Economy

The Fictional Problem of Income Inequality

By Logan Albright

With the rise of the Occupy Wall Street movement and the persistently high levels of unemployment we have seen over the last few years, the issue of income inequality is becoming increasingly important in the national discourse. Cries that the one percent has succeeded at the expense of the ninety-nine percent, egged on by President Obama and Senate Democrats, have become impossible to ignore, and more and more average Americans are told that they should feel resentment and anger at those who have more than they do.

Niall Ferguson, in an article for Monday’s edition of Newsweek Magazine, validates these complaints against the wealthy, arguing that over the past four decades the rich have grown richer while the poor have gotten poorer.

“Adjusted for inflation,” he says, “the income of the average American male has essentially flatlined since the 1970s, according to figures from the Census Bureau. The income of the bottom quarter of U.S. families has actually fallen. It’s been a different story for the rich.”

Thinking that these figures sounded odd, I consulted the U.S. Census Bureau’s online database for confirmation. Here is what I found: looking at mean household incomes in inflation-adjusted 2010 dollars, it is true that the lowest fifth of Americans earns barely more today than in 1970. A little arithmetic reveals an increase from 1970 to 2010 of about 10%. However, only four years out of the decade between 1970 and 1980 show higher income per household than we see today. But while the spirit of Ferguson’s comments is largely correct, I would argue that the comparison is an unfair one.

To begin with, the early seventies were a time of relative prosperity (the oil crisis which instigated the economic woes that dominated the decade did not occur until 1973) whereas 2010 found us in the middle of a particularly nasty recession. It seems unsportsmanlike to compare two periods of time on opposite ends of the business cycle. It’s a bit like comparing consumer spending in December with that in July, without the benefit of seasonal adjustment. A look at incomes in 2006, just before the recession, reveals that incomes in the lowest fifth grew by 23%, nothing to sneeze at. As you can see, it is easy to cherry-pick yearly comparisons to suit one’s thesis.

But more important, in my view, than the census figures is the general rise in the standard of living in 2010 versus 1970. Inflation adjusters are notoriously poor at accounting for technological improvements, and the last forty years have shown tremendous growth in the luxuries available to us. In 1970, the idea that a child, even a relatively wealthy one, would have access to luxuries such as cellular phones, iPods and personal computers was laughable.

A report by the Heritage Foundation claims that 80 percent of poor households have air conditioning, whereas in 1970, only 36 percent of the entire population did. The report is filled with many more such statistics, and it illustrates that the increase in the standard of living for poor families cannot be captured by looking at income alone.

Income inequality is an easy target for populist outrage, but inequality is not, per se, a problem. If everyone is becoming richer, it does not matter whether some become richer faster than others. The old saw that a rising tide lifts all boats turns out to be true, and if I get a raise, I have no reason to complain that my neighbor got a bigger one. Rather than fixating on how well the rich have done, it would be wise for Americans to focus on improving the lives of everyone, not acting as if success is something to be ashamed of.

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