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April 12, 2012


New Study: Income Gap Inequality is a Myth

It’s a simple point, easily made for simple minds: Rises in economic fortunes disproportionately benefit the wealthy, liberal demagogues tell us. How is that so? Because during the years A to B, household incomes for the middle class rose only X dollars, while those of the upper class rose 10 times X.

The simple mind reels: My goodness! It says. You mean my income rose only $5,000 a year, while those in the highest income brackets rose $50,000?

The outrage simmers, bubbles to the surface, and holy class-warfare Batman - we’ve got ourselves the Obama Administration.

We also hear a lot about the converse: Tax cuts that reduce the typical middle class tax bill by $1,000, reduce the typical upper-class tax bill by $10,000.

Inequality! goes the cry. Tax the rich!

The robust intellect, though, knows this to be a ruse: Of course when household X makes 10 times as much as household Y, and taxes go down by Z percent, household X will see a benefit ten times as much in dollars, even though its benefit is the same by percentage points. The converse is true of percentage increases in household income.

Now, things would be quite different if the increase in percentage between different income levels differed by a factor of ten, and that’s exactly the kind of thing Barack Obama has been claiming throughout all of his five short long years on the American national political scene.

Only thing is… it’s all wrong, as James Pethokoukis points out at the American Enterprise Institute blog:

Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007.  (All figures are inflation adjusted.)

So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.

But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University. (Here’s an earlier, working-paper version.) The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss.

The study presents challenges for both liberals and conservatives, as Ed Morrisey points out at HotAir:

Obama has been hammering Republicans for opposing his massive expansion of entitlements, claiming that they have been enacted on a bipartisan basis in the past, and that they do … pretty much what the Cornell study says they do. If Obama wanted to do so, he could embrace this study to make his point, but then it would devastate his class-warfare arguments and his demand for Buffett Rules, higher capital-gains taxes, and so on. On the other hand, Republicans can use this study to fight those policies, but it would hem in their arguments about safety-net programs and the complications of the tax code.


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6 comments

Wow.  I’m shocked.  David R. Henderson, “The Joy of Freedom” takes on one of the classic texts of terror: Wolff’s “Top Heavy, A Study of the Increasing Inequality of Wealth in America.”  Henderson points out that Wolff makes much of the growing disparity in the ratio of the very wealthy to the poor in America.  To do that, Wolff had to calculate the actual wealth of each (notoriously difficult).  But guess, what?  Wolff didn’t include actual wealth, only ratios, so it was impossible to tell if the subject is Bangladesh or America.  “Wolff writes as if all that matters is relative wealth rather than whether people are doing well.” 
If we measure what people can buy in relation to the number of hours worked, we are vastly richer.  It’s really astounding.  Freedom does that—people buying and selling, producing and consuming and saving and giving—has this amazing way of raising everyone’s standard of living. Freedom and prosperity go together; authoritarian, expansive, capricious governments and poverty go together. 
“When politicians say, “spread the wealth,” translate that as “concentrate the power,” because that is the only way they can spread the wealth. And once they get the power concentrated, they can do anything else they want to, as people have discovered—often to their horror—in countries around the world.” Thomas Sowell

[1] Posted by Theron Walker✙ on 4-13-2012 at 12:16 AM · [top]

So, get N economists in a room and you have N! opinions.  This points out a devastating fact about public discourse.  We have a hard time getting factual information about crucial matters of public policy, and when we do, the facts presented are often incomprehensible to anyone without a quantitatively based university education.  Sorry, all you history, sociology, and women’s study majors grin.

What we are left with is politicians slinging focus group tested sound bites; not intended to inform, but rather to inflame.  This all leaves me pretty depressed about the state of our country.  We require examinations on government and civics for those trying to become citizens, or least we did in the past.  We require written tests for driver’s licenses.  How about government and civics tests being required before you can get a voter registration card, or would that make too much sense.  O.K., how about if you cannot pass the test you can still vote, but you only get 1/2 or 1/4 vote.  You only get a full vote if you can pass the test.

A quick, true story as an illustration.  My wife works with prison ministries and counsels youthful inmates getting ready for release.  Most of them have no idea how to balance a check book, write a resume, etc., but they know all about how to qualify for welfare, and get all manner of public assistance payments.

[2] Posted by Daniel on 4-13-2012 at 08:18 AM · [top]

There was a chart floating around on FB the other day - shows that Reagan increased the deficit by approx 180% and Obama increased it by approx 35%.  THIS WAS ABSOLUTEY TRUE, but it didn’t tell the real story - that Reagan increased the deficit by $800B and Obama has increased it by $6T - or 7.5 times as much (numbers not adjusted for inflation).

3 types of lies - lies, damned lies and statistics.

[3] Posted by B. Hunter on 4-13-2012 at 09:20 AM · [top]

No discussion of income gap is complete without reference to the out-of-wedlock birthrate, now at 40%.  Out-of-wedlock birth is a ticket to poverty.  All American citizens carry a responsibility to their government.  Yes, those with income have a responsibility to provide taxes.  Yet, no one ever mentions the moral responsibility of prospective mothers.

[4] Posted by Jill Woodliff on 4-13-2012 at 09:38 AM · [top]

[2] Daniel.  By N!, I hope you meant N exclamation point and not N Factorial. N Factorial would have been an exaggeration for N’s above, say 4. Although I think it is no exaggeration to say that if you put all the economists in the world end-to end, they still cold not reach a conclusion.  But I strongly agree that the lack of quantitative background and understanding greatly and negatively impacts American dialog, discourse, rational and political effectiveness, and productivity.  “unintended consequences” is largely a cop out when game theory and other forms of quantitative analyis would show the unintended consequences imminently predictable.

[5] Posted by Don+ on 4-13-2012 at 12:14 PM · [top]

Somehow it seems to me the Ed Morrissey at “hotair” item ought to have been the headline here.

[6] Posted by Fallen on 4-14-2012 at 03:29 PM · [top]

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