Income distribution in the United States

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For many years now we have been hearing that the rich are getting richer and the poor are getting poorer here in the United States. It is our bad capitalistic system! It favors the rich at the expense of the poor! We need to correct this problem. We need to take from the rich and redistribute to the poor. We need a socialist, Marxist type system! Listen to what Thomas Sowell has to say about this.

The following is from Thomas Sowell. Intellectuals and Society. pp.41 - 50

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Most intellectuals outside the field of economics show remarkably little interest in learning even the basic fundamentals of economics. Yet they do not hesitate to make sweeping pronouncements about the economy in general, business in particular, and the many issues revolving around what is called “income distribution.” Famed novelist John Steinbeck, for example, commented on the many American fortunes which have been donated to philanthropic causes by saying:

One has only to remember some of the wolfish financiers who spent two thirds of their lives clawing a fortune out of the guts of society and the latter third pushing it back.

Despite the verbal virtuosity involved in creating a vivid vision of profits as having been clawed out of the guts of society, neither Steinbeck nor most other intellectuals have bothered to demonstrate how society has been made poorer by the activities of Carnegie, Ford, or Rockefeller, for example — all three of whom (and many others) made fortunes by reducing the prices of their products below the prices of competing products. Lower prices made these products affordable to more people, simultaneously increasing those people’s standard of living and creating fortunes for sellers who greatly expanded the numbers of their customers. In short, this was a process in which wealth was created, not a process by which some could get rich only by making others poorer.

Nevertheless, negative images of market processes have been evoked with such phrases as “robber barons” and “economic royalists” — without answering such obvious questions as “Just who did the robber barons rob when they lowered their prices?” or “How is earning money, often starting from modest circumstances (or even poverty-stricken circumstances in the case of J.C. Penney and F.W. Woolworth) the same as simply inheriting wealth and power like royalty? The issue here is not the adequacy of intellectuals’ answers to such questions because, in most cases, such questions are not even asked, much less answered. The vision, in effect, serves as a substitute for both facts and questions.

This is not to suggest that nobody in business ever did anything wrong. Saints have been no more common in corporate suites than in government offices or on ivy-covered campuses.

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Income distribution

Perhaps the biggest economic issue, or one addressed most often, is that of what is called “income distribution,” though the phrase itself is misleading, and the conclusions about income reached by most of the intelligentsia are still more misleading.

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Given the vast amounts of statistical data on income available from the Census Bureau, the Internal Revenue Service and innumerable research institutes and projects, one might imagine that the bare facts about variations in income would be fairly well known by informed people, even though they might have differing opinions as to the desirability of those particular variations. In reality, however, the most fundamental facts are in dispute, and variations in what are claimed to be facts seem to be at least as great as variations in incomes. Both the magnitude of income variations and the trends in these variations over time are seen in radically different terms by those with different visions as regards the current reality, even aside from what different people may regard as desirable in the future.

Perhaps the most fertile source of misunderstandings about incomes has been the widespread practice of confusing statistical categories with flesh-and-blood human beings. Many statements have been made in the media and in academia, claiming that the rich are gaining not only higher incomes but a growing share of all incomes, widening the income gap between people at the top and those at the bottom. Almost invariably these statements are based on confusing what has been happening over time in statistical categories with what has been happening over time with actual flesh-and-blood people.

A New York Times editorial, for example, declared that “the gap between rich and poor has widened in America”. Similar conclusions appeared in a 2007 Newsweek article which referred to this era as “a time when the gap is growing between the rich and the poor — and the superrich and the merely rich,” a theme common in such other well-known media outlets as the Washington Post and innumerable television programs. “The rich have seen far greater income gains than have the poor,” according to Washington Post columnist Eugene Robinson. A writer in the Los Angeles Times likewise declared, “the gap between rich and poor is growing.” E.J. Dionne of the Washington Post described “the wealthy” as “people who have made almost all the income gains in recent years” and added that they are “undertaxed”.

Similar statements have been made by academics. According to Professor Peter Corning of Stanford University, in his book The Fair Society, “the income gap between the richest and the poorest members of our society has been growing rapidly.” Professor Andrew Hacker of Queens College likewise declared in his book Money. “While all segments of the population enjoyed an increase in income, the top fifth did twenty-four times better than the bottom fifth. And measured by their shares of the aggregate, not just the bottom fifth but the three above it all ended up losing ground.”

Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories — and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one category to another over time.

In terms of statistical categories, it is indeed true that both the amount of income and the proportion of all income received by those in the top 20 percent bracket have risen over the years, widening the gap between the top and bottom quintiles. But U.S. Treasury Department data, following specific individuals over time from their tax returns to the Internal Revenue Service show that in terms of people the incomes of those particular taxpayers who were in the bottom 20 percent in income in 1996 rose 91 percent by 2005, while the incomes of those particular taxpayers who were in the top 20 percent in 1996 rose by only 10 percent by 2005 — and the incomes of those in the top 5 percent and top one percent declined.

