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Some facts about income inequality

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Friday, Jan. 31, 2014, 8:57 p.m.
 

Former U.S. Labor Secretary Robert Reich made a splash in 2011 with a two-minute YouTube video purporting to show that the only Americans who enjoyed any improvement in economic well-being during the 30 years following Ronald Reagan's election to the presidency were the extremely rich. According to Mr. Reich, most Americans stagnated economically during those three decades. The result is an America today marred by a near-historic level of income inequality.

Knowing that I think Reich to be wrong, the good people at LearnLiberty encouraged me to do a short video in response — which I did. Yet given President Obama's recent emphasis on reducing income differences — and his accompanying suggestion that ordinary Americans are treading water economically — there is even more that should be said.

The fact is that middle-class incomes have not stagnated. Those of us old enough to remember 1980 with sufficient clarity to compare life back then to life today ought to see this reality clearly.

During Jimmy Carter's final year in the Oval Office, virtually no Americans had cellphones (much less smartphones) or access to the Internet and to medical wonders such as Lasik surgery and Viagra. (I purchased my first pair of soft contact lenses in July 1980. They were so expensive that I bought insurance on them against loss or damage. No joke.)

A list of goods and services that ordinary Americans today take for granted but were unavailable just 34 years ago (or that then cost an arm and a leg) would be far too long for this column. Nor would such a list persuade skeptics who insist on looking only at quantitative data.

Such data are plentiful. For example, Cornell University economist Richard Burkhauser and co-authors Jeff Larrimore and Kosali Simon found that between 1979 and 2007, inflation-adjusted income for people in the average American household rose by nearly 37 percent.

This figure is more than 11 times larger than the 3.2-percent figure often cited in the mainstream media.

What explains this huge difference in estimates of the growth of ordinary Americans' incomes?

One reason for the difference is that the smaller figure does not account for changes in the number of people living in the typical American household. Fewer people live under one roof today than in 1979, meaning that any given amount of income earned by the typical household is now shared by fewer people. Each individual, in other words, has more income today than he or she would have if the number of people living under the same roof was unchanged since 1979.

Other reasons for the difference are the reduced tax burden on middle-class Americans, the increased real value of employer-provided fringe benefits, and the rise in the real value of government transfer payments to the middle class. These changes are among those that are routinely ignored by Reich and others who are determined to whip ordinary Americans into a frenzy about the alleged economic stagnation of middle America over the past three decades — a frenzy that “progressives” hope will frighten Americans into giving government even more resources and power.

A 2011 study by the Congressional Budget Office reached a similar conclusion, finding that “(f)or the 60 percent of the population in the middle of the income scale ... the growth in average real after-tax household income was just under 40 percent.”

Income growth of this magnitude is emphatically not evidence of middle-class economic stagnation.

Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.

 

 
 


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