Obama: Wrong about Income Inequality: The Problem Is Joblessness, Not Rich People

By Bailey, Ronald | Reason, April 2014 | Go to article overview

Obama: Wrong about Income Inequality: The Problem Is Joblessness, Not Rich People


Bailey, Ronald, Reason


ARE THE RICH getting richer? Yes. Are the poor getting poorer? No. In fact, over the past 35 years most Americans got richer. Has income inequality increased in the United States? Yes. Does it matter? Well, President Barack Obama thinks so. In a December speech at the Center for American Progress, the president declared that" a dangerous and growing inequality and lack of upward mobility" is "the defining challenge of our time" Is that true? No.

In December 2013, a Congressional Budget Office (CBO) study looked at historical tax burdens borne by Americans at all income levels. Among other things, the CBO examined after-tax income trends for each quintile of American households since 1979, including not just wages but benefits and transfer payments. Using the CBO data, the Brookings Institution economist Gary Burtless has shown that from 1979 to 2010, the last year for which data are available, the bottom fifth's after-tax income in constant dollars rose by 49 percent. The incomes of households in the second lowest, middle, and fourth quintiles increased by 37 percent, 36 percent, and 45 percent, respectively. The poor and the middle class got richer.

Burtless then divides the households situated in the top fifth of incomes into four groups: those in 90th percentile and below, those in the 91st through 95th percentiles, those in the 96th through 99th percentiles, and the top 1 percent. From 1979 to 2010, incomes for those fortunate households increased by 54 percent, 67 percent, 79 percent, and 202 percent, respectively. The rich got richer too, and they got richer faster.

Because of these differential increases in income, the share of pre-tax national income going to the top quintile has increased from 43 percent in 1979 to just over go percent in 2010. The share of income accruing to the top 1 percent increased from 9 to 15 percent.

So inequality in the U.S. has increased. But if most Americans' incomes are rising, does it matter if some are getting a larger share?

Inequality is often expressed in the Gini coefficient, a number that ranges between zero (indicating complete equality) and one (indicating that all income goes to one person). The higher the number, the more concentrated the country's income. If the rich get richer and the poor get poorer, the Gini coefficient goes up. If everyone gets richer but the rich get more, the Gini coefficient still goes up.

The Harvard economist Martin Feldstein explained in 1999 why over-relying on this measure is a mistake. "The common procedure of regarding a higher Gini coefficient as a deterioration of the national condition," Feldstein wrote, "is equivalent to treating the marginal social utility of high incomes as negative, i.e., that something bad has occurred when the well-to-do become better off."

Those worried about rising income inequality also often make the mistake of assuming that each income quintile contains the same households. They don't. Between 2009 and 2011, for example, 31.6 percent of Americans fell below the official poverty threshold for at least two months, but only 3.5 percent stayed below it over the entire period.

In his December speech, the president suggested that rising inequality is limiting income mobility, leaving poor Americans increasingly stuck and struggling on the lower rungs. The data do not support this claim.

In 2009, two economists from the Office of Tax Analysis in the U.S. Treasury compared income mobility in two periods, 1987 to 1996 and 1996 to 2005. …

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Obama: Wrong about Income Inequality: The Problem Is Joblessness, Not Rich People
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