America's Income Gap

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America's Income Gap

by Ari Armstrong, August 27, 2004

Horror of horrors -- rich people in America make more money than poor people do! For some reason, some people see income inequality as inherently evil -- even if income among the poor is generally increasing, as is the case.

A recent AP story published by The Denver Post on August 17 makes a big deal about the "income gap" -- even though this "gap" is utterly irrelevant in deciding whether the poor are better off.

The AP story, by Leigh Strope, reports, "Over three decades, the income gap has steadily increased between the richest Americans and those at the bottom of the pay scale... The wealthiest 20 percent of households in 1973 accounted for 44 percent of total U.S. income, according to the Census Bureau. Their share jumped to 50 percent in 2002, while everyone else's fell. For the bottom fifth, the share dropped from 4.2 percent to 3.5 percent."

But why should anyone care whether a person's percent of the total pie is rising or falling? What matters is whether the person is making more or less (real) income. To take a simplified example, let's say Jack and John each make $1,000 in Year One, then, in Year Two, Jack makes $2,000 while John makes $50,000. In Year One, Jack earns 50 percent of the pie, while in Year Two Jack earns a mere 4 percent of the pie. But Jack is earning twice as much money, so isn't that a good thing? It is bad only if one considers envy a virtue.

Notice the line, "while everyone else's fell." This is apparently intended for dramatic effect. Yet, by definition, if one group's percentage of the pie increases, everyone else will receive a lower percentage of the pie. But who cares? The important consideration is whether the pie is growing or shrinking.

One page of Census Bureau statistics I readily found tells an interesting story. It breaks up families into five groups by income, then reports the median income of each group from 1966 through 2001. In 1966, the median income for the lowest wage earners was $10,854, in 2001 dollars. By 2001, the amount had risen to $14,021. In other words, the worst-off families made about 30 percent more money at the end of that period (though of course individual membership in the income groups is in flux).

Meanwhile, in 1966, families in the top fifth of income earners made $78,770. In 2001, they made $159,644, or 103 percent more. So the great injustice, supposedly, is that poor families are making only 30 percent more, while rich families are making 103 percent more. That's the "income gap." Gee, what a tragedy.

We can peek at a few other figures. In 1967, per-capita income (in 2001 dollars) was $11,067, while in 2001 it was $22,851.

Here's the general trend of median family income, in 2000 dollars. In 1953, it was $23,317. In 1966, it was $34,117. In 2001, it was $51,407. Sure, there have been years when this figure has dropped (as with the other measures), but the overall trend is an impressive gain.

Now look at the statistical manipulation of the AP writer. Strope writes, "Three in five new jobs pay below the national median hourly wage -- $13.53, said Sung Won Sohn, chief economist for Wells Fargo." Yet, as Alan Reynolds points out, by definition 2.5 out of 5 workers make below the median wage. That is simply the definition of "median." Taken literally, the line in the AP story, if we round 2.5 to 3, is tautological. However, I assume Sohn was trying to say that, based on a previous median hourly wage, somewhat more than half of new jobs pay less than that. Yet we may suspect the figure "three in five" contains a considerable rounding error. Besides, "new jobs" include those for new workers, who of course make less than the average.

Of course we've suffered some economic problems lately. Strope ignores the real causes of this slump and instead points to irrelevant factors. Strope writes, "Economists say wages should rise as companies boost hiring [gee, you think? It's a good thing we have unnamed 'economists' to tell us that], but the growing gap between the haves and have-nots [i.e., have-lesses] will remain. Technology has eliminated many U.S. jobs, as has global competition, particularly from low-wage countries such as China."

Neither technology nor global competition has "eliminated" U.S. jobs in the aggregate, though both have altered the sorts of jobs people hold. Technology, along with other forms of capital, is precisely what's responsible for the general and massive increase in the standard of living in the U.S. over the decades. Global competition has increased aggregate wealth (because of comparative advantage), increased U.S. exports, and driven down prices.

Strope does (unintentionally) indicate one important problem of low wage earners: "[L]ow-skilled jobs remain vulnerable to outsourcing." The problem does not lie with "outsourcing;" the problem lies with the low skills. The partly socialized American education system is wonderful for rich kids, and absolutely abysmal for poor kids (in general). To describe the lowest tier of American workers as "low skilled" is to dramatically understate the case. The American school system is turning out droves of illiterate, unmotivated, and utterly ignorant "low-skilled" workers who can't even compete with poor kids from India for whom English is a second language. Wages generally depend largely on the level of capital (which is why America is so wealthy), and wages for individuals depend on a person's ability to produce things of value. (Poor-quality education is only one reason why more lower-skilled workers have entered the work force over the past few decades, thus keeping the income averages from rising faster.)

On August 26, the Census Bureau issued a press release that has ignited the popular media and Kerry fans. The Bureau reports, "Real median household income remained unchanged between 2002 and 2003 at $43,318... [T]he nation's official poverty rate rose from 12.1 percent in 2002 to 12.5 percent in 2003... The percentage of the nation's population without [health-insurance] coverage grew from 15.2 percent in 2002 to 15.6 percent in 2003."

Or, put another way, the U.S. is suffering from a bit of an economic slump. When people aren't working, they enter the realm of "official poverty" -- regardless of their personal resources -- and they lose their health insurance.

Or, as I've done, people simply calculate that modern health insurance typically is a massive fraud that isn't worth the expense. In a rational world, people would buy only catastrophic health insurance (for the most part), they would buy it directly rather than via an employer, and the responsible and frugal would not be forced to subsidize the reckless and wasteful. But we don't live in a rational world -- we live in a world in which state intervention in medicine has seriously damaged the industry -- not that the mainstream press would report that.

Eduarto Porter wrote an article for the August 19 New York Times in which he explains rising health-insurance costs are contributing to unemployment. Yet Porter fails to note, even as a perspective from a cited source, the problems created by state intervention in the medical industry. Porter argues rising health costs are attributable to "expensive new drugs," "costly new machines," and a move away from "managed" costs. These points are important: to a large extent, higher medical bills are a price people willingly pay to live longer, better lives. This does not change the fact that health costs have risen inordinately because of economic interventions.

Porter does not even try to describe the ways political actions have negatively impacted health care, yet he describes new political plans that will supposedly improve it. Bush favors "tax-free health savings accounts." Kerry wants direct federal subsidies of health care. What nobody wants, apparently, is a free market in health care. Unsurprisingly, politicians rarely contemplate the possibility that the problems with health care were created by politicians; they consider only additional political controls. And the leftist media only egg them on.

Despite a century of increased political control of the economy, our mostly free-enterprise system has continuously delivered increased standards of living. But federal spending (and federal deficits) spiral upward, while interventionism pours sand in the economic engine. Kerry's supporters who blame Bush for economic problems are half right: Republicans are perhaps as responsible as the Democrats. Meanwhile, hysterical egalitarians shift the attention of the masses away from the crucial concept of capital formation and thus foster a political system that undermines long-term economic growth.

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