Since time immemorial, clergyman, philosophers and scholars have drawn attention to the existence of income inequality, many suggesting that it ought to be reduced. Personal income, however, is one concept; income inequality is a vastly different notion.
Failing to distinguish between the two is a source of gross misunderstanding and misinterpretation of inequality, and helps explain why we focus so intensively on it. Let us examine this subject a little closer.
While you and I know that income and income inequality are independent concepts, the reader may be easily swept away by a writer’s prose. When it is stated that income inequality has increased, it is easy for the unguarded reader to read: “Therefore I am displeased with my income, and some political action should be taken to reduce inequality among my brethren, which includes me.”
This interpretation would please those who concentrate on income inequality. But we know that aiming to reduce inequality in the population is irrelevant to the goal of increasing individual incomes which is strongly believed to be the principal goal of American people. It is not that reducing inequality is undesirable; it is a matter of a difference in emphasis. In sum, the primary goal is advancement in income and wealth.
In terms of being well-off in either wealth or income, Americans do very well. For example, according to economist Edward Lazear of Stanford University, in a Dec. 29 op-ed in The Wall Street Journal, the nonpartisan Pew Research Center reported in 2012 that 84 percent of a large sample of the American population asserted earning more than their parents. Also, and this is very significant to our final conclusions, 60 percent of Americans in the top 20 percent of income earners were raised in families that were not in the top 20 percent. Moreover, in lower income brackets there were also marked upward movements to adjacent brackets as well.
This indicates there are powerful incentives for individuals to improve their well-being, and strong opportunities for them to leverage them to their benefit. Ironically, existing income inequalities also can serve as incentives for people to better themselves. Because it compares groups of people over time, this form of discussion is called dynamic analysis.
Consider another important contribution to the analysis. Almost all people view the long-run growth in their wealth and annual income as central indicators of personal achievement and success. But there are other metrics one may use – number of real estate parcels owned; acres of land under cultivation; or the number of TV sets, radios or electronic devices, in the respondent’s possession.
A most meaningful measure of the success of a national economy, however, is to choose a representative sample of its people, and observe their income growth over an extended period, say 15 or 20 years, a process leading to what is called a longitudinal sample.
Based on such data, the researcher can answer a variety of questions and gain valuable insights. One of great importance is to ask: Of those who begin the experience in the lowest income bracket, what proportion are in, say, the top segment after x years, after x minus one year, after x minus two years, and so forth?
These measures display the dynamic growth aspects of a society instead of the static, year-by-year comparisons provided by government bureaus. The product of these agencies demonstrate the oft-repeated inference that the rich are getting richer, and the poor are — well, either stagnating or sinking further into poverty, primarily because of the influx of recent migrants, both legal and illegal. But these overall conclusions are refuted by the Pew data set forth in our dynamic analysis above.
Despite the controversial rise in inequality, according to economists Stephen Moore and Julian L. Simon, the standard of living for all income groups, including the poor, continues to rise (see their study It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years, Cato Institute, 2000). Further, writer Peter Ferrara, blogging for Forbes magazine, maintains the standard of living in terms of radios, TVs, dishwashers and air conditioners. The amount and quality of medical care accessible to the average citizen in the lowest income class is now equivalent to the average accessed by a middle class person in 1965, and to the average European middle class member in 2000. It is difficult to find a simpler symbol that sharpens this contrast more vividly than the saying this: In 1900 we were struggling to find enough food to eat, to avoid starvation. Today, we (including the poor), struggle mightily to avoid obesity.
This remarkable, if not dramatic improvement in long-run income growth for all income brackets took place when income inequality allegedly was increasing.
Given this controversial concept, would the reader prefer an economy with sluggish, halting growth, or a dynamic environment which lifts average living standards for people in all brackets, even for those in poverty?
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)