Embracing the Inequality Debate

In the ongoing inequality “Battle of the Network Narratives,” new volleys of stories, statistics, and charts are fired back and forth. The CNN Money article, “This is why Obama is so concerned about the middle class,” claims the U.S. economy is unjust and slow to recover {from the late 2007-2009 Great Recession] because it’s top-heavy with accumulated wealth:

It’s not hard to see why income inequality and middle class woes are in the spotlight these days.

The numbers tell the story. The richest Americans have seen their fortunes rise in recent decades. Everyone else has either been treading water or falling backwards.

That’s in large part because the wealthy have benefited from the soaring stock market and corporate profits. But wages, which the middle class depends on, have stagnated.

Contra this claim, I would argue the ways numbers can be used and misused is more the story. Let’s start a list:

1. “Income inequality” and “middle class woes” are “in the spotlight” because the people that aim media spotlights believe these are important social, political and economic issues. These stories support calls for higher taxes and expanded government. Alternative narratives of government as more the problem than the solution fall outside the spotlight. Rarely leading on the evening news are stories about overregulation or, say, federal deficits, unsustainable Medicare, Medicaid, Social Security, underfunded government employee pensions, and the dysfunctional health care system.

2. Claims that only the wealthy benefit from stock market gains, and that wages have stagnated for the middle class are misleading. The American Benefits Council notes over 600,000 defined benefit retirement plans have 70 million employees participating. These plans held some $4.4 trillion in 2014, with, in 2012, “61 percent… invested directly or indirectly in equity securities…”

As of June 30, 2014, 401(k) plans held an estimated $4.4 trillion in assets and represented nearly 18 percent of the $24.0 trillion in U.S. retirement assets, which includes employer-sponsored retirement plans (both defined benefit (DB) and defined contribution (DC) plans with private-sector and public employers), individual retirement accounts (IRAs), and annuities. In comparison, 401(k) assets were $2.2 trillion and represented 16 percent of the U.S. retirement market in 2004.

So some 70 million Americans benefit from the “soaring stock market” through their 401k retirement plans. Many benefit also through company pensions and through their own stock portfolios.

How many Americans own stock directly or indirectly? Well, headlines from CNBC “The stock gap: American stock holdings at 18-year low” and Gallup: “U.S. Stock Ownership Stays at Record Low: The 52% who own stocks continues trend of sub-60% readings seen since 2009.”

From a Federal Reserve chart from the CNBC story: In 1989 the percentage of Americans with stock was at 32%, so the current levels are significantly higher. It should be no surprise that many who saw their stock portfolio value cut in half in the 2007-09 downturn decided to get out of the market (the Dow declined 54% from October 2007 through March 2009). Unfortunately many exited before stock indexes recovered. The general rule is to diversify investments between stocks, bonds, real estate, and gold or other commodities.

Wealthy people own more stock than average, so benefit more when the stock market booms. And for the same reason their portfolios take a bigger hit when stock prices fall. The 2007-2009 stock market crash reduced wealth and income inequality in America dramatically. Another crash in 2020 would also go a long way to reduce wealth and income inequality. Is that what anyone wants?

The CNN Money article includes other misleading statistical claims. Don Boudreaux counters some of these in his LearnLiberty.org video here. In an earlier post these issues are discussed in more detail, with links to videos and video debates on income and wealth distribution. See “The Campaign Against Income Inequality.”

“Inequality, Mobility, and Being Poor in America,” a journal article by economist Steven Horwitz is discussed in this Coordination Problem post which links to downloadable version of the article. Here is abstract with overview of issues:

The conventional narrative that the last generation has seen the rich get richer and the poor get poorer while the middle class gets hollowed out has serious flaws. First, the claims of growing inequality overlook data on income mobility. It is not the same households who are rich and poor each year, and many poor households become richer over time. Second, the claim of middle class stagnation is largely a statistical deception based on an incomplete interpretation of median household income. The middle class has shrunk but so has the percentage of poor households as the percentage of rich households has grown significantly in the last few decades. Third, looking at consumption rather than income enables us to see both the absolute gains of poor US households and the narrowing of the gap with the wealthy. Poor US households are more likely to have basic appliances than the average household of the 1970s, and those appliances are of much higher quality. Together these three points offer a much more optimistic view of the degree of inequality and the ability of the poor to become rich. The picture is not all rosy and a final section discusses the relevance of housing, health care, and education costs to this argument.

Highly recommended for students debating income inequality as it relates to freedom and equity “in the realm of economics.” [From the wording of the LD value topic.]