Thursday, May 24, 2007

The Poor Get Richer

As I've shown, the "hegemony of the rich" and the "shrinking middle class" are myths. The fiction incorporates at least four flaws:

  1. poverty cannot be measured without accounting for all government poverty-relief transfers, taxes, hours worked and assets (such as home ownership);

  2. the typically cited income quintiles contain unequal populations, overstating earning disparities;

  3. there is substantial mobility between income quintiles; and

  4. if the rich get richer, the poor don't necessarily suffer; money is not a zero-sum game.

A new study by The Congressional Budget Office adds to the evidence, summarized in Wednesday's Wall Street Journal:

A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991.

The CBO results don't fit the prevailing media stereotype of the U.S. economy as a richer take all affair -- which may explain why you haven't read about them. Among all families with children, the poorest fifth had the fastest overall earnings growth over the 15 years measured. (See the nearby chart.) The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s.

(source: CBO Report, Figure 2 via WSJ)

What happened? CBO says the main causes of this low-income earnings surge have been a combination of welfare reform, expansion of the earned income tax credit and wage gains from a tight labor market, especially in the late stages of the 1990s expansion. Though cash welfare fell as a share of overall income (which includes government benefits), earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market.

Earnings growth tapered off as the economy slowed in the early part of this decade, but earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon.

The report also rebuts the claim, fashionable in some precincts on CNN, that the middle class is losing ground. The median family with children saw an 18% rise in earnings from the early 1990s through 2005. That's $8,500 more purchasing power after inflation. The wealthiest fifth made a 55% gain in earnings, but the key point is that every class saw significant gains in income.

There's a lot of income mobility in America, so comparing poor families today with the poor families of 10 years ago can be misleading because they're not the same families. Every year hundreds of thousands of new immigrants and the young enter the workforce at "poor" income levels. But the CBO study found that, with the exception of chronically poor families who have no breadwinner, low-income job holders are climbing the income ladder.

The latter point was explained by Arnold Kling on TCS:

The often-used phrase "distribution of income" suggests the metaphor of a pie. I believe that a more accurate metaphor would be an escalator. The pie metaphor treats income as static, thereby ignoring one of the most important facts about the standard of living, which is its rise over time. . .

In 1975, many of the families surveyed were young families or new immigrants, and they were near the bottom of the escalator. After fifteen years on the escalator, many of them reached the top half of the escalator. When you came back and surveyed the same families in 1991, most of them were near the top of the escalator. That is, they were in the top income categories relative to all families in 1991.

In 1991, the families at the bottom of the escalator were families that had formed or immigrated after 1975, so that they could not be included in a study that followed families from 1975 to 1991. If you were to look at all families as of 1991, you could spread them evenly across five income categories, but it would be a different group of families than those surveyed in 1975 and 1991.

Russell Roberts echoes the point:

[I]t's not like the top 1% are sitting off to the side in their own guarded compound living like kings at the expense of everyone else, making the rules of the economic game that somehow let them do well while punishing others.

And because it's not the same people, you have to be very careful drawing conclusions about changes in the average American's well-being over time. As I've written before, those numbers are affected by immigration, divorce and demographic changes. The median can fall but the median person can still do better over time.

Thus simply because the Census Bureau classes about 10 percent of families poor -- even accepting the definition (I don't; others agree) -- is not itself an indictment of American capitalism. That's because income mobility ensures poverty data doesn't measure the same families year-to-year: The Census Bureau calculates only about 13 percent of the poor remain in poverty after 24 months. Thus, says Kling:

[T]he data that Kevin Lang cites--higher average income with no reduction in the poverty rate--do not provide conclusive evidence that economic growth is no longer pulling people out of poverty. We could observe that same data even if everyone were being pulled out of poverty, depending on how many people are entering and exiting poverty.

I support a tax-funded safety net. But it's hard to debate anti-poverty policy when bombarded by misguided hype about "two Americas" and un-supported assumptions that the sky is falling.

(via Cheat Seeking Missiles)


MaxedOutMama said...

I'm particularly pleased to see this because I was just trying to reconcile strong HUD median incomes with a dire CNN Money article about 35 year old male incomes over 30 years.

A lot in these stats depends on the timing of the slice.

@nooil4pacifists said...

M_O_M: The never-ending insistence that only those "born to the purple" can succeed in George Bush’s Amerika is the single most annoying cannon of current progressives. Given the ample evidence to the contrary, one can only assume the doctrine is a defense against its adherents' own failures.

Particularly frustrating is the use of quintiles containing unequal populations--one would think the whole notion of income quintiles would be equal sample population sizes. I sat next to a Census bureaucrat at a recent Washington Nationals game and spent at least 3 innings berating him about the error. He, a self-confessed liberal, fully confirmed the problem, and temporized only that the Bureau also analyses poverty data with same-size quintiles--but wasn't sure that data was public. So I'd guess that the CNN/Money article you read only superficially examnined the income data.

Hayek was right: the smaller the government, the better--and better able to ameliorate authentic shortfalls among the needy.