Have the Rich Become Richer and the Poor Poorer?
Listen to a Barack Obama stump speech in Philadelphia or a Hillary Clinton townhall meeting in North Carolina and you will hear both candidates decry the growth in income equality over the past two decades. They would have you believe that the rich have become richer while the lower and middle classes have seen their incomes stagnate. It is of course implied that the wealthy are enriching themselves at the expense of the peons beneath them. So Robin Obama and Maid Clinton will rob from the evil rich to give to the deserving poor.
Of course some of the rich are evil and make their money from the sweat of the poorer man’s labor; I just watched Enron: The Smartest Guys in the Room, a documentary that you all should watch simply because it will help you understand why you’re Keynesian friends so vigorously detest big business. Ken Lay and Jeffrey Skilling did rob the poor to make themselves rich.
But not all rich people accumulated their wealth by pillaging the poor. They may even have once been poor themselves. They make money because they offer people something that they are willing, and often eager, to buy. Why do consumers buy these goods? Because we are forced by the evil capitalist Prince Sean John? No, we choose to reward innovaters by enriching them. Steve Jobs offers us a better delivery system for MP3s, so we make Apple rich. Larry Page and Sergey Brin marketed a more efficient search engine formula, we make Google rich. Pretty simple.
So why has income inequality increased? Those with the highest incomes in the United States are earning a greater share of the GDP than 10 or 20 years ago. This is true, but is this “bad”?
I would argue not. Growing income inequality does not mean the lower and middle classes are stagnating while the rich get richer. This essay from the Von Mises Institute does a far better job than I explaining why. But if you don’t have the time or inclination to read his essay I’ll boil in down for you. Essentially, the author points out that income inequality measures the growing difference between incomes rather than whether the incomes are increasing in absolute terms. What?
The author provides an example. I’ve changed his original characters to protect their privacy. One poor person, David Crabb, makes $10,000 in 2000. His far handsomer friend, Paul Matzko, makes $20,000 that same year. The difference between our incomes, $10,000, is the income inequality. Business has picked up over the years and in 2007 David Crabb pulled down $15,000 selling original KJV Bibles. I, by selling The Message, have increased my annual income to $30,000. The difference between our incomes has increased to $15,000, thus income inequality has increased. But have BOTH raised our incomes.
This shows that income inequality is not necessarily a bad thing. But wait Paul, what if the poor person’s income has not even increased absolutely, like this article from Canada shows? That is a better question, but I think I have a possibly better answer: a person making $10,000 in 2007 is wealthier than a person making $10,000 (adjusted for inflation) in 1987. How?
Because the “same” good or service purchased for the same price in 2007 is typically better than that offered in 1987.This is a real problem for surveys analyzing income inequality. They often ask, “How many TVs, cars, or audio devices do you own?” But a TV, car, or audio device from 1987, though costing the same in real dollars as the same product in 2007, is “worth” less. So a $1,000 TV in 1987 was clunkier and smaller screened than the flat screen Vizio of today. The Pinto is inferior in every way to a Yaris. The Sony Walkman can’t hold a candle to the Apple iPod. The “poor” people that I helped provide utilities for this summer often had cell-phones. Twenty years ago only the rich and well-connected could have the privilege of mobility. Even when income stagnates, people are getting wealthier.
And remember, American society is incredibly mobile. The rich can become poor. The poor can become rich. Our society has relatively few inherent barriers, despite the class warfare so desperately wished for by Leftist economists, politicians, and historians.So this crisis, concocted by Obama, Clinton, Kennedy, and their ilk, is a big phony. Robin Hood is not needed today because our capitalist system is a win-win. The rich are richer…and the poor are too.
Lomborg develops the same argument in the Skeptical Environmentalist (without the reference to David Crabb or the KJV).
If I can mount a defense…
The only reason my income increased so minimally is because I had yet to tap into the Hyles-Anderson market. After signing a contract with Hyles-Anderson, my income increased 400%.
I’d also like to point out that as the truth continues to be taught across our fair land and more and more Christians see the light, not only will my income steadily increase but yours will dramatically decrease. Our incomes our inversely related to each other.
After all, wouldn’t you rather read Romans 6:1–”God forbid!” as opposed to “LOL! Are you joking me?!?”
Perhaps one of the largest economic fallacies today is that trade is a zero-sum game, which you do well to dispute. It is a very basic but important fact to consider that buyers do not buy, nor sellers sell, a good or service unless they expect to benefit from the transaction.
