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Debunking Income-Inequality Research – OpEd

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By Bradley Thomas*

Barack Obama proclaimed income inequality to be “the defining challenge of our time” in a 2013 speech. Inequality continues to be a hot political topic and serves as the pretext for recent proposals floated by various politicos like a 70 percent marginal tax rate, student loan forgiveness and universal day care.

Indeed, couched in language like “not everyone is sharing in this prosperity” (Sen. Amy Klobuchar) and “the economy … is working for a thinner and thinner slice at the top” (Sen. Elizabeth Warren), the subject received its fair share of attention at last week’s Democratic debates.

Such high political stakes make it even more concerning that the majority of income inequality research is so misleading.

Snapshot in Time

Most income inequality data represent merely a snapshot in time. Of course, people move about income levels through the duration of their lifetime. Today’s “low-income” individual may be a recent college grad from an upper middle-class family merely working an entry-level job on her way to a lucrative career. Or consider a retired couple with pension plans, savings, investments, a paid-off house and other assets. They may have little “income,” but they have enough wealth to afford a comfortable lifestyle.

Conversely, today’s “high-income” earner may be a small business owner who struggled for decades and finally had a successful year. Indeed, according to Tufts University economist Gilbert Metcalf, “higher-annual-income groups are likely to contain some people at the peak of their age-earnings profile for whom peak earnings are a poor measure of annual ability to consume.” That is, someone may put together a few years of high earnings that don’t reflect his or her long-term well-being.

In short, the people captured in the “low-income” category at a given moment in time may not necessarily be poor, and vice versa. Snap-shot income measures in no way tell us anything about the financial well-being over the lifetimes of the people being studied.

For instance, University of Michigan-Flint economist Mark Perry examined US census data to confirm that “more than 3 out of 4 households in the top fifth of (income-earning) households are in their prime earning years between 35-64 years old.” He continued, “The lowest quintile households are more than 1.5 times as likely to be younger (under 35) as the highest quintile households, and more than three times as likely to be old (65 and over).”

In other words, younger, less experienced workers earn less than their older, more experienced counterparts. Should this type of “inequality” be considered “the defining challenge of our time”?

In sum, simple “income” statistics often provide a misleading snapshot of citizens’ financial well-being, and thus provide an extremely poor indicator upon which to base policy.

Rich Getting Richer and Poor Getting Poorer?

Rarely left out of income inequality “analysis” by progressives is the alleged observation that the rich are getting richer while the poor get poorer.

This proclamation, however, also suffers in large part due to a static view of the data.

As Russ Roberts, economist at Stanford University’s Hoover Institution wrote in this 2018 article, “the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time.”

A far better measure is to measure the same people over time, rather than aggregate figures.

“When you follow the same people over time, you get a very different story from the standard one,” Roberts discovered.

Indeed, “When you follow the same people over time, the largest gains over time often go to the poorest workers; the richest workers often make no progress,” he wrote.

Roberts cites a study published by the Pew Charitable Trusts that examined the Panel Study of Income Dynamics which tracked data on the same people from the late 1960’s up to 2002 that showed “children raised in the poorest families made the largest gains as adults relative to children born into richer families.”

Moreover, recent research by the Office of Tax Analysis in the Treasury Department “used tax returns to see how rich and poor did between 1987 and 2007. They find the same encouraging pattern: poorer people had the largest percentage gains in income over time (compared to richer people).”

Specifically, the study examined people who were between the ages of 35–40 in 1987 and then followed up with them 20 years later when they were 55–60.

The results shattered the myth of the common narrative. “The median income of the people in the top 20% in 1987 ended up 5% lower twenty years later. The people in the middle 20% ended up with median income that was 27% higher,” Roberts reported.

“And if you started in the bottom 20%, your income doubled. If you were in the top 1% in 1987, 20 years later, median income was 29% lower.”

By following the same people over time, researchers discovered that low-income earners experienced far greater income gains compared to those starting out richer. Admittedly, many of those starting out in lower incomes may not have caught up with those starting at the top after two decades, however, this data clearly dispels the notion that the rich have gotten richer while the poor got poorer.

