always quote the true unemployment statistics (currently U3 stands at over 10% while U6 stands at over 14%) rather than the fictional ones the media always uses.

    A sharp poke in the ribs using facts will get people’s attention in a way the Legacy media’s propaganda campaign won’t; people see the reality of high fuel prices and high unemployment and will respond to the party that explains the facts that they see on the ground

  2. Why are you using statistics from 2007? The results of outsourcing manufacturing were not yet apparent back then. Do you think the economy might just be a little different now? I would love to go back to the economy of 2007 when my house was worth something and real unemployment was around 5%. I don’t get to live in the past. Cherry picking much?

  3. These facts are too complicated to be understood easily by the majority of the usual Democrat voter. It’s easier to believe Obama saying that the middled class are poorer and the rich are richer … than the truth: The rich are richer and the middle class are only half as rich.

    Also, these facts will NEVER be heard by the Democrat middle or lower earning workers because the MSM will not print it.

  4. I’ve seen a few of these studies that took about income disparities, counting income BEFORE taxes are paid and before government benefits are received, and then these findings are used as a basis to call for increased taxes and government benefits to reduce the inequality. But even if we do adopt their proposals, by definition it will have ZERO effect on the claimed problem, because they are explicitly excluding the effects of their solution from their measurements. If you count income before taxes, then no matter how much you increase taxes it won’t show up in your measurements. If you count income excluding government benefits, then no matter how much you increase government benefits it won’t show up in your measurements.

  5. Obama was right.

    According to the article here, Obama’s economists are wrong because they look at individual “tax units” rather than households. But the problem is, income for households has gone up because more couples are working, children are moving back in with their parents, etc… So Obama was right: it has become much harder to be a lower or middle class American. You can’t say the lower and middle class has gotten richer when you need both husband and wife to work just to stay afloat.

    And measuring dole payments as income is substituting cause and effect, I think.

    Also, as David Frum pointed out on his website, the cost of health benefits has exploded in recent years, so it’s not really right to count that as imputed income.

  6. Oddly, I think this article accomplishes something it did not intend. Its actually made the case that the lower and middle classes make out almost as well as the wealthy do provided the government is assisting them. By pointing out that the Obama-embraced analysis neglected government assistance, this article has argued for the effectiveness of government assistance and the success of a quasi-socialist model.

  7. Even these charts are decieving. How many two parent households were there back in the earlier 70′s? Today a household who has a “stay at home mom” that doesnt have a job on the side is the minority i would imagine.

  8. In talking to the innumerate about income figures, I always just mention that income has to include both fringe benefits and government payments to be meaningful. This is a great study.

    Another example, when arguing about public employee compensation, I mention pensions but I emphasize retiree health benefits. My mother the librarian always said that her pension wasn’t much (she had a short career) but her health bennies were great.

  9. “Equality is one of those equivocal words which the philosophy of the 18th Century has made fraudulent. In the last twenty-five years it has cheated millions out of their lives and tens of millions out of their property.” – John Adams, 2nd President of the United States of America

  10. I would caution everyone who makes any comparison using either the top X percent or the bottom Y percent that there is a significant fallacy trap that must be dealt with.

    The bottom bracket, no matter what slice, is bounded by utter poverty, with no income, and no assets. You cannot get more indigent than this. Comparisons involving this slice of the population almost always fail to take into account the value of any in-kind aid, which can be amazingly ample, at least in pockets. That is the only way to explain how this slice has the highest rate of obesity.

    The top bracket, no matter what percentile is chosen is unbounded at the top. If Bill Gates were to win the PowerBall megajackpot, he still would be in the top bracket. People at this level are highly transient. One year, they make a lot, the next year, they may have a tax loss carry-forward. The very top slice is full of special cases, once in a lifetime payouts, and the like.

    If any income and tax burdens are to be made, it is far more useful to ignore both the top and bottom slice, no matter how you thin or thick the slices are, especially because of the open-ended top slice.

    • You are right. If we define “the poor” as the bottom quartile of wage-earners… WE WILL ALWAYS HAVE “THE POOR”… they will always be 25% of the population labeled “IMPOVERISHED”…even if they all doubled their incomes, doubled their number of cars, cell-phones and cable TV’s.

