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The public policy blog of the American Enterprise Institute
Americans should be alarmed by a rocketing rise in inequality.
At least that’s the constant message of the Obama White House and much of the media. In a recent speech in Cleveland, for instance, President Barack Obama again spoke about how the incomes of the wealthiest Americans have soared over the past few decades, “but prosperity never trickled down to the middle class.”
And in a recent New York Times article, economist Thomas Piketty stated that the “United States is becoming like Old Europe” with extreme levels of income inequality. Coauthor Emmanuel Saez added that “absent drastic policy changes,” inequality will continue to grow. The Piketty-Saez solution is to raise tax rates on the rich to 70-90%. Obama, too, wants higher taxes on wealthier Americans.
But is America growing dangerously more unequal, so much so that “drastic” measures must be taken? New research from economists Kevin Hassett and Aparna Mathur of the American Enterprise Institute suggests otherwise. They find that inequality “has remained fairly steady over the past thirty years.”
Hassett and Mathur’s findings add to a growing body of research showing claims of income stagnation and a dramatic increase in U.S. inequality to be wildly overblown. The rich didn’t steal all the money. The U.S. standard of living isn’t stuck where it was 30 and 40 years ago.
Claims to the contrary are starting to sound like excuses just to raise taxes, enlarge government, and proclaim the superiority of state capitalism over market capitalism.
Hassett and Mathur arrive at their results by using two different approaches.
First, instead of looking at income inequality, Hassett and Mathur look at consumption inequality, which represents a broader look at the economic resources a person can summon. Looking just at income ignores how individuals are generally able to smooth consumption by borrowing in the low-income years — such as during retirement or when they are just entering the workforce — and saving in the high-income years. Studies of income alone often exclude things like Social Security, Medicare, and food stamps.
Additionally, tax return data of the sort Piketty and Saez discuss can be influenced by changes in tax rates, giving a highly distorted picture of income inequality. For example, the personal tax rate reductions of the 1980s and the early 2000s caused businesses to shift income out of the corporate form and into the personal tax, thus raising reported incomes at the top.
So what does the consumption data tell us?
In 1984, households in the top income quintile, or top 20%, accounted for 37% of total consumption spending. Households in the bottom quintile accounted for only 10 percent of total spending. So the ratio of top-to-bottom consumption was approximately 3.8.
By 2010, that ratio had increased to just 4.4. This hardly represents an explosion in inequality. As measured by this ratio, consumption inequality has increased marginally over time, averaging 4.21 between 1984 and 1990, 4.29 between 1991 and 2000, and 4.46 between 2000 and 2010.
Also note that a common measure of inequality, the Gini index, shows little change during recent decades:
The other way Hassett and Mathur look at inequality is by the sorts of goods Americans own and how that has changed over time. Using information from the U.S. Energy Information Administration’s Residential Energy Consumption Survey, the economists conclude that low-income households “have improved their standard of living as measured by their possession of material objects.”
For example, the percentage of low-income households without a color television has decreased from 17.7% in 1987 to 2.1% in 2009. And in 1993, the first year that a question on printer usage was included in the RECS survey, 98.3% of low-income households did not have a printer. By 2009, only 17.7% of low-income households did not own a printer.
Hassett and Mathur are hardly alone in their views.
— According to a recent study in the National Tax Journal from researchers at Cornell University, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue.
— Research from the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan, who find that “median income and consumption both rose by more than 50 percent in real terms between 1980 and 2009.”
— Minneapolis Fed researchers calculate that since the 1970s, median income per person “rose by 50 percent. … The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich. The findings reported here … refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades.
Should the U.S. economy be growing faster? Yes. But that won’t happen if we raise taxes, increase regulation, and expand government as a way of dealing with an economic myth.
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