Variations in income can be viewed empirically, on the one hand, or in terms of moral judgments,
on the other.
Most of the contemporary intelligentsia do both.
But, in order to assess the validity of the conclusions they reach, it is advisable to
assess the empirical issues and the moral issues separately, rather than attempt to
go back and forth between the two, with any expectation of rational coherence.
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 for 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 larger 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.”
According to Professor Andrew Hacker 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.”
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.”
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 income 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 actually declined.
While it might seem as if both 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 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 the span of time covered.
During that span, there were thousands of people in the top 400—which is to say, turnover
was high.
Fewer than one-fourth 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 that 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.
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 at some point 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 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 focussing on the income brackets, instead of the actual people moving between
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 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 human beings 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 superrich 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 only very 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 the many feats of verbal virtuosity.
The reason for the large discrepancy between growth rate trends in household income and
growth rate 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 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 incomes 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 household 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 the 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.