      It’s a catch-22-definition-trap that the government LOVES…

      Yes, there will always be the poor (to quote Jesus)… and I’ve been poor, too. But I went back to school, got my doctorate, and now making six figures. AMERICA, FTW, BABY!!!

  11. There’s a problem with these stats: they appear to measure household income.

    But during that time period, an ever increasing number of households had two earners. Take out the second earner and how do the stats look?

  12. While including medical benefits and the impact of taxes and transfers to income seems legitimate to me when comparing compensation over time I cannot buy into using household income as a valid metric. It is far too easy to postulate a scenario where crashing compensation levels for middle class jobs leads to a return to the nest situation. Total household income might increase, even significantly, while compensation per job decreases. Spouses working because they have to and adult children returning home because they cannot earn enough to pay rent is hardly a sign of increasing compensation.

    • From the comments in the link you gave:

      “So in terms of spending power over the last 30 years the rich have gotten richer, while the poor have gotten…. richer. In fact, in terms of 2007 dollars, EVERYBODY’s gotten richer over the last 30 years.

      “Poor Got Richer” – Now THERE’S a factual headline you won’t see on Mother Jones, CJR or any of the other commie outlets.

      But you guys are griping because the poor got richer, but not as much as the richest people got richer? Seriously?

      If you commies want some wealth… Why don’t you make it, instead of trying to get the gubmint to steal it for you?

      Do W O R K.

      C R E A T E something people want.

      F A C I L I T A T E transactions that let people get or do things they want.

      Steve Jobs took a bread box and some microchips and turned them into the largest company in the world. He didn’t bang drums in a park, bitching about The Man.

      To paraphrase the Home Depot commercial, “More doing, less bitching”.

      Et voila! Wealth.

      #2 Posted by padikiller on Thu 27 Oct 2011 at 03:08 PM”

  13. All of the above analysis and hand wringing do not negate one fact… Forcably taking income and personal property from people who have earned it is morally wrong, and is the definition of theft. you people on the left are theives… the gyrations you go through to justify your theft is simply amazing.

  14. More socialism to obtain equal “outcomes” always results in less productivity. See Europe.

    Socialism has failed everywhere it has been tried while bringing down the standard of living for all but the ruling elitists. Obama and his economists wish to make it seem as if capitalism fails, when it simply isn’t so. It is most convenient to rely on woefully incomplete studies and the related statistics as the gist of this article states.

  15. I feel both the author and the good folks at Cornell have ENTIRELY missed the point. Not to mention having made a VERY shaky conclusion based on largely opaque data.
    What empirical data do they use to declare that the middle class has gained 36% across the board by way of…social spending? How do they weigh the data given that some families will have elders living with them while others won’t?
    Anyway onto the missed point. WHY hasn’t the middle class realized pre tax gains? That is the question. The answer is class warfare. Social spending is no substitute. And given that today’s Republicans want to axe social spending to boot….

  16. This article is great and all, but the real problem with both of these studies is that they compare two totally different groups of people. The middle quintile in 1979 is obviously not going to be the same group of people as the middle middle quintile in 2007. The only way to really measure income growth of the middle class is to literally observe the physical human beings in the middle quintile at one point in time and evaluate how THEIR income grows. As in Susie Peppers made $xxxxx in 2000 and $yyyyy in 2010, so her income grew by yyyyy-xxxxx.

  17. Comparing after tax receipts is an intriguing addition to the analysis. There is another big problem with the data. Tax law changes in the mid-80′s caused a major shift in business income from C-Corps, which is not treated by Piketty and Saez as income, to pass-through entities such as partnerships and LLCs, where it is treated as “income” for the 1%. Apples and oranges provides for bad data as you can see at http://capmatters.com/wp/inequality-debate-based-on-bad-data/. Bad data leads to bad analysis which leads to bad policy.

    • Pass-through income is not “income” for the 1%. It is income for any business owner that is not organized as a “C” corporation. While it does include doctors, lawyers, CPAs, etc., it also includes the owner of a small rental house that earns $500 per month from it, as well as the corner grocer in a small town that barely makes ends meet. Until people stop making blanket statements without facts, or until others just believe everything that fits into their argument, truth will be ignored in favor of emotion.

