Another Look at Income Inequality
In Mark Perry’s recent post: More on … ‘rising income inequality’ with new data from … Census report he argues Census data indicate not much has changed over the last twenty years. The share of total income earned by the top 20% and the top 5% of households is about the same now as in 1993.
So why then is income inequality so often reported as widening significantly?
Many news stories look at income data for the top 10%, 1%, or .1%, and with the stock market booming, income gains is higher at the top income levels.
Much of the news focus on income and wealth inequality follows the publication of Thomas Piketty’s Capital in the Twenty-First Century. The research findings in the book have however been challenged by other economists. Don Boudreaux reviews Piketty’s book in Barrons.
Boudreaux explains a key issue often overlooked:
If we follow the advice of Adam Smith and examine people’s ability to consume, we discover that nearly everyone in market economies is growing richer. We also discover that the real economic differences separating the rich from the middle class and the poor are shrinking. Reckoned in standards of living—in ability to consume—capitalism is creating an ever-more-egalitarian society.
Very rich people have lots of wealth and income, but their high-definition televisions (many purchased early for $5,000 or more) have pictures rarely better than the HD TVs the rest of us purchased some years later for under $1,000. The gear shifters and other technology on high-tech mountain bikes the rich buy for $10,000 or more, are usually available to the rest of us a few years later for under $1,000. We should thank the rich for funding the development costs for advanced technologies that the rest of us can soon afford.
The ultra rich can afford bigger houses and boats, more expensive vacations, and pay for higher-end technology sooner than the rest of society. But how big a deal is any of that? Does a bigger a house or bigger boat really matter? Most Americans have houses people in other countries think are weirdly large already.
Families living in developed countries enjoy an astonishingly level of luxury. The more complicated task is to manage our lives so we live within our incomes and avoid cheated by scam artists or jump onboard destructive or wasteful fads. People not paying attention can go deeply in debt buying stuff they don’t really care about, from too-expensive cars to high-dollar vacations. Many people are too late learning to save first before spending. And many make their lives harder by eating too much (of the wrong foods), exercising too little, and not learning how to manage stress.
Okay… end of lecture. Sorry…
Separately, it is important to remember that the people in the top 20 percent and top 10, 5 and 1 percent of income levels are mostly different people than twenty years ago. There is significant income mobility as people mature and gain more valuable work skills, and for others as they get older and retire to lower incomes.
Income mobility itself is much debated. This NYT article cites research over the last twenty years: “Upward Mobility Has Not Declined, Study Says“
The odds of moving up — or down — the income ladder in the United States have not changed appreciably in the last 20 years, according to a large new academic study that contradicts politicians in both parties who have claimed that income mobility is falling.
And this page has Don Boudreaux’s video on the real “truth about the economy” focusing on various competing measures of income and inflation.