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Inequality Myths ^ | May 18, 2014 | Michael Tanner

Posted on 05/18/2014 10:21:48 AM PDT by Kaslin

From President Obama to Paul Krugman, Thomas Piketty 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-Dickensian poverty. 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 that status. Only 19 percent receive any significant income or wealth from a trust fund or an estate, and fewer than 20 percent inherited 10 percent or more of their wealth. As National Review’s Kevin Williamson has pointed out, for the richest 1 percent of Americans, inheritance accounts for just 15 percent of their wealth. No doubt that’s still a lot of money, but the plain fact is that most of the rich earn their wealth.

In fact, wage income is responsible for a majority of net worth for wealthy Americans. Among the top 10 percent in terms of wealth, wages accounted for 55.8 percent of their net worth in 2010. This actually represented an increase from 46.2 percent in 2007; it is likely that stock-market losses during the recession increased the role of wages and lowered the contribution of capital gains. Interest and dividends even among this most affluent cohort accounted for less than 10 percent of net worth. Nearly half of high-net-worth households do not have the kind of capital investments in properties, businesses, or stocks that Piketty fears will lead to inherited fortunes and ever-increasing inequality.

America hardly seems about to turn into a nation of non-working landed gentry or rentiers. Most of the wealthy continue to be professionals who earn most of their wealth through their occupations.

The rich stay rich; the poor stay poor. Sure, some families stay wealthy for generation after generation. The Kennedys, Rothschilds, du Ponts, and Rockefellers all spring easily to mind. Yet it is also true that wealth is often dissipated over generations; research shows that the wealth accumulated by some intrepid entrepreneur or businessman rarely survives long. In many cases, as much as 70 percent has evaporated by the end of the second generation and as much as 90 percent by the end of the third.

Even over the shorter term, the composition of the top 1 percent often changes dramatically. If history is any guide, roughly 56 percent of those in the top income quintile can expect to drop out of it within 20 years. Of course, they may retain accumulated wealth, but even by this measure shifts can occur rapidly. Indeed, just as rises in capital markets can make some people rich, declines can wipe out their wealth just as quickly. During the nadir of the recession, declining stock-market returns resulted in a 39 percent decline in the number of American millionaires.

At the same time, it remains possible for the poor to become rich, or, if not rich, at least not poor. Studies show that roughly half of those who begin in the bottom quintile move up to a higher quintile within ten years. And their children can expect to rise even further. Better than one out of every eleven children born to parents in the bottom quintile of incomes will reach the top quintile of incomes over the course of their lifetime.

Greater inequality necessarily means greater poverty. Although it is a virtual matter of faith on the Left that the poor are poor because the rich are rich, there is little correlation between poverty rates and inequality. Poverty rates have sometimes risen during periods of relatively stable levels of inequality and declined during times of rising inequality. The idea that gains by one person necessarily mean losses by another reflects a zero-sum view of the economy that is simply untethered to history or economics. The economy is not fixed in size, with the only question being one of distribution. Rather, the entire pie can grow, with more resources available to all.

Moreover, this argument ignores the degree to which poverty is attributable to the choices and actions of the poor themselves. High-school dropouts are roughly three and a half times as likely to end up in poverty as those who complete at least a high-school education, while few college graduates are poor for any extended period of time. Children growing up in single-parent families are almost five times as likely to be poor as children growing up in married-couple families. Less than 3 percent of full-time workers live in poverty. The link between income inequality and poverty is tenuous at best.

* * *

There is good reason for this country to have a debate over issues such as how best to reduce poverty and increase middle-class incomes. But beating the inequality drum will do little to contribute to that debate.

TOPICS: Business/Economy; Culture/Society
KEYWORDS: incomeinequality; inequality; inequity; piketty

1 posted on 05/18/2014 10:21:48 AM PDT by Kaslin
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To: Kaslin

The Bolsheviks must be crushed.

2 posted on 05/18/2014 10:24:55 AM PDT by skeeter
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To: skeeter
It is the Kulaks (middle-class entrepreneurs) which must be crushed so that the Bolsheviks can prevail.
3 posted on 05/18/2014 10:35:36 AM PDT by mason-dixon (As Mason said to Dixon, you have to draw the line somewhere.)
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To: Kaslin

“Equality” is a legacy from the days of the Jacobins of the French Revolution. The motto, “Liberty, Equality, Fraternity” (Liberté, Egalité, Fraternité, French) turned out to have a couple of mutual exclusives. The emphasis during the Revolution was on “fraternity”, which meant “our posse” and not much of anybody else. Thus the “equality” went right out the window, right along with “liberty”, as there was the most morbid fear for one’s very life during the Reign of Terror. The wrong word spoken could result in a swift “trial” and summary execution, and the guillotine fell again and again. And even without the “fraternity”, liberty was often at odds with equality, like in “Animal Farm”, some animals were more equal than others.

