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Census: Widening gap between the rich and the poor in the period from 1979 to 2007

99 Percent Confusion


By --November 8, 2011

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A new Congressional Budget Office (CBO) analysis of numbers provided by the Internal Revenue Service and the Census Bureau is being trumpeted through the mainstream media. According to the news reports, the analysis shows a widening gap between the rich and the poor in the period from 1979 to 2007.

Specifically, the numbers reveal a much greater rate of growth in the income of the top one percent of income earners over that thirty year period than in all middle and lower percentiles of the population. Some conservatives’ temptation in the face of such studies is to read more deeply into the numbers in search of mitigating circumstances and qualifying contexts. In truth, such quests amount to quibbling, or worse, as they implicitly accept the most fundamental assumptions of the liberal reading of these rich-poor gap horror stories, whereas it is precisely at the level of basic assumptions that the liberal reading of this CBO analysis, and others like it, can most effectively be undermined.

First of all, to state the obvious, the period covered by the analysis could not speak any more eloquently as to the perspective and intention of those providing the numbers to the CBO, or the ‘news’ to the rest of us. From the year before the beginning of the Reagan presidency to the year before the end of the Bush 43 presidency—had someone told you the years encompassed by the study, but not the findings, would you have had any doubt as to the general thrust of those findings? The intention is to saddle the broadly Republican era of ‘corporate greed’ with the virtual or actual crime of burying the hopes of the poor in the name of filling the coffers of the rich. Why does this study not encompass the period up to the 2010 tax year and the 2010 census, for example? (Can anyone spell BHO?) The purpose of the CBO study, or of its popular presentation, was not to investigate recent changes in the U.S. economy. The purpose was to pile on with the Occupy Wall Street (OWS) crowd, i.e. broadly to support Democrats versus Republicans. Enough said.

What do these numbers measure?

The real issue one must take with these numbers, however, is not with the motives of those serving them up, but with the numbers themselves. Specifically, the primary question is “What do these numbers measure?” This is exactly the question that the promulgators of such fraudulent ‘news items’ would prefer that you never ask. Ambiguity is the enemy of statistical analysis, but it is the bosom buddy of liberal politics. If someone were to burst into the room and announce in a haunted voice, “It’s gone from 10 to 10,000,000 in just the last few years,” your response to this information would depend entirely on the referent of the subject pronoun. Does “it” refer to the number of dollars in your bank account or the number of mosquitoes in your bedroom? The CBO analysis and its attendant town criers are hoping that the urgent tone of their delivery will trump any sensible consideration of what they have actually told us. In fact, what they are bemoaning as the inevitable life-destroying power of unbridled capitalism seems to me to be pretty good news.

So let’s start again. Here is the heart of the CBO analysis, as reported by the Associated Press on October 26th, 2011:

“The richest 1 per cent of Americans have been getting far richer over the past three decades, while the middle class and poor have seen their after-tax household income doing nothing more than crawling up by comparison, according to a government study.

After-tax income for the top 1 per cent of U.S. households almost tripled, up 275 per cent, from 1979 to 2007

“After-tax income for the top 1 per cent of U.S. households almost tripled, up 275 per cent, from 1979 to 2007, the nonpartisan Congressional Budget Office found. For people in the middle of the economic scale, after-tax income grew by just 40 per cent. Those at the bottom experienced an 18 per cent increase.”

Couldn’t be much clearer, right? After all, numbers don’t lie, do they? True enough. Unfortunately, people are somewhat less trustworthy than numbers. As noted above, the salient question, carefully overlooked by the AP report, is: What do these numbers represent? The closest thing the report offers to an answer is that the numbers represent the incomes of “the rich” and “the poor”. And as a matter of language, this is correct. However, as a matter of human beings and their relative lots, things are much murkier.

