Economics, Free Enterprise, Pethokoukis, U.S. Economy

Has there been an explosion in U.S. inequality? No

062512inequality

Americans should be alarmed by a rocketing rise in inequality.

At least that’s the constant message of the Obama White House and much of the media. In a recent speech in Cleveland, for instance, President Barack Obama again spoke about how the incomes of the wealthiest Americans have soared over the past few decades, “but prosperity never trickled down to the middle class.”

And in a recent New York Times article, economist Thomas Piketty stated that the “United States is becoming like Old Europe” with extreme levels of income inequality. Coauthor Emmanuel Saez added that “absent drastic policy changes,” inequality will continue to grow. The Piketty-Saez solution is to raise tax rates on the rich to 70-90%. Obama, too, wants higher taxes on wealthier Americans.

But is America growing dangerously more unequal, so much so that “drastic” measures must be taken? New research from economists Kevin Hassett and Aparna Mathur of the American Enterprise Institute suggests otherwise. They find that inequality “has remained fairly steady over the past thirty years.”

Hassett and Mathur’s findings add to a growing body of research showing claims of income stagnation and a dramatic increase in U.S. inequality to be wildly overblown. The rich didn’t steal all the money. The U.S. standard of living isn’t stuck where it was 30 and 40 years ago.

Claims to the contrary are starting to sound like excuses just to raise taxes, enlarge government, and proclaim the superiority of state capitalism over market capitalism.

Hassett and Mathur arrive at their results by using two different approaches.

First, instead of looking at income inequality, Hassett and Mathur look at consumption inequality, which represents a broader look at the economic resources a person can summon. Looking just at income ignores how individuals are generally able to smooth consumption by borrowing in the low-income years — such as during retirement or when they are just entering the workforce — and saving in the high-income years. Studies of income alone often exclude things like Social Security, Medicare, and food stamps.

Additionally, tax return data of the sort Piketty and Saez discuss can be influenced by changes in tax rates, giving a highly distorted picture of income inequality. For example, the personal tax rate reductions of the 1980s and the early 2000s caused businesses to shift income out of the corporate form and into the personal tax, thus raising reported incomes at the top.

So what does the consumption data tell us?

In 1984, households in the top income quintile, or top 20%, accounted for 37% of total consumption spending. Households in the bottom quintile accounted for only 10 percent of total spending. So the ratio of top-to-bottom consumption was approximately 3.8.

By 2010, that ratio had increased to just 4.4. This hardly represents an explosion in inequality. As measured by this ratio, consumption inequality has increased marginally over time, averaging 4.21 between 1984 and 1990, 4.29 between 1991 and 2000, and 4.46 between 2000 and 2010.

Also note that a common measure of inequality, the Gini index, shows little change during recent decades:

The other way Hassett and Mathur look at inequality is by the sorts of goods Americans own and how that has changed over time. Using information from the U.S. Energy Information Administration’s Residential Energy Consumption Survey, the economists conclude that low-income households “have improved their standard of living as measured by their possession of material objects.”

For example, the percentage of low-income households without a color television has decreased from 17.7% in 1987 to 2.1% in 2009. And in 1993, the first year that a question on printer usage was included in the RECS survey, 98.3% of low-income households did not have a printer. By 2009, only 17.7% of low-income households did not own a printer.

Hassett and Mathur are hardly alone in their views.

According to a recent study in the National Tax Journal from researchers at Cornell University, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue.

Research from the 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.”

Minneapolis Fed researchers calculate that since the 1970s, median income per person “rose by 50 percent. … The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich. The findings reported here … refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades.

Should the U.S. economy be growing faster? Yes. But that won’t happen if we raise taxes, increase regulation, and expand government as a way of dealing with an economic myth.

14 thoughts on “Has there been an explosion in U.S. inequality? No

  1. What a load of loaded horse-hockey.

    The SPENDING patterns? Nice strawman.

    The issue at hand is INCOME INEQUALITY.

    NO ONE on the left is boo-hooing over spending/consumption inequality.

    Y’all can do better and you owe it to your country to do so.

    • Level of income is a choice. Education is free and available. There are many opportunities to obtain the skills necessary to earn higher pay. Income inequality is itself a strawman because society naturally pays more for the services that it needs and/or wants while it does not pay for the services it does not need or want. How then, does it make sense to force society to pay for goods or services that it does not value? How does it make sense to force society to pay for individuals that produce no goods or services at all? Gainful employment can be had. If it cannot be had, it can be made. It’s about the willingness to TRY because while it does take effort, it pays off for anyone willing to work for it. (I know, I do it myself every day.) We qualify for government assistance and choose not to take it because it’s wrong. We are able bodied and we can and will do it on our own. Sometimes we have to make choices. Sometimes we have to go without getting our breaks replaced on the car or replacing our tires when we really ought too, or buying ourselves shoes so we can get some for our kids, but what we have is ours and we work hard for it. We don’t cry about income inequality and expect the government to take from others so we can have luxuries. We earn it and one day our work will pay off. If it does not, we will make adjustments so that it will. A household that has all the things listed above has all their needs met and more. They have no right to the income of others and if their material desires are still not satisfied then it is incombant upon them to find a way to honestly earn the income necessary to satisfy them.

