Monday, March 10, 2008

"The Inequality Myth"

We've heard a lot about the growing income gap between rich and poor - a common theme around election time. In the Wall Street Journal today, economist Brad Schiller breaks down the details. He says the idea of inequality rests on two facts, but many other facts mitigate those two.
The two facts in favor
  • The top 20% earners have increased their share of the pie from 43% in 1970 to 50% today while the bottom 20% have decreased their share from 4.1% to 3.4%.

  • The middle 60%, meanwhile, have seen wage stagnation. The median household income is at $48,200, only $200 more than 1998 totals.

The mitigating facts

  • First, the pie is much bigger. GDP is three times larger than it was in 1970, so that 3.4% slice actually represents a 36% increase in income. It's a nearly indisputable fact that the poor have significantly higher purchasing power than in 1970, even if they are farther away from the rich in income.

  • Second, the population has grown by 20 million since 1970, most of it through immigration, legal and illegal. Which means that the newest Americans are poorer. Schiller gives the metaphor of a line of people moving forward...the line keeps moving, but new people keep getting on the end of the line, so that the line in fact gets longer - the people in front are even farther away from the people in back.

  • And finally, and this was very interesting...all of the data is based on household income. But the combination of divorce and people marrying later has dramatically changed households. The average "population" of a household has decreased from 3.14 to 2.57, so that even if wages stagnated, the actual income has increased, because it is supporting fewer people.

My one complaint about the piece is that he uses 1998-2006 for some comparisons, and 1970-2006 for others. Clearly when Democrats talk about income inequality, they are talking about the Bush Tax Cuts. I wish Schiller had used 1998-2006 as the comparative period for all of the data points.

A point of annoyance with both parties...the Democrats hammer away at the first two points, never mentioning the latter three. And Republicans generally stay mute on the subject, instead of engaging in debate. Perhaps it's because they realize that true populist campaigns, like that of John Edwards, tend to flame out. A majority of voting Americans, it appears, don't like being told how poor they are.

Note: WSJ is a paid subscription, but I believe the opinion page is accessible for free.


Wini C. Hill said...

Although not necessarily a mathematician by trade, 1+1=2 in my book and I'm going to stick with it. That said, if I was making $48,000 in 1998 and now I'm making $48,200, because I'm part of a bigger pie, does that mean that my piece tasted great but was less filling? Or because there are more rich folks getting access to that biggest piece of the pie, my $200 piece of the pie is of greater value because it's contributed to the rich getting more and better pies? Or because I'm probably paying $200 to, oh, let's say $2,000 more per year for gas, heating, electricity, insurance that I will look at that $200 piece of pie and say, 'hmm, perhaps I should forego that luxury and let the rich have that piece of pie, too?" Or add it to my taxes to pay for the presidential campaign fund? Don't even get me started on those idiots making less than $20,000, because their pies are getting bigger even as we speak. Make the pie higher.

Jamie Lin said...

Mr. Schiller made several fetal mistakes in his arguments. First, when dismissing "the poor are getting poor," he did not use the same "dollar" to measure the pie. In "2007 dollar" terms, the poor's pie should have been $471 billion in 2007 versus $218 billion in 1970. Taken 93% increase in number of households into consideration, each household's pie has only increased by 11.7% in 38 years – while the economy expanded by 307%. More importantly, being poor or rich is relative. Therefore, even if the author did not make the first mistake, the poor indeed has been getting poor with only 36% (or 12%) increase in pie size in comparison to 300+% gain for other classes.

Moreover, the author wrongly accused new immigrants of being a drag to the poor's advancement. Not only did he raise no evidence to support his assessment, but he also used an largely incorrect model, a ticket line, to explain new immigrants' entrance into the system. By various measures, new immigrants are a very positive factor to this economy, especially in promoting growth and equality. For example, since the creation of E-class investment visa in 1990, almost 200,000 new immigrants have joined the US economy through each investing more than $1 million and creating more than 10 jobs. Not only have these people not dragged the poor, they have instead increased the pie while distributing a lot of the gain to lower class through paychecks, stock options and other various forms of employee compensations. Besides, over 40% of PhDs that are currently working in US are not native. These PhDs certainly would earn anything but below median income or bring more inequality. It’s very easy to see how the ticket line model is off as new immigrants certainly do not all enter this economy from the back of the line and how dead wrong the author was in blaming new immigrants for bringing inequality.

Jamie Lin

New York, NY

An NYU Stern MBA and a proud new immigrant entrepreneur who has created many jobs