The terms “rich” and “poor”, insofar as they matter in a society in which “poor” commonly means having a high school education, taking buses rather than driving a car, watching DVDs rather than Blu-rays, and going out for dinner at fast-food restaurants rather than at upscale places with white tablecloths, may continue to be useful as descriptions of relative economic positions. Add to each of those little words a definite article, however, and suddenly straightforward adjectives become agenda-driving nouns. “The rich” and “the poor” are not descriptions. They are categories. Specifically, they are categories of people. And herein resides the Big Lie of liberal economic policy. Reports such as the AP story cited above are worded so as to carry an implication that could never reasonably be stated explicitly, namely that “the rich” and “the poor” of 1979 are “the rich” and “the poor” of 2007. In other words, the implication is that the same people continue to fill these two abstract categories. (”Those at the bottom experienced an 18 per cent increase.”)

In a command economy, there might indeed be such a lack of economic mobility that the categories of the rich and the poor could be filled by the very same people (or their descendants) over a 29-year period. In a semi-free market economy, however, there is obviously no such status. We can all name many famous men and women who “rose from nothing,” as we say, to great material success. And for every famous example, there are who-knows-how-many obscure cases of the same trajectory, whether in the lives of individuals, or over the generations of a family. Indeed, it was not long ago that the American Dream was understood to be embodied by those immigrants who worked low-paying, back-breaking jobs for decades in order to give their children a chance at a level of material comfort they themselves could never hope for, and whose personal success was measured in the satisfaction they experienced, in their last years, at seeing their children end up as teachers, doctors, and scientists.

Of course, some of the poor of 1979 may still be among the poor of 2007—or of today, for that matter—but unless the CBO analysis were able to show that the two instantiations of the “the poor” were in fact comprised of almost all the same people, there would seem to be little cause for alarm. In short, as long as “the rich” and “the poor” are purely statistical categories, rather than socio-economic castes, the fact that the income of “the poor” has risen at a much slower rate than that of “the rich” is not only nothing to worry about, but is in fact a hopeful sign, including for those currently peopling the category labelled “the poor.”

“But,” the liberal might say, “what about the problem of more and more wealth being concentrated in the hands of the tiny minority at the top?”

Old liberal canard of representing the economy as a pie of unchanging size which gets divided up, more or less equitably

Here, we run up against the old liberal canard of representing the economy as a pie of unchanging size which gets divided up, more or less equitably. Again, were this an accurate representation, then the concerns about an increasing ‘concentration’ of wealth would have merit. And yet here is how the AP story itself describes the growing disparity of incomes:

“The top 1 per cent made $166,000 or more in 1979; that jumped to $349,000 in 2007, the study said. The income of the top fifth started at $51,607 in 1979 and rose to $71,016 in 2007. On the other end of the spectrum, those in the 20th percentile went from $12,823 in 1979 to $14,851 in 2007.”

To begin with, there is sleight of hand in these numbers. Notice that the income the AP purports to be reporting on is “after-tax income,” which, in this CBO analysis, specifically means “Market Income Plus Transfers Minus Federal Taxes” (CBO, p. 37). And yet the figures cited in the above paragraph, featuring the grand $349,000 minimum for the top 1 percent, are taken, not from the CBO’s chart depicting after-tax income, but from a chart expressly labelled “Market Income”, i.e. household income before federal transfers and taxes. (CBO, p. 35) The figures from the after-tax income chart show that the minimum income of the second quintile (21-40%) changed, not from $12,823-$14,851, but from $15,411-$18,979, while the top 1 percent changed from $115,965-$252,607, not the reported $166,000 to $349,000. This true “gap” is significant, to be sure, but it is substantially less dramatic than the figures misleadingly quoted by AP.

More importantly, these proper figures, when compared with the CBO’s pre-transfer, pre-tax figures, reveal something else that might reduce the class warfare points the AP hoped to score with this study. Notice that the 2007 minimum household income of the top 1 percent is reduced by about 33% when transfer payments and taxes are taken into account—from $347,421 to $252,607—whereas the minimum household income of the second quintile group actually increases after taxes and transfers, from $14,851 to $18,979, an increase of 21%. The net effect of taxes and transfer payments is to increase the income of the relatively poor by a significant margin, while decreasing that of the wealthy by an even greater margin.

