Tuesday, April 26, 2011

Newsflash: Nobody's Actually Getting Poorer

One of the more repeated bits of conventional wisdom out there is that, while the last few decades have been quite good for America's "rich," our poor and middle class have really struggled.  For example, here's President Obama trotting out the conventional wisdom in his recent middle finger to Paul Ryan speech on deficit reduction:
In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. Meanwhile, the top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. That's who needs to pay less taxes?
Leaving aside the speechwriter's apparently bad grammar (I think it's "fewer" taxes), an interesting new study (h/t Mark Perry) from the Employment Policies Institute calls President Obama's basic assertion that the "rich got richer, and the poor got poorer" into question.  Here's The Daily Caller with a good summary of the new study:
Research, published at The Journal of Policy Analysis and Management, from Cornell economist Richard Burkhauser, Joint Committee on Taxation economist Jeff Larrimore, and Indiana University economist Kosali Simon, however, suggests that the president’s piece of conventional wisdom isn’t entirely accurate. According to the findings, while the rich have indeed been getting richer, for the last 30 years so too have the poor and middle class.

Burkhauser told The Daily Caller that Obama’s suggestion that the poor are getting poorer understates the amount of income to which Americans actually have access. The president does not take into account, Burkhauser explained, tax unit shifts, government transfers, and other sources of income such as health care benefits.

“The bottom line is [conventional wisdom] asks what’s been happening to private personal income over time and they are right if you look at that for tax units, things do not look very good for the middle class,” he said. “But if you take other things into account, the reason the country has not gotten in a civil war is because things are not that bad. In fact everybody has done better.”

Burkhauser’s research shows what has actually been happening to the lives of Americans over the last thirty years — not just counting the amount of money individuals made in the market, but the actual income that people get in their hands to spend.

“This isn’t a zero sum game, where one group wins at the expense of others,” Burkhauser said. “The growth in productivity of Americans in the top twenty percent of tax units increased the size of the economic pie sufficiently to register major gains across the entire distribution of after-tax income.”
Burkhauser's findings add to a growing body of work which demonstrates that policymakers' (and rent-seekers') breathless concerns over American "income inequality" could be totally overblown, and thus that the redistributionist/statist policies that they justify based on said inequality should be met with serious skepticism.  One of the things not covered by Burkhauser but explained here frequently is the role that trade with China and other low-cost nations plays in further shrinking the great divide between rich and poor because the benefits of "cheap" imports are disproportionately enjoyed by lower income Americans. (In short, "rich" people don't shop at Wal-Mart or Target, so they don't get as much benefit from free trade with China than do frequent Wal-Mart/Target shoppers.)

So if America's poor and middle class have actually been earning more than originally thought (and more than they did only a few years ago), and if through free trade (and other things like technology) they can afford a lot more with those earnings, then should we really follow the President and his buddies into the tax-happy abyss based on an increasingly incorrect conventional wisdom about wage stagnation?

I think not.

(p.s. If the middle class has experienced a 30-40% increase in "total income" since 1979, and 1979 is when US manufacturing jobs peaked, then what does that say about another bit of conventional wisdom re: the alleged "superiority" of such jobs?  Hmmmm.)

UPDATE: Cato's Alan Reynolds has more on the issue here.

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