Wednesday, October 29, 2008

Income Increases and Inequality

Liberals and the liberal media often whine about the supposedly declining (194,000 hits on Google) or shrinking (38,000 hits on Google) middle class, citing alleged wage stagnation and assertedly increased income inequality. Even bureaucrats at the Census Bureau repeat these charges (at 6):
Between 2006 and 2007, real median household income rose 1.3%, from $49,568 to $50,233 (see top chart above--a level not statistically different from the 1999 prerecession income peak ($50,641 in 1999 and $50,557 in 2000).
I've rebutted these myths before. The fundamental flaw is the mistaken leftist presumption that the household income quintiles (or deciles) contain equal populations. Plainly, if middle or lower income quintiles contain more total persons than upper quintiles, merely tracking either the earnings per quintile or median earnings is misleading.

In several posts on his Carpe Diem blog, Professor Mark Perry similarly refutes the left's false figures. So does The Skeptical Optimist's Steve Conover. Each include some nifty charts:

The claim: This chart of Census Bureau data is the source of "the rumor about the middle class's plight": "real median household income" (adjusted to 2006 dollars using the CPI-U-RS).

source: The Skeptical Optimist

Looks bad, right? Look closer.

Hidden by "households": Obviously, "households" don't get paychecks, workers do. And while Census quintiles all contain identical numbers of households, they don't contain the same number of people or even workers, as Steve Conover explains:
A household has a group of people in it; most of those groups contain at least one specific person who earns a paycheck. The U.S. Census Bureau (in their "Current Population Survey") calls those people "Earners." The amount of money income received by a household depends to a great degree on the number of "earners" in that household.
It's common knowledge that American families have fewer children than before. So Professor Perry makes the correction:
When adjusted for household size, real median income per household member reached an all-time high of $19,546 in 2007, 65.6% higher than the $11,820 income per household member in 1967, and more than 2 times the unadjusted increase per household of 29.6%.

source: Carpe Diem, via Census Bureau

source: Carpe Diem, via Census Bureau

Simply put: "In just a little more than one generation, real median income per household member has increased by a factor of almost 2/3!"

Bottom income overlooked: Even that adjustment overstates poverty. As I have shown, the Census Bureau's definition of income also excludes some non-cash payments such as employer-sponsored health insurance, government-subsidized housing and food stamps. It doesn't consider home-ownership, which normally accounts for a larger percentage of wealth among the middle and lower incomes classes as compared with the top class. Census income also is pre-tax, so tax credits (which are proportionately larger for lower and middle-income earners) and tax payments (which are proportionately larger for higher earners) aren't covered. To those claiming pre-tax income is a better measure when considering income equality: nonsense. Accusations of income inequality normally preface pleas for enlarged poverty programs or higher taxes for the upper earners. If current government policies already level the field (at 9), additional welfare or top-bracket taxes aren't necessarily justified.

Top tables skew: Lefties are alarmed about Census Bureau tables that once said median incomes were rising faster among upper as compared with lower quintiles. (The 2007 figures (at 7) are different, pointing to declines at the top and increases in the middle.) But, upper quintile households typically have more "earners" and, in any event, the top decile or quintile is unbounded, thus "wider," skewing the median. Further, as Alan Reynolds has detailed in articles and a useful book (the latter could be better edited):
A rising mean income among the top 5, 10 or 20 percent has been routinely misinterpreted as indicating that income gains were confined to only that top group. In reality, rising incomes among those with incomes below the rising threshold have caused the definition of top income groups to exclude incomes that had formerly been among the top group. The mean average of income in top income groups can be pulled up by a few unusually high incomes at the top. But the average can also be pushed up from below by rising numbers of people moving up -- leaving what used to be considered a "middle class" income and "joining the ranks of the rich."
As I've previously shown, adjusting for the number of earners per household, and setting aside the top group, real median incomes are up, as Conover depicts:

source: The Skeptical Optimist

source: The Skeptical Optimist

Gini is bottled: I'm not sure income equality (as opposed to equality of opportunity) matters. Still, if it does, the bottom line is that income inequality is overstated (especially for failing to account for income mobility and immigration). As Congressman Jim Saxton reported last week:
According to a key Census Bureau measure, income inequality has been unchanged since 2000. The Census Bureau recently confirmed that no statistically significant change in the inequality measure occurred between 2000 and 2007, the last year for which data are available. The measure referred to here is known as the Gini coefficient, a standard gauge of income inequality published by the Census Bureau and widely used by economists and other researchers.
Professor Perry charts the results:

Source: Carpe Diem

Remember this next time a liberal claim Bush economics disproportionately favored the relatively rich at the expense of the poor.

Conclusion: The economic news is bad enough. Don't let unsupported soak-the-rich populism prejudice any proposed fix.

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