Even granting this, however, there has undoubtedly been a widening of the income gap between the top and bottom households. And by giving no explanation as to the reasons for this growing ‘disparity,’ the media feed the monster of class envy. The actual CBO summary has this to say about the improving fortunes of the top 1 percent:

“The precise reasons for the rapid growth in income at the top are not well understood, though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities.” (CBO Summary, p. 3)

In other words, the CBO at least has the dignity to confess that, contrary to the finger-pointing demagoguery implied in the media presentation of the numbers, they do not really know why the rich are getting so much richer. The speculations they offer, such as the increase in the preponderance of little Beyoncés and Michael Jordans, probably come closer to explaining the numbers than any nonsense about corporate greed. (The average major league baseball salary in inflation-adjusted dollars was just over $300,000 in 1979. The minimum player salary in 2007 was $380,000.)

More importantly, apropos the OWS mantra of unfair distribution, consider the numbers within the CBO’s numbers. While it is true that the higher income groups gained at a faster rate than the lower groups, it is nevertheless clear that incomes rose across the board during the period in question. In other words, societal wealth in general grew substantially during those years, regardless of how it was distributed. That is to say, the amount of wealth available in the U.S. during that period was not static, not a pie to be cut up, but rather a treasure trove admitting of potentially infinite expansion. On the face of it, then, nothing about the greater rate of income growth in the higher percentiles suggests that anyone in the lower percentiles was thwarted or undermined in any way. If you earn more money this year than you did last year, while my income remains the same, it in no way follows that my stasis is the result of your growth. This simplest of points is continually lost on liberals, in part because their entire electoral strategy is based on the creation of a dependency culture with its attendant redistributive demands, and in part because so many of the leading liberal figures are people who, on principle or by accident, have largely eschewed such activities as might actually contribute to the creation of new wealth, i.e. they have never knowingly participated in the ongoing expansion of the proverbial pie.

So what are we to make of the fact that the highest income category—meaning the ever-changing collection of actual humans who happen, in any given year, to comprise the top percentile of the nation’s income earners—appears to be getting wealthier at a much faster rate than the lower income categories?

Consider what it means to be poor in a market-driven economy. It means, basically, that you are producing, or at least presenting to the market, far less of value than most other people. If one thinks this sounds cruel, it is because one is mistaking the “value” in question for human worth, a different matter entirely.

To remove the pall of ‘black-heartedness’ from this account, however, let’s leave aside the poorest of the poor for a moment, and consider the more common case of the so-called middle class. I teach at a mid-sized university, and I think I do a pretty good job. So why isn’t my income comparable to that of Bill Gates? I doubt he works a whole lot harder than I do these days, and, if I may flatter myself, I think I do my job as well as he does his. On the other hand, my efforts will make a significant impact on perhaps a couple of hundred people this year, whereas Gates’ products will be sought after by millions, perhaps even billions, of people around the globe; according to his company’s website, he will directly employ over 90,000 people this year, not to mention the untold numbers of people who have jobs in large part due to their own employers’ contractual relationships with Gates’ company; and his work continues to contribute to revolutionary changes in the realms of communication, entertainment, commerce, and education. In short, Bill Gates will produce far more of material value this year than I will. In other words, he will produce more wealth. This does not mean he is a better human than I am. It means he is worth more money. So I have no grounds for claiming a share of his income, anymore than he has any claim against mine.

