Income inequality is a hot political issue today and I have frequently discussed it on this blog. In particular, the chart just below shows that income inequality is only slightly worse since 1979, after government transfers and federal taxes are taken into account.
The AEI scholar, Mark Perry, has analyzed the 2016 annual report from the Census Bureau on “Income and Poverty in the United States” and points out the very strong correlation between income inequality and household demographics.
The mean number of earners per household increases steadily from a low of .43 in the lowest income households to 2.04 in the top income households.
The marital status of householders. The share of married-couple households is only 17.3% in the bottom income quintile and then increases steadily to 76.5% for the top income quintile.
The age of householders. In the lowest income quintile only 42.4% of households included individuals in the prime earning years of ages 35-64, while 69.9% of households in the top quintile include individuals in this group.
The work status of householders. Only 18% of the lowest earning quintile households included an adult who was working full time, as compared to 77.7% of top earning households.
The education of householders. Only 14.6% of lowest earning households had a family member with a college degree and this percentage rose steadily to 64% for top earning households.
Conclusion. Household demographics are very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in the lower-income quintiles. Individuals in high-income quintiles are far more likely to be well-educated, married, working full-time and in their prime working years. It is also true that individuals and households can and do move up and down the income quintiles as these key demographic variables change.
For several years now Americans have been having a lively debate about income inequality and the supposedly shrinking middle class. The American Enterprise Institute scholar, Mark Perry, has an enlightening new post on this topic. The AEI has produced a vivid graphic showing that the American Middle Class (defined as the middle 50% of Americans by household income) has dramatically increased in income from 1971 through 2001 but has been stagnant since the Great Recession in 2008-2009. He has other charts showing that both the Low-Income group and the Middle-Income group have been shrinking since 1971 precisely because the High-Income group (defined to be households with $100,000 or more in income in constant 2014 dollars) has been growing so rapidly. Isn’t it obvious what we need to do to restore confidence to the Middle Class? Clearly we need to speed up economic growth. For example we could:
Implement broad-based tax reform. Lower the rates for both individual and corporate taxes, paid for by closing loopholes and limiting deductions. Better yet, shift from taxing income to taxing consumption.
Remove roadblocks to innovation by making it easier to start new businesses.
Improve K-12 education, especially for low-income kids who need extra help. Enhanced early childhood education, more emphasis on career (vocational) education, and charter schools in big cities are the way to get this done.
Make attending college more affordable. There are many good schools around the country which are not expensive to attend (the University of Nebraska at Omaha where I teach is one of them). College students and their families should make it a top priority to avoid huge debt. Attending a prestigious (and expensive) institution is simply not necessary to get a good education.
There are other more controversial ways to speed up economic growth such as increasing international trade and reforming our broken immigration system. But just the measures above will go a long way and shouldn’t be that difficult to implement.
My last post, “The Moral Case for Free Enterprise,” was motivated in part by a recent speech of Pope Francis comparing the excesses of global capitalism to the “dung of the devil.” The scholar Mark Perry of the American Enterprise Institute has just published an interesting chart (just below) demonstrating an 80% reduction in world poverty in the 36 year period from 1970 to 2006. He quotes AEI President Arthur Brooks that “if you love the poor, if you are a good Samaritan, you must stand for the free enterprise system, and you must defend it, not just for ourselves but for people around the world. It is the best anti-poverty measure ever invented.” In a previous post, a year and a half ago, “A Global Perspective on Income Inequality,” I referred to another chart (just below) to demonstrate the massive growth of income in the developing world. To a large extent this is the result of economic globalization shifting low-skill employment from the developed world to the developing world where the cost of labor is less expensive. As Arthur Brooks says, “It was globalization, free trade, the boom in international entrepreneurship. In short, it was the free enterprise system, American style, which is our gift to the world.” So, yes, the world as a whole is now much better off but American workers have paid a price for the global shift in low-skill work. The answer is not to impede globalization but rather to:
Speed up the growth of our own economy in order to raise wages and provide more jobs for the unemployed and underemployed.
Improve K-12 educational effectiveness and expand career educational opportunities to better prepare present and future workers for the many new high-skill jobs being created all the time.
The world is changing rapidly but there are effective ways for the U.S. to adapt if only we have the good sense to move forward!
Many political commentators have been complaining recently about the financial difficulties of the American middle class. For example, a recent report from Bill Moyers and Company, “By the Numbers: The Incredibly Shrinking American Middle Class”, has a chart showing that the median middle class salary, adjusted for inflation, is now no better than it was in 1989 and not much higher than in 1979: But there is another point of view, very well described by the two economists, Donald Boudreaux and Mark Perry, in the Wall Street Journal just about a year ago, “The Myth of a Stagnant Middle Class”. They make several pertinent points:
The Consumer Price Index overestimates inflation by underestimating the value of improvements in product quality and variety.
Wage figures ignore the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits. Health benefits, pensions, paid leave, etc. now amount to almost 31% of total compensation according to the Bureau of Labor Statistics.
The average hourly wage has been held down by the great increase of women and immigrants into the workforce over the past three decades. Because the economy was (before the Great Recession) so strong, it created millions of jobs for the influx of often lesser skilled workers into the workforce.
Messrs. Boudreaux and Perry point out several other improvements in the quality of life which Americans enjoy:
Life expectancy has increased to 79 years for an American born today, five years longer than in 1980. And the gap in life expectancy between whites and blacks has narrowed.
Spending by households on the basics of food, housing, utilities, etc. has shrunk from 53% of income in 1950, to 44% in 1970 to 32% today.
Although income inequality is rising when measured in dollars, it is falling when measured in terms of our ability to consume. For another example, air travel is now as common as was bus travel in an earlier era. And another: the latest electronic products are available to even middle class teenagers.
Conclusion: We should stop complaining about inequality and thank our lucky stars for the free enterprise system which has been so successful in improving our quality of life.