      • Trish – The point is that there is no point to this article. It purports to address an issue that is not an issue. Show me anywhere that the Democratic Party or any of its affiliates are decrying consumption inequality and I’ll rescind my intial comment.

        You will not and can not because THIS IS NOT AN ISSUE.

      • So, would you say that if everyone, 100% of the population, received doctoral degrees, they would all be gainfully employed and enjoying the same luxuries as the current most educated? Not true, while ANYONE can be successful in the US, EVERYONE can not. That is to say, the argument is moot.

  2. Microwaves and printers are dirt cheap now. In 3 minutes I found a $34.00 color printer and a $49.00 700w microwave. They aren’t “luxuries”, they are common household items.

    • Just because something is cheap doesn’t mean it isn’t a luxury. We are so pampered as a society that we don’t even value the vast conveniences and enormously high standards of living that our freedom has afforded us. It’s a little disgusting, really, that we can’t even appreciate it.

      • When looking at a similar study released last year stating the poor are not poor enough, I did some research. In order for housing to qualify for government assistance, an oven or microwave was required. These people are poor and require help paying thier rent, the government requires a minimum standard of living be provided by the slum lords to get thier checks. The fact that poor households have a microwave, is not a point to them enjoying luxuries.

        Also, when using a consumption comparison by itself, you leave out key facts. The top quintile earners make up over 50% of all income. While those in the bottom quintile make up less than 4% of all income. When looking at these facts plus your consumption numbers, you will see, the poor, are being required to support more of the economy than they likely should.

  3. First, Ira’s comment shows how a liberal reads things and doesn’t understand them. What don’t you get about the idea that Barack Obama gives you a cell phone now if you are poor; even though the cell phone isn’t ‘income’, you consume it as if it were.

    Secondly, data about Color TV and Computers doesn’t seem very relevant to QofL since you can’t really buy a not color TV these days, and in the early 90′s personal computers were in their infancy.

    Ira, “Income” is an economic term which excludes Government Transfer Payments. As the US becomes more socialist, why would anyone expect income growth anywhere except in the upper class?

    Since even the middle class now receives Government Transfer Payments, the expected income growth of the middle class is instead converted to non-income Government Subsidy. Only the wealthy, who don’t receive Govt. Payments would expect to see income growth.

    This is one of the key lies of the modern liberal.

    • First off, the cell phone giveaway is a GOP plan and since you can’t be bothered to do any research on your own here’s a link: http://www.factcheck.org/2009/10/the-obama-phone/

      The rest of your BS sounds smart but it’s not.

      I know this because your intial point is SO ignorant you are obviously spewing some nonsense you stole from some random hate filled website. Probably the Blaze or one of that drunk’s trashy sites.

  4. “consumption inequality, which represents a broader look at the economic resources a person can summon.”

    Er… it’s a *narrower* look at the resources, as this measure throws out people’s differing ability to save and invest.

    • “98.3% of low-income households did not have a printer. By 2009, only 17.7% of low-income households did not own a printer”

      amazing quote from the article — this is clearly a typo in the data since half of low income households do not have a computer per the same chart.

      GoodInk is right — this doesnt address earnings or savings potentials, which means the entire thing is off point.

      There is just so much wrong with the logic here — please continue picking it apart, I don’t want to hog all the fun.

  5. This study/article becomes completely self-serving as it has selected to not look at data from the post-war to present period.

    Besides, without matching data in the graph about household debt we really don’t know how that consumption in the bottom quintile was achieved.

  6. Trish–education after 12th grade–meaning any sort of education that helps people find a better job–is not free. Even government subsidized education involves payment of tuition and/or accumulation of student debt, and the more valuable the education for future employment, the greater the cost.

    And if society paid for work according to what it wants and needs, then why do stockbrokers make more than garbage collectors? There’s obviously more involved than your simple reductionist scheme, and unfortunately often it’s a case of “those that have are those that get, and those that don’t, are those that don’t get”.

  7. This pathetic article discounts the level of income growth over the past 30 years COMPARED to the post war era. The studies from Chicago and the Minnesota Fed take these figures in a vacuum, and directly conflict with CBO and Census Bureau data.

    As for consumption inequality, one has to focus on more concentrated levels of income vis-a-vis the entire range to get a fair picture, most of the inequality has to do with the top 10% and above.

    Even if we were to take these dubious numbers from that Fed report and UC/Notre Dame, real median incomes still have only grown at half the rate as it has from 1947-1975, between 1979 and 2007 for instance.

    More reliable numbers on median incomes actually show growth of only 20-35 percent from the late 70s till 2007. By comparison, incomes grew over 100% in the 25-30 years after WWII.

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