And there is a further point here that is directly relevant to the issue of growing income disparity. I intend to continue working as a teacher for many years. I enjoy the work, and I am generally satisfied with the pay. Like everyone, I have occasionally fantasized idly about having millions of dollars, or living in a mansion on the Riviera. But as with most people, my fantasies have remained idle. That is to say, I am not wealthy in part by choice, in the sense that I have never undertaken any activity that might realistically have given me any hope of becoming one of the super-rich. As a result of undertaking no such activity, I know that I am consigning myself to earning an income that grows slowly, if at all, whereas Gates, at least in the early phases of his working life, saw his financial prospects grow quickly and in grand leaps. To put it another way, I have chosen to function as a tiny moving part in an economic machine of which Bill Gates is part of the design team. No great sighs involved here. I would not want the stresses and strains of his practical existence, anymore than he might be satisfied with the material limitations of mine. And in truth, if the gods presented me the option of exchanging my life for his (intellectually and emotionally, in addition to materially), I could only say yes in a fit of short-sightedness. I would not be willing to do all that he has had to do—admirable though it is—at the price of my years rummaging around in university libraries trying to divine the relationship between form and matter while living on a poverty-level income.

I suspect that, in their own ways and for their own reasons, many other people in the middle and lower income brackets would choose as I would, were the gods to make the same offer to them. Most people simply settle into an available means of supporting themselves—one consistent with their personal interests, if lucky—and make do with that, changing jobs or careers as practical circumstances demand, rather than with their eye on the Riviera. So much, then, for the slow rate of income growth among the middle class. They are typically working in jobs with set salaries that change gradually over time, unlike the wealthy, many of whom are engaged in more volatile wealth-creating activities wherein extreme changes of fortune are more likely. (Remember, once again, that we are talking primarily about categories, not people; there is nothing to prevent someone who belongs to the middle class from developing a useful new product or service and suddenly jumping into the top 1 percent.)

As for the poor, who are they? People who are just starting out in their working lives, and have not yet found a full-time job suited to their skills; part-time or seasonal workers content to make their income stretch as far as possible while pursuing further education (or amusement) during their off-time; people of little focus, education, or remunerable skill who are stuck in low-paying, minimal-advancement jobs for an extended period of time; loafers content to get by on whatever cash they can scrounge together; single parents who cannot dedicate themselves to a career in a manner that allows for economic advancement; and genuine down-on-their-luck cases from under whom the floor has fallen out temporarily. The idea that the average household income of people in this category could rise significantly is counterintuitive, in that the very nature of being in any of the conditions described above militates against short-term material progress. People who are hardly working, or who are working in low-skilled jobs, can hardly be expected to show a substantial increase in income. In other words, there will always be a minority of the population that is living at a relative subsistence level in any given year, and subsistence is by definition a low-growth business. The question, however, is whether there is economic mobility to allow for those in the ‘poor’ category at any given time to find their way out of it. This is the question that is avoided entirely by analyzing poverty in terms of ‘bottom percentiles.’

There must always be a bottom percentile. Conversely, there must always be a top 1 percent. As with their opposite number, the justice or fairness of their position cannot be measured in dollars. The relevant question is whether there is economic mobility—downward mobility in this case—that would allow those falling within this category in any given year to fall out of it in any given year.

Liberal fudging about the rich-poor gap

And here we encounter another convenient bit of liberal fudging about the rich-poor gap. Imagine the case of a major league athlete, a mediocre back-up third baseman, for example. Given present-day baseball salaries, even this relatively “ordinary” player has probably been earning upwards of a million dollars per year. This year, however, chronic injuries and sagging performance have forced him out of the game. He spends the year fishing and watching his children play T-ball. He has no significant investments, but knows that his savings from his years in the majors can easily cover him during this down time. Is he rich or poor? You and I would probably call him rich. Practically speaking, “rich” means, in part, not even needing to work for money anymore. However, observing the standards used by the CBO in conducting their study, he is poor. In one year, according to the CBO’s terms, he has fallen from the top 1 percent to lowest quintile. He is as poor as the part-time employee at the doughnut shop in terms of annual income. His accumulated past income can be of no consequence on this model.