All three terms are subject to vast misinterpretation and possess multiple levels of meaning. Only on some esoteric, highly refined line of logic could all three be on the same exalted platform.

4 posted on 05/18/2014 10:46:21 AM PDT by alloysteel (Selective and willful ignorance spells doom, to both victim and perpetrator - mostly the perp.)
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To: skeeter
The commies are all about 'equality'.

For us, not them of course. They, being intellectually and morally superior, are deserving of a bit more.

5 posted on 05/18/2014 10:53:40 AM PDT by skeeter
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To: Kaslin

1. Our dreadful, anti free enterprise economy along with the rates of unemployment and of those no longer seeking employment means there are more people stuck working at entry level jobs.

2. Business is not expanding as much as it is controlling costs. Controlling costs includes controlling or reducing labor costs.

3. Environmental and other regulatory restrictions means a lot of basic industry has gone overseas losing better paying entry and secondary level jobs.

4. The next few years look a lot worse than we are today with the attacks on coal and oil.

6 posted on 05/18/2014 11:03:00 AM PDT by JimSEA
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To: Kaslin


7 posted on 05/18/2014 11:32:41 AM PDT by Organic Panic
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To: Kaslin

the inequality myth depends on the myth that we are all the same, yet our differences abound; not only with respect to gender but with respect to our ability and lack of ability to develop various talents, with respect to our diligence, our tenacity, our perseverance, our willingness to sacrifice and many other human attributes from which we all derive our capacity to succeed at surviving in UNEQUAL measure

then, we have the very natural, very human attribute of individually deciding how much something we need or something we desire is worth TO US PERSONALLY and thus what level of reward we are personally willing to afford to our fellow humans for whatever we seek to obtain from them

together the two conditions join what we have to offer the marketplaces of goods, services and ideas with what others are willing to pay for our ideas, goods and services as well as what we are willing to pay for theirs

the only thing we are equal in is in the Constitutional framework of limited government - rights and powers denied government - intended to allow the our Liberty to thrive

8 posted on 05/18/2014 12:09:36 PM PDT by Wuli
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To: Kaslin

They say “equality” without knowing what it means. They really are talking about the communist ideal of everyone making about the same amount of money no matter how hard they work, no matter how productive they are, no matter how many years they went to college to learn their profession.

Their stated goal is to take money from the productive ones and give it to the indolent slobs who don’t want to work.

Of course, the liberal ruling elite will keep all their money, their wealth and their property.

9 posted on 05/18/2014 12:40:49 PM PDT by I want the USA back (Media: completely irresponsible. Complicit in the destruction of this country.)
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To: Kaslin
As discussions now center around the President's newest tool for dividing Americans--something he calls, "income inequality," perhaps Economics Professor Dr. Walter E. Williams's common-sense, and economically sound, advice might be helpful.

That advice may be found here and then to January 2014 archive, where he discusses the topic. Essays on other subjects, such as government-controlled minimum wage levels, also are available at the site.

Williams introduces the "income inequality" matter in this paragraph:

"Democrats plan to demagogue income inequality and the wealth gap for political gain in this year's elections. Most of what’s said about income inequality is stupid or, at best, ill-informed. Much to their disgrace, economists focusing on measures of income inequality bring little light to the issue. Let’s look at it." - Walter E. Williams

In the paragraphs which follow, he does just that! Too bad we didn't have honest and articulate politicians in both Parties in Washington who would be as straight with American citizens as is Dr. Williams.

10 posted on 05/18/2014 12:42:36 PM PDT by loveliberty2
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To: Kaslin

Notions of inequality (or superiority) generate genocidal wars. Beware the man preaching superiority. Beware the woman complaining about inequality.

11 posted on 05/18/2014 12:43:50 PM PDT by (I Won't Go Underground
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To: Kaslin
I don't care how much someone else has only about how much I have.

I wrote to obama and said that we can add all of our money together and then split it and we'd be equal. Still waiting to hear back.

12 posted on 05/18/2014 4:52:24 PM PDT by Eagles6 (Valley Forge Redux. If not now, when? If not here, where?)
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To: Eagles6


13 posted on 05/18/2014 6:00:06 PM PDT by publius911 ( At least Nixon had the good grace to resign!)
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To: publius911


14 posted on 05/18/2014 6:32:50 PM PDT by Eagles6 (Valley Forge Redux. If not now, when? If not here, where?)
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