      As an aside, wars of all kinds are started and fought based on emotional decisions, not on truth and logic.

  18. James’ article completely misses the point: what’s wrong with our economy is precisely that wages and real median incomes have stagnated tremendously.
    Here are some reasons to dismiss your piece, James:

    1) Your point on government transfer payments is legitimate, but you use the fact in the wrong way; much of the spike has to do with soaring entitlement spending brought about by a soaring retirement age population and rising health care costs. Also, tax loopholes and breaks have doubled since 1982:
    http://www.americanprogress.org/issues/2011/06/low_tax.html

    Rising Medicare spending doesn’t go to seniors. It goes to pay for health care that seniors need, meaning it goes towards insurers and hospitals. Social Security can be considered income, but that’s beside the point: the fact remains that by the figures above, incomes have barely grown relative to what they did 50-60 years ago. Social Security and welfare benefits aren’t taken into account with regards to any figures on median wages and median incomes.

    2) Median incomes have barely risen with productivity for over 30 years:
    http://stateofworkingamerica.org/charts/productivity-and-real-median-family-income-growth-1947-2009/

    So in reality, the President here has gotten it right: we need to get wages growing at the rate that they used to for over 20 years after the Second World War.

  19. All of the statistical analysis misses important points of economic reality, i.e. pure human action. It is the essence of human society that some (very few) are rich, some (very few) are poor. This fact cannot be avoided, masked or erased. That is because human society has evolved with singular task in mind: put limited resources available for production (limited not in a sense of absolute availability, but in a sense of being ready for immediate use) in the hands of the most competent so that they may serve the most pressing needs of the consumers in optimal way. If human society aims at using people’s skills in a best way to serve immediate needs of other people, this is the only way and it produces the outcome lamented by Piketty and Saez. Society awards those who use limited resources in the optimal way with profits and riches. It punishes others that squander those resources. Other way is inconceivable since it would preclude any rational action. Believe me, you would walk hungry every day if your baker used any other criteria for selling you bread besides your money. If he/she sold based on ideology, religion, sex, stature, race, education, affiliation with political, social or sport organization or any other arbitrary criteria, society as a whole could not exist. USSR is perfect example of such destructionist failure.
    I have never seen any statistical study pay any attention to the most important aspect of wealth gap, and that is the structure of wealth. It is relatively easy to research. Just take Forbes data about fabled one-percenters and see how it changes. True mark of real capitalist (market) society is not wealth of top 5%, it is the structure of top 5% and how it changes in time. Where top 5% are the same people for hundreds of years we can certainly say there is no capitalism. That is despotism and aristocratic society. Where top 5% changes constantly we see capitalism at work with its main mechanism – realocation of capital. Society at large takes limited production resources from less able hands and gives it to more able hands. In articles mentioned above statisticians (they are not economists, for they do not pay attention to human action) measure income between eighties and 2k-teens. But they fail to note the structure of wealth. Was Steve Jobs a billioner in 1980? Was Jack Welch? Was Bill Gates? We don’t even remember the names of “robber barons” from Forbes list in 1980. Those names have faded into obscurity. As long as there is a constant change in the structure of wealth at the top 5% and in all other arbitrarily chosen brackets, as long as new people are placed on top and the old ones fade to obscurity, we are observing the marvel of capitalism perform its magic – creating wealth by serving the needs of the most possible number of people in the most optimal way.
    Talking to people around me I have never encountered a single one that would say that their life in 1980s was better than now. Remember 80s? No computers, no mobiles, no GPS, no MRI, no Playstation. People thought that copy machine and telefax were God’s gift to humanity :-). Comparing 2012 to 1980 is ludicrous. It’s like comparing 1950 to 1850. This kind of perversion can only spring from the mind of statistician eager to compare the incomparable. They would gladly compare life with horse buggies and cars, for they are all “modes of transportation”.
    What would society want to achieve by restricting wealth creation? Who can say when did Steve Jobs create enough iPads, iPhones? When did GE create enough MRIs? When did Glaxo create enough vaccines? When did Intel create enough processors? For if we want to define “enough” wealth, we would have to stop those wealth creators from further work. We would have to order Apple to stop producing iPads since we will not tolerate profit from additional units. Would this restriction on production make people as a whole richer or poorer?

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