While it might seem as if both of these radically different sets of statistics cannot be true at the same time, what makes them mutually compatible is that flesh-and-blood human beings move from one statistical category to another over time. When those taxpayers who were initially in the lowest income bracket had their incomes nearly double in a decade, that moved many of them up and out of the bottom quintile — and when those in the top one percent had their incomes cut by about one-fourth, that may well have dropped many, if not most, of them out of the top one percent. Internal Revenue Service data can follow particular individuals over time from their tax returns, which have individual Social Security numbers as identification, while data from the Census Bureau and most other sources follow what happens to statistical categories over time, even though it is not the same individuals in the same categories over the years.

Many of the same kinds of data used to claim a widening income gap between “the rich” and “the poor” — names usually given to people with different incomes, rather than different amounts of wealth, as the terms rich and poor might seem to imply — have led many in the media to likewise claim a growing income gap between the “super-rich” and the “merely rich.” Under the headline “Richest Are Leaving Even the Rich Far Behind,” a front-page New York Times article dubbed the “top 0.1 percent of income earners — the top one-thousandth” as the “hyper-rich” and declared that they “have even left behind people making hundreds of thousands of dollars a year.” Once again, the confusion is between what is happening to statistical categories over time and what is happening to flesh-and-blood individuals over time, as they move from one statistical category to another.

Despite the rise in the income of the top 0.1 percent of taxpayers as a statistical category, both absolutely and relative to the incomes in other categories, as flesh-and-blood human beings those individuals who were in that category initially had their incomes actually fall by a whopping 50 percent between 1996 and 2005. It is hardly surprising when people whose incomes are cut in half drop out of the top 0.1 percent. What happens to the income of the category over time is not the same as what happens to the people who were in that category at any given point in time. But many among the intelligentsia are ready to seize upon any numbers that seem to fit their vision.

It is much the same story with data on the top four hundred income earners in the country. As with other data, data on those who were among the top 400 income earners from 1992 to 2000 were not data on the same 400 people throughout that span of time. During that span, there were thousands of people in the top 400 — which is to say, turnover was high. Fewer than one-quarter of all the people in that category during that span of years were in that category more than one year, and fewer than 13 percent were in the same category more than two years.

Behind many of those numbers and the accompanying alarmist rhetoric is a very mundane fact: Most people begin their working careers at the bottom, earning entry level salaries. Over time, as they acquire more skills and experience, their rising productivity leads to rising pay, putting them in successively higher income brackets. These are not rare, Horatio Alger stories. These are common patterns among millions of people in the United States and in some other countries. A University of Michigan study which followed the same working individuals over time found a pattern very similar to that in the Internal Revenue Service data. More than three-quarters of those working Americans whose incomes were in the bottom 20 percent in 1975 were also in the top 40 percent of income earners by 1991. Only 5 percent of those who were initially in the bottom quintile were still there in 1991, while 29 percent of those who were initially at the bottom quintile had risen to the top quintile.

Yet verbal virtuosity has transformed a transient cohort in a given statistical category into an enduring class called “the poor.” Just as most Americans in statistical categories identified as “the poor” are not in an enduring class there, studies in Britain, Canada, New Zealand and Greece show similar patterns of transience among those in low-income brackets at a given time. Just over half of all Americans earning at or near the minimum wage are from 16 to 24 years of age — and of course these individuals cannot remain from 16 to 24 years of age indefinitely, though that age category can of course continue indefinitely, providing many intellectuals with data to fit their preconceptions.

Only by focusing on the income brackets, instead of the actual people moving through those brackets, have the intelligentsia been able to verbally create a “problem” for which a “solution” is necessary. They have created a powerful vision of “classes” with “disparities” and “inequities” in income caused by “barriers” created by “society.” But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the “barriers” assumed by many, if not most, of the intelligentsia.

Far from using their intellectual skills to clarify the distinction between statistical categories and flesh-and-blood human beings, the intelligentsia have instead used their verbal virtuosity to equate the changing numerical relationship between statistical categories over time with a changing numerical relationship between flesh-and-blood human beings (“the rich” and “the poor”) over time, even though data that follow individual income-earners over time tell a diametrically opposite story from that of data which follow the statistical categories which people are moving into and out of over time.

The confusion between statistical categories and flesh-and-blood people is compounded when there is confusion between income and wealth. People called “rich” or “super-rich” have been given these titles by the media on the basis of income, not wealth, even though being rich means having more wealth. According to the Treasury Department: “Among those with the very highest incomes in 1996 — the top 1/100 of 1 percent — only 25 percent remained in this group in 2005. If these were genuinely super-rich people, it is hard to explain why three-quarters of them are no longer in that category a decade later.

A related, but somewhat different, confusion between statistical categories and human beings has led to many claims in the media and in academia that Americans’ incomes have stagnated or grown slowly over the years. For example, over the entire period from 1967 to 2005, median real household income — that is, money income adjusted for inflation — rose by 31 percent. For selected periods within that long span, real household incomes rose even less, and those selected periods have often been cited by the intelligentsia to claim that income and living standards have “stagnated.” Meanwhile real per capita income rose by 122 percent over that same span, from 1967 to 2005. When a more than doubling of real income per person is called “stagnation,” that is one of many feats of verbal virtuosity.

