U.S. Income Inequality Is Not Increasing

Published June 1, 2007

Income and Wealth
By Alan Reynolds
Westport, CT: Greenwood Press, 2006
231 pages, $55.00, ISBN 0-313-33688-1

The past decade has brought a tsunami of complaints about increasing economic inequality in the United States, a “vanishing middle class,” and a huge and increasing concentration of wealth among the top 1 percent of wage earners.

As Alan Reynolds points out in his superb new book Income and Wealth, those claims are false. Every one of them.

Reynolds, a senior fellow at the Cato Institute, has written for all the major newspapers and is a syndicated columnist. He observes that the amount of inequality one sees in the United States depends on how you define terms such as “average,” “working,” “family,” and “real,” and on what dates are used.

The definitions used by activists for bigger government grossly overstate the income of those at the top of the scale and similarly understate figures for those at the bottom.

Manipulating Income Figures

New York Times columnist Paul Krugman, for example, continuously declares real incomes in the United States have stagnated since 1973 for all but the top 10 percent.

But as Reynolds notes, “studies that use income tax data to estimate income distribution usually exclude transfer payments,” which have risen substantially since 1973. The data also exclude employee benefits, which skyrocketed during that period, and include a huge amount of income “that used to be reported under the corporation income tax” and that happens to have been rising in recent years.

By artificially deflating incomes in the lower brackets and inflating those in the upper brackets, Krugman and his cronies make income inequality appear much larger than it really is.

Middle-Income Families Doing Fine

Reynolds also takes on the numerous reports about a “vanishing middle class,” which suggest once-prosperous individuals are plummeting into the lower income brackets.

As Reynolds points out, these reports use a fixed definition of middle income, which “ensures that the proportion of households in that middle group must decline with a rise in general prosperity, because prosperity causes a rising percentage of families to earn more than $50,000.”

And general prosperity has indeed risen. Reynolds notes, “In constant 2000 dollars, U.S. consumers spent $25,816 per person in 2004–nearly double the $13,371 figure for real per capita consumption in 1973.” Similarly, “median household net worth (assets minus debts) has increased steadily and substantially.”

More than 75 percent of poor households had air conditioning in 2001, whereas in 1971 less than 32 percent of all U.S. households did.

The same is true of other items such as microwave ovens and color TVs. Whereas nobody had a home VCR or DVD player in 1971, 98 percent of poor households did in 2001, and around a quarter had personal computers and cell phones.

Middle-income households have enjoyed similar improvements in living standards. For example, the average size of new homes rose from 1,500 square feet in 1970 to 2,349 square feet in 2004, while the home ownership rate rose by several percentage points. Obviously, incomes for lower and middle-income households have risen nicely in recent decades.

‘Work Matters’

The most important factor in household income is simply the number of workers in the home, Reynolds notes: “There are nearly six times as many full-time year-round workers in the top quintile as there are in the bottom quintile, according to the Census Bureau.”

Contrary to the activists’ fevered assertions of a continuously rising number of “working poor,” Reynolds writes, “The poverty rate among full-time workers is negligible.” Reynolds aptly summarizes the situation as follows: “Work matters.”

And, Reynolds notes, if we ignore transfer payments we get a distorted picture of conditions in the lower income quintiles. Reynolds suggests individual and household spending and wealth are better indicators than income figures, which have been so skillfully manipulated.

Policy Follows Falsehoods

The activists’ trick of turning good news into bad would not matter much if these debates were purely for intellectual sport, but they are in fact the driver for much of our public spending at all levels of government.

Huge increases in government spending on Medicaid and Medicare, other health insurance, and other transfer programs intended to alleviate economic inequality are destroying state budgets. And the federal budget groans under the weight of transfer programs and other entitlements.

Certainly all of these mistakes could be honest ones, but they’re falsehoods nonetheless, and an objective reader of Income and Wealth must conclude many journalists and activists are knowingly manipulating statistics to further an agenda for more government control over the economy and to undermine support for free markets.

S.T. Karnick ([email protected]) is director of research for The Heartland Institute.