Why Income Inequality Is A Myth — And Occupy Wall Street Is Wrong

occupy wall street

Photo: Andrew Burrows

Sorry, the story just doesn’t hold together.According to left-wing think tanks, columnist and bloggers – and, of course, the Occupy Wall Street radicals – the top 1 per cent have been exploiting the 99 per cent for decades.

The rich have been getting richer at the expense of the middle class and poor.

Really? Just think for a second: if inequality had really exploded during the past 30 to 40 years, why did American politics simultaneously move rightward toward a greater embrace of free-market capitalism?

Shouldn’t just the opposite have happened as beleaguered workers united and demanded a vastly expanded social safety net and sharply higher taxes on the rich? What happened to presidents Mondale, Dukakis, Gore and Kerry? Even Barack Obama ran for president as a market friendly, third-way technocrat.

Nope, the story doesn’t hold together because the financial facts don’t support it. And here’s why:

1. In a 2009 paper, Northwestern University economist Robert Gordon found the supposed sharp rise in American inequality to be “exaggerated both in magnitude and timing.” Here is the conundrum: family income is supposed to rise right along with productivity.

But median real household income — as reported by the Census Bureau — grew just 0.49 per cent per year between 1979 and 2007 even as worker productivity grew four times faster at 1.95 per cent per year. The wide gap between the two measures, if accurate, would suggest wealthy households rather than middle-class families grabbed most of the income gains from faster productivity.

But Gordon explained that this “compares apples with oranges, and then oranges with bananas.” When various statistical quirks are harmonized between the two economic measures, Gordon found middle-class income growth to be much faster and the “conceptually consistent gap between income and productivity growth is only 0.16 per cent per year.” That’s barely one‐tenth of the original gap of 1.46 per cent. In other words, income gains were shared fairly equally.

2. A pair of studies from 2007 and 2008 conducted by the Federal Reserve Bank of Minneapolis supports Gordon. Researchers examined why the Census Bureau reported median household income stagnated from 1976 to 2006, growing by only 18 per cent. In contrast, data from the Bureau of Economic Analysis showed income per person was up 80 per cent.

Like Gordon, they found apples-to-oranges issues such as different ways of measuring prices and household size. But in the end, they concluded that “after adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 per cent to 62 per cent from 1976 to 2006.” In addition, research shows that median hourly wages (including fringe benefits) rose by 28 per cent from 1975-2005.

3. A 2008 paper by Christian Broda and John Romalis from the University of Chicago documents how traditional measures of inequality ignore how inflation affects the rich and poor differently: “Inflation of the richest 10 per cent of American households has been 6 percentage points higher than that of the poorest 10 per cent over the period 1994 – 2005. 

This means that real inequality in America, if you measure it correctly, has been roughly unchanged.” And why is that? China and Wal-Mart. Lower-income families spend a larger share of income than wealthier families on goods whose prices are more directly affected by trade. Higher income folks, by contrast, spend more on services which are less subject to foreign competition.

4. A 2010 study by the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan notes that official income inequality statistics indicate a sharp rise in inequality over the past four decades: “The ratio of the 90th to the 10th percentile of income, for example, grew by 23 per cent between 1970 and 2008.”

But Meyer and Sullivan point out that income statistics miss a lot, such as the value of government programs and the impact of taxes. The latter, especially, is a biggie. The researchers find that “accounting for taxes considerably reduces the rise in income inequality” over the past 45 years. In addition, “consumption inequality is less pronounced than income inequality.”

5. Set all the numbers aside for a moment. If you’ve lived through the past four decades, does it really seem like America is no better off today. It doesn’t to Jason Furman, the deputy director of Obama’s National Economic Council. Here is Furman back in 2006: “Remember when even upper-middle class families worried about staying on a long distance call for too long? When flying was an expensive luxury? When only a minority of the population had central air conditioning, dishwashers, and colour televisions? When no one had DVD players, iPods, or digital cameras? And when most Americans owned a car that broke down frequently, guzzled fuel, spewed foul smelling pollution, and didn’t have any of the now virtually standard items like air conditioning or tape/CD players.”

No doubt the past few years have been terrible. But the past few decades have been pretty good — for everybody.

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