The reason for the large discrepancy between growth rate trends in household income and growth trends in individual income is very straightforward: The number of persons per household has been declining over the years. As early as 1966, the U.S. Bureau of the Census reported that the number of households was increasing faster than the number of people, and concluded: “The main reason for the more rapid rate of household formation is the increased tendency, particularly among unrelated individuals, to maintain their own homes or apartments rather than live with relatives or move into existing households as roomers, lodgers, and so forth.” Increasing individual incomes made this possible. As late as 1970, 21 percent of American households contained 5 or more people. But by 2007, only 10 percent did.

Despite such obvious and mundane facts, household or family income statistics continue to be widely cited in the media and in academia — and per capita income statistics continue to be widely ignored, despite the fact that households are variable in size, while per capita income always refers to the income of one person. However, the statistics that the intelligentsia keep citing are much more consistent with their vision of America than the statistics they keep ignoring.

Just as household statistics understate the rise in the American standard of living over time, they overstate the degree of income inequality, since lower income households tend to have fewer people than upper income households. While there are 39 million people in households whose incomes are in the bottom 20 percent, there are 64 million people in households whose incomes are in the top 20 percent. There is nothing mysterious about this either, given the number of low-income mothers living with fatherless children, and low-income lodgers in single room occupancy hotels or rooming houses, for example.

Even if every person in the entire country received exactly the same income, there would still be a significant “disparity” between the average incomes received by households containing 64 million people compared to the average income received by households containing 39 million people. That disparity would be even greater if only the incomes of working adults were counted, even if those working adults all had identical incomes. There are more adult heads of households working full-time and year-around in even the top five percent of households than in the bottom twenty percent of households.

Many income statistics are misleading in another sense, when they leave out the income received in kind — such as food stamps and subsidized housing — which often exceeds the value of the cash income received by people in the lower-income brackets. In 2001, for example, transfers in cash or in kind accounted for more than three-quarters of the total economic resources at the disposal of people in the bottom 20 percent. In other words, the standard of living of people in the bottom quintile is about three times what their earned income statistics would indicate. As we shall see, their personal possessions are far more consistent with this fact than with the vision of the intelligentsia.

Moral considerations

The difference between statistical categories and actual people affects moral, as well as empirical issues. However concerned we might be about the economic fate of flesh-and-blood human beings, that is very different from being alarmed or outraged about the fate of statistical categories. Michael Harrington’s best-selling book The Other America, for example dramatized income statistics, lamenting “the anguish” of the poor in America, tens of millions “maimed in body and spirit” constituting “the shame of the other America,” people “caught in a vicious circle” and suffering a “warping of the will and spirit that is a consequence of being poor.” But investing statistical data with moral angst does nothing to establish a connection between a transient cohort in statistical categories and an enduring class conjured up through verbal virtuosity.

There was time when such rhetoric might have made some sense in the United States, and there are other countries where it may still make sense today. But most Americans now living below the official poverty line have possessions once considered part of a middle class standard of living, just a generation or so ago. As of 2001, three-quarters of Americans with incomes below the official poverty level had air-conditioning (which only one third of all Americans had in 1971), 97 percent had color television (which fewer than half of all Americans had in 1971), 73 percent owned a microwave oven (which fewer than one percent of all Americans had in 1971) and 98 percent of “the poor” had either a videocassette recorder or a DVD player (which no one had in 1971). In addition, 72 percent of “the poor” owned a motor vehicle.

None of this has done much to change the rhetoric of the intelligentsia, however much it may reflect major changes in the standard of living of Americans in the lower income brackets. Professor Corning, for example, has called the American economy “an ever-spreading wasteland of poverty” and said that “close to one-quarter of our population” are “struggling to meet their basic needs.” Similarly, Professor Andrew Hacker declared that “a rising proportion of children are growing up in homes without the means even for basic necessities.”

Undefined terms like “basic necessities” and arbitrarily defined terms like “poverty” allow such rhetoric to flourish, independently of documented facts about rising living standards in the lower income brackets. While such alarmist rhetoric abounds, specifics are conspicuous by their absence. At one time, poverty meant that people were hungry or couldn’t afford adequate clothing to protect themselves against the elements. Today it means whatever those who define the official poverty level want it to mean, so that saying that X percent of the American population live in poverty is to say that they meet some ultimately arbitrary definition, which could be set higher or lower, causing half as many or twice as many to be called “poor’. Moreover, the income statistics so often cited tell us very little about the actual standard of living among people who receive the majority of their economic resources over and above whatever incomes they may be earning.

In this situation, income statistics for the largely non-working, low-income population tell us more about the notions or agendas in the minds of those who define statistical categories than they tell us about the actual living conditions of flesh-and-blood human beings in the real world.

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1 Jan 2024