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Inequality Myths

May 14, 2014 in Economics

By Michael D. Tanner

Michael D. Tanner

From President Obama to Paul Krugman, ThomasPiketty to Elizabeth Warren, the Left has adopted “inequality” as the cause of the day. They paint a picture of a new Gilded Age in which a hereditary American gentry becomes ever richer, while the vast majority of Americans toil away in near-Dickensianpoverty. It’s a compelling political narrative, one that can be used to advance any number of policy proposals, from higher taxes to increases in the minimum wage.

Unfortunately, bad facts make for bad policy. Let’s look at just some of the ways they get it wrong.

Inequality has never been worse. Let’s not even discuss the fact that for large swaths of human history inequality was the norm (kings vs. serfs, anyone?). More significantly, inequality isn’t even at the highest level in recent American history.

Most of those discussing the rise in inequality, including Piketty, look at “market income,” which does not take into account either taxes or social-welfare transfer payments. I’ve fallen into this trap myself on occasion. But, obviously, both of those factors have a significant impact on net income. If those factors are taken into account, income inequality actually decreased in the U.S. over the decade from 2000 to 2010, according to Gary Burtless from the liberal Brookings Institution.

Looking at the issue from another direction, a study by Kevin Hassett of the American Enterprise Institute finds that consumption (that is, spending) for both the highest quintile and the lowest has been relatively flat over the last decades, weakening the argument that there has been increasing inequality.

Of course, I’ve been talking about income, and Piketty and others are more concerned about the disparity in accumulated wealth. The highest quintile, after all, may be saving their increased wealth rather than spending it. Over time, this can lead to increasing disparity. But even here, the evidence shows that wealth distribution has been relatively stable over the past several decades. According to research using the Federal Reserve’s Survey of Consumer Finances, the wealthiest 1 percent of Americans held 34.4 percent of the country’s wealth in 1965. By 2010, the last year for which data are available, that proportion had barely risen, to 35.4 percent.

The rich don’t earn their money, they inherit it. Piketty worries that inheritance will lead to much more inequality in the future. But, at least currently, inheritance plays a very small role. About 80 percent of American millionaires are the first generation of their family to attain …read more

Source: OP-EDS

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