More on Inequality: What Does the Data Mean?

In yesterday’s Wall Street Journal, the economist Robert Grady addresses “Obama’s Misguided Obsession With Inequality”.  The basic problem is that an important Congressional Budget Office report in 2011, “ Trends in the Distribution of Household Income Between 1979 and 2007”, is easy to misrepresent and misinterpret.  Here are three basic pieces of data from the CBO report:
Capture3CaptureCapture1The first chart shows that yes, between 1979 and 2007 the rich did indeed get richer relative to the rest of the population.  The second chart shows, however, that median household income increased by 62% during this same time period.  And the third chart shows that all five income groups made substantial gains at the same time.
As Mr. Grady says, “Here is the bottom line.  In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain and have the opportunity to gain.  In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed. … The point is this: If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth – not income inequality or the redistribution of wealth – is the defining challenge of our time.”
So then, what is the best way to address income inequality?  Should we concentrate on raising taxes on the rich and increasing spending on social programs like we have done in the last five years?  Or should we rather concentrate on speeding up economic growth, as Mr. Grady says, in order to create more jobs and more opportunities for advancement?
Compare the enormous growth in the period from 1979 to 2007 with the stagnation of the past five years.  Isn’t it obvious which is the better way to proceed?

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