To claim that this case does not meet the prerequisites of ‘fairness’ because the athlete has savings to get him through his year without income while other poor people do not is to allow liberal egalitarian pieties to trump the liberals’ own reasoning. It is to make personal envy an extenuating circumstance in cases otherwise conforming to the standard model of ‘poverty’ and ‘wealth’ assumed in the CBO study. The question of whether it is fair for one person to have a much greater income than another in any given year—the rich-poor gap as defined by the CBO—is entirely distinct from the question of whether it is fair for one person to have more accumulated wealth than another. Rectifying the latter ‘problem’ would require the direct and overt denial of basic property rights—it would require direct confiscation by force—which is why the circumspect Left must conflate the matter with the issue of uneven annual incomes, as though the moral question of fairness, rather than basic principles of constitutional republicanism and individual liberty, were all that is at stake.

In sum, on the Left’s own working model, the baseball player in question has indeed gone from the richest of the rich to the poorest of the poor within just one year. Clearly, the kind of downward mobility required for fairness exists in this system.

Now imagine that after a few months off, our third baseman gets the itch to play again. He starts a rigorous exercise program, gets himself into great shape, and is invited to spring training the following season by a new team. He makes the cut, and finds himself in the majors again with a base salary of $600,000. He has risen from the bottom 20 percent to the top 1 percent in one year. Obviously, this represents the kind of upward mobility that is required for fairness. For in a free economy, the only real unfairness consists in someone being artificially prevented from rising, or artificially protected from falling. (Bailouts, anyone?) Using the CBO’s own definitions of ‘the rich’ and ‘the poor,’ we can define a fair and just economy as one in which the bottom 1 percent and the top 1 percent could, in theory, be completely reversed in any given year. If nothing prevents that from happening in theory, then we already have the only kind of economic justice that can make sense in a free society.

So, what are we to make of the ‘widening gap between rich and poor’? At least three things:

The CBO analysis, read carefully, is measuring the changing incomes of “households.”

The CBO analysis, read carefully, is measuring the changing incomes of “households.” (The study makes a mathematical adjustment for different household sizes, but one that, appropriately, still favors households with greater total income and/or fewer people.) The sharp rise in household incomes at the highest percentiles indicates an increase in two-income households in which both parties are earning salaries that would, in the past, have been regarded as a family’s primary income. This would be consistent with lower birthrates in the higher income groups, as women pursue careers over full-time motherhood, and with the greater incidence of single-income households (including a greater incidence of single-parent households) in the lower income groups. It is reading backwards to see any evidence of unfair advantage here. The point is not that single income families are being ‘held down,’ but rather that couples that stay together and pursue side-by-side careers create for themselves an obvious advantage in the area of household income. (Using the CBO’s adjusted household income formula, a childless couple with combined income of $80,000 and a single mother of three with an annual income of $80,000 have adjusted household incomes of $56,577 and $40,000, respectively.) As the CBO itself notes:

“Women’s participation in the labor force rose rapidly [over the period of the study], and the gaps between hourly wage rates and annual earnings for men and women narrowed.” (CBO, p. 14)

Do liberals want to claim that the rising economic fortunes of women relative to men are leading to economic injustice? And as for the increase in the number of single parent households, with their inherent economic disadvantages, this problem, if it is one, would seem to be more on the heads of the modern moral relativist Left than of free market conservatives.

One can be in a lower quintile in a given year without necessarily being “poor”

Not surprisingly, the minimum annual income for households in the lowest and 2nd quintiles shows the least improvement. As noted, this group comprises those who, in the given year, happened to be unemployed, underemployed, between jobs, taking time off to undertake further job-training, starting out in a new enterprise, or just working unskilled or seasonal jobs by choice or necessity. There will always be a section of the population in such conditions in any one year—though not the same actual group of people from one year to the next. (And, as in our baseball player example, one can be in a lower quintile in a given year without necessarily being “poor” by any other measure.)

What is noteworthy, however, is that beyond these lower groups, the entire economy shows a clear upward trend over the years from 1979-2007. In the middle quintile (41-60%), the 2007 minimum after-tax income was almost identical to the 1979 maximum income for the same quintile. That trend becomes even more marked as we move into the higher quintiles. The fourth quintile’s (61-80%) minimum 2007 income was greater than its 1979 maximum. The 91-95% group had a 2007 minimum income much higher than its 1979 maximum, $81,135 to $64,086.

