Why Do We Want To Be Poorer and Less Equal Than We Are?
New Census data showing record levels of income and no increase in inequality should be cause for celebration.
Two of the major economics stories Americans tell about ourselves don't seem to be true. Yet we are really enamored with the ideas that income inequality is on the move, separating the wealthy from the rest of us ("we" rarely consider ourselves part of the wealthy), and that the middle class is on the verge of extinction (as Pew found recently, fully 47 percent of people in households making over $100,000 a year consider themselves "middle class").
Mark J. Perry of the American Enterprise Institute and the University of Michigan (Flint) has compiled Census data that refute these popular claims. "The Gini index measure of income dispersion reveals that there has been no significant trend of rising income inequality' for US household incomes over the last quarter century," he writes. "The Gini index in 1993 was 0.454 and last year it was 0.482, the same as in 2013, and this statistical measure of income inequality has also shown remarkable stability for the last several decades in a narrow range between 0.46 and 0.48."
There is, of course, an argument to be made that existing income inequality is too vast (and it is indeed larger than it was in the 1970s, both in America and throughout most advanced economies). But as Perry notes, that isn't the case being advanced:
We hear all the time about "rising income inequality" in America (there are more than 100,000 Google search results for that term), about "the rich getting richer and the poor getting poorer," the "stagnant or disappearing middle class," all of the recent income gains going to the rich," the lack of income mobility and other narratives of pessimism. In a December 2013 speech, President Obama described rising income inequality as the "defining challenge of our time" and promised that for the rest of his presidency, he and his administration would focus all of their efforts to stop the increase in income inequality. And yet, the data in today's Census Bureau tell a much different story. [emphasis in original.]
Perry notes that median household income in 2017 reached $61,372, a new record and the fifth consecutive year of increase. When you adjust for the smaller sizes of households, things look better still:
Compared to 1975, the average household income per US household member has increased by 74% from $19,500 to $34,000, while the median household income per person has increased by 45% from $16,600 to $24,160. Without adjusting for household size, average household income increased by only 50% since 1975 (vs. 74% adjusted for average household size) and median income increased only 25% (vs. 45%), demonstrating the importance of adjusting for changes in household size when comparing median household incomes over time.
There's also little doubt that standards of living have improved dramatically over time. By virtually any measure, food today is better than it was in the past, and cheaper too. The same goes for virtually any consumer good, with exceptions for health care and education (which are both more expensive when adjusted for inflation) and, in some part of the country, housing as well. But even there, there are many improvements. Anyone who wears glasses can tell you that frames keep getting more expensive and stylish but lenses keep getting thinner, lighter, and more scratch-resistant while staying about the same in nominal dollars.
Perry's data