The Great American Income Inequality Debate

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The Great American Income Inequality Debate

It's the classic clash between "the haves" and "the have-nots." Only in this case, it's between "the haves" and "the have-a-lot-mores"— and in the shadow of the Great Recession, those who merely "have" are not happy.

The widely-held perception is that the middle class and the poor are falling farther and farther behind upper-tier earners. This conclusion is reinforced by stagnant or declining wages, coupled with certain types of costs, such as healthcare and energy, that have been rising. Feeding the perception that the inequality is growing is a recent report published by the Congressional Budget Office that sought to quantify certain aspects of "income inequality."1

The report analyzed income changes from 1979 to 2007 and concluded that:

  • Average real after-tax household income for the top 1 percent of households grew by 275 percent.
  • For the next 19 percent of households, the growth was 65 percent.
  • The next 60 percent experienced a 40 percent growth.
  • Income for the bottom 20 percent grew just 18 percent.

The timing of this report seems politically motivated, designed to generate support for disgruntled citizens massing in the streets, protesting what they perceive to be an unfair system that needs to be dismantled. Those protestors are responding to a system that they perceive as enabling the top 1 percent to get richer at the expense of the other 99 percent. This new report merely fuels that flame of misunderstanding.

However, the Trends editors take exception to this report not because of its timing and motivation, but because of fundamental flaws in its simplistic analysis and conclusions. As we'll highlight, a preponderance of rigorous studies and reports support our assessment.

For example, a supporter of the Obama administration, Northwestern University economist Robert Gordon, argues that Census Bureau data used in the new CBO report are analogous to "comparing apples with oranges, and then oranges with bananas." His 2009 research paper, "Misperceptions About the Magnitude and Timing of Changes in American Income Inequality,"2 demonstrated the flawed results that emerge when differing household demographics and differing inflation measures are used to assess various income levels.

At the core of the CBO analysis and several similar studies is the presumption that if national productivity rises by a certain percentage, a "fair system" would result in incomes at all levels rising at the same rate. Therefore, it's assumed that people in the segments with slower-rising incomes are being unfairly penalized for the benefit of those in the faster-rising segments...

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