Far from showing any injustice in the system, these figures would seem to offer heartening news for the materially ambitious who currently occupy the lower income groups. The message appears to be “the sky’s the limit.” Even households at the ‘middlest’ of the middle class, those at the 50% mark, are earning much more money than their counterparts of thirty years ago. And the overall growth in all categories, contrary to the liberal media’s attempts to use these numbers to foment envy and anger in the ‘lower classes,’ serves as a practical refutation of the presumption at the heart of the OWS rabble-rousing and all leftist class warfare, namely that wealth earned by the rich is wealth thereby unavailable to the rest of us, i.e. that property is theft. To that notion, the CBO’s numbers, and even, unintentionally, the media’s reporting of those numbers, respond with a resounding “Phooey.”

Cost-of-living, Inflation Gradual economic advancement

Most people pursue livelihoods that, by their very nature, admit of only gradua economic advancement. Inflation, and the cost-of-living salary increases designed to mitigate its effects, have created the peculiar impression among workers of all sorts that substantial gains in real (inflation-adjusted) income are part and parcel of any job. That is to say, the continual rise in non-inflation-adjusted wages breeds a presumption in many minds that real wages for the same job just ought to rise over time. Thus, the CBO’s numbers for the middle quintiles of income earners, which show incomes to have increased substantially ahead of the rate of inflation during the period from 1979-2007, are described by AP as “doing nothing more than crawling up”—as though a beginning teacher’s salary (in inflation-adjusted dollars) should be expected to have leapt up by 40 or 50 percent over the period. On what grounds?

The top 1 percent, on the other hand, includes all of those people who have ventured out into unknown waters, rather than working in more predictable, steady, and economically moderate careers. Of course, for all the 1% vs. 99% talk, the idea that 1 out of every 100 households is comprised of the super-rich—Obama’s millionaires and billionaires—ought to have the rest of us signing up for the nearest investment seminar, rather than drawing up anti-Semitic signs for OWS.

In truth, of course, the majority of that 1% group in any given year earns much less than a million dollars. Mathematically-speaking, almost none of the denizens of the 1% group are corporate executives or sinister bankers. Most of them are small business owners and other ‘people like us’ who happened to have a good idea and make good on it, at least for one year. And that reality ought to cause some glee among the 99%, as we look at the CBO numbers one more time.

What does it mean that the minimum annual household income of the top1 percent rose by 218% over just 29 years, from $115,965 to $252,607? It does not mean precisely what the OWS types would have us believe—namely, that “the rich are getting richer.” What it means, exactly, is that more people are getting rich. The top 1 percent used to comprise the tiny minority of people earning huge money, and then the upper levels of ‘everyone else.’ That is to say, the 1979 incarnation of “The 99%” would have been calling itself “The 99.9%.” By 2007, so many more of the rest of the population had found a way to economic success that an annual household income of more than a quarter of a million bucks—after a 33% reduction due to federal taxes—was accessible to one out of every hundred households. What’s more, by 2007 the people in the 95th percentile—firmly entrenched within the noble “99%” category—were earning only $7000 less than those who, in 1979, were in the top 1%.

These numbers spell encouraging news for those with hopes of making it big. True, they hold more moderate pleasures for people who prefer safe careers, or who pursue their dreams in corners of the economy that have little mass appeal. But to hold the wealthy accountable for one’s own (financially) limiting choices is worse than petty. It is hypocritical (“I don’t care about money, but give me more!”), not to mention foot-stompingly childish. If you chose to be a teacher, don’t blame Bill Gates for the fact that he has more money than you do. If you want his kind of money, go out and do what he did.



Daren Jonescu -- Bio and Archives | Comments

Daren Jonescu has a Ph.D. in Philosophy from McMaster University in Hamilton, Ontario. He currently teaches English language and philosophy at Changwon National University in South Korea.

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