I would add two points:
1. New empirical work by two economists shows that the basket of goods lower-income people buy has a lower inflation rate than others. If one takes into account this lower inflation, about two-thirds of the rise in inequality is wiped out from 94-05. If this work holds up, it can’t be emphasized enough. Article here.
2. But a more fundamental point is that most income statics track percentiles and groups, not individuals or families. Talking about what has happened over time to the “middle class” or the “top 10 percent” doesn’t say much, because people are moving in and out of these statistical designations all the time. Tom Sowell has made this point many times, and here’s a post that makes the point as well.
I’ve enjoyed an aspect of blogging that I did not originally anticipate: I learn as much from the comments at times as from the research for the actual post. To be honest I had only a fuzzy idea of what constituted a zero-sum game until now.
Why do lower-income goods (from China apparently) inflate at a lower rate? I understood the gist of what the article said was happening, but not why.
Mobility is anathema to many of the Leftist academics I’ve come in contact with at Temple. A book, “The Lower Sort” by a well known social historian, David Brion Davis, dismisses the idea that colonial Philadelphians enjoyed significant economic mobility. He makes the mistake of using percentiles and groups rather than individuals and families as well. Within his data though there appeared to be proof of a gradual rise in income through mobility. I don’t remember the exact numbers, but within a given decade 6% moved up while 4% moved down. I pointed out that over time a 2% increase in same population income adds up, but I was pooh-poohed. Go figure.
Part of the reason why you mentioned yourself, namely that the CPI does a poor job of accounting for new, better quality products. A simple example: suppose an iPod released last year costed $100, while the iPod released this year costs $150 but has a larger screen and can play videos–the price has inflated by 50 percent, but would we really consider this a true measure of inflation since the quality has improved so much?
This problem with the CPI has been called the “new goods” or “quality bias,” and has been estimated to overstate inflation by .8 percent annually. Poor people buy more of these new goods, thus the overstatement of inflation and inequality.
When you say “poor people buy more of these new goods” do you mean that total consumer spending by poor people on goods is greater than that of the wealthy? So even though the wealthy few make the most money, they don’t spend as large of a share of that income as the poor?
To put it a better way: poor people spend a higher proportion of their budget on lower-inflation goods. Thus, their purchasing power declines at a lower rate than for rich people, who tend to spend their money on things that have high levels of inflation.
Absolute levels of spending are irrelevant here.
I decided to post a letter I received from a friend and my response.
Dear [friend],
Thanks for communicating your concerns in such a kind fashion. I appreciate it it when you (and others) challenge my assumptions and presentation.
It was not my intent to sadden you or offend anybody, but rereading my post I can see how it could come across as callous.
[personal sympathy story]
On to my note specifically…
I am one of those “poor” people. I make (pre-tax) $2,000 above the federal poverty threshold. I work full-time and by not living extravagantly I’m making ends meet. I have not had health insurance this past year, but I don’t have any major health problems (besides intestinal problems that indicate a fifty-fifty chance of having colon cancer someday). I don’t have a car and when I can’t borrow Mike’s I use public transport to get around. I qualify for Medicare.
Admittedly I’m not homeless. I have come in contact and spent time with lots of homeless and poor people (I do live in Philadelphia after all).
The system currently in place, flawed as it is, should be able to help you. A single woman on disability should be able to apply for food stamps and medicaid in addition to a social security stipend. Government housing should also be an option. None of those are pleasant, but it is some form of a safety net.
The system has lots of problems. It encourages single motherhood, so if you had a kid out of wedlock you’d have even more help from the government. Most of the problems are because of bureaucratic incompetency. That’s why I favor cutting welfare spending in the behalf of grants to private charities…they are proven to be more efficient and cover the gaps better.
Whenever talking about “big” problems/issues it is easy to lose sight of the effect on individuals. Thanks for reminding me of that. I do not wish to belittle the hardships faced by people today who fall between the cracks.
That said, I do believe everything I wrote is accurate and timely. You (and I to a degree) are poor, but we are wealthier than we probably would have been in the same shoes twenty years ago.
Telling someone that they are doing better (relatively) compared to people a generation ago is cold comfort, but true. Though income inequality is not the crisis it is often made out to be, poor people still struggle to make ends meet and as individuals trying to improve their circumstances they deserve my sympathy and support.
Thanks again. I appreciate your candor and friendship.
Paul