Differences in Household Size

Another flaw with income inequality research is the heavy reliance on “household income” as a measure.

Naturally, households with two working adults will tend to earn more than those with one or no income earners. For instance, Perry analyzed 2016 US Census Bureau data and found that 63 percent of households in the lowest income quintile nationally had no income earners, and had an average of just 0.43 earners per household. Conversely, households in the top quintile featured an average of 2.04 earners.

The number of earners per household also has a substantial impact on median household income. Failing to disclose average number of earners when discussing household income data, as is so often the case, is irresponsible.

Furthermore, as divorce rates rise and people are increasingly living on their own, household income measures can drop even if every individual is doing better. For instance, take a married couple each earning $50,000, for a household income of $100,000. Say they divorce and start living separately, and five years later are each earning $60,000. Both are better off, but the aggregate household income measure would see a drop in average, as two $60,000 income households drive down the average compared to the former single household with $100,000 in income.

Estimates of household income are clearly misleading and can lead to some erroneous conclusions.

Racial Inequality

Having established that using household income data, without any analysis, is intellectually lazy and misleading leads us to the analysis of racial income inequality so en vogue today.

Simply pointing out such income discrepancies is proof positive of discrimination, according to progressives; an “institutional” discrimination that must be addressed by massive government programs to correct.

But what does the data really tell us?

Federal Reserve data shows that nationally, 29 percent of white households have two earners, compared to 27 percent of Hispanic and 18 percent of black households.1

Also, according to US Census Bureau demographic data, the median age of whites in the nation is 40.1, compared to a median age for blacks of 33.8.2

And nationally, the median income for men with a bachelor’s degree or more is $46,518 and women $30,406, compared to $24,485 and $13,801, respectively, for high school grads.

According to US Census Bureau data, 24.3 percent of whites age 25 and over nationally have at least a bachelor’s degree, compared to 19 percent of blacks and 13 percent of Hispanics.3

Moreover, 18 percent of white households feature both parents with a bachelor’s degree or higher, compared to 5 percent of black and 6 percent of Hispanic households nationally.

Differences in the number of household earners, average age and educational attainment between races explains much of the differences in income.

Finally, when evaluating claims that income disparity between races proves systemic discrimination we can compare the levels of economic success among people of color. After all, racists just see people of color, and do not differentiate based upon different backgrounds.

As Thomas Sowell wrote in his book “Civil Rights: Rhetoric and Reality,” “Blacks may ‘all look alike’ to racists, but there are profound internal cultural differences among blacks.”

As a result, comparing results for people of the same color but different culture is a valuable tool to provide an indication of other factors besides discrimination at work.

As Sowell detailed in his book, Jamaicans and Nigerians, for instance, earn noticeably more income than native blacks.

Conclusion

Income inequality is a pretext for massive expansion of state power and social control. Trillions of taxpayer dollars and hundreds of federal means-tested programs are directed to stem the supposed crisis of income inequality. But the research purportedly bolstering the narrative that income inequality is a threat to civil society is woefully misleading.

Income inequality stirs up emotions in many people, but sadly the first casualty to the passions is the truth. It is vital to factually evaluate inequality data, failure to do so will continue to enable the growth of the federal leviathan.

*About the author: Bradley Thomas is creator of the website Erasethestate.com, and is a libertarian activist and writer with nearly 15 years experience researching and writing on political philosophy and economics. Follow the author on twitter: Bradley Thomas @erasestate

Source: This article was published by the MISES Institute



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MISES

MISES

The Mises Institute, founded in 1982, teaches the scholarship of Austrian economics, freedom, and peace. The liberal intellectual tradition of Ludwig von Mises (1881-1973) and Murray N. Rothbard (1926-1995) guides us. Accordingly, the Mises Institute seeks a profound and radical shift in the intellectual climate: away from statism and toward a private property order. The Mises Institute encourages critical historical research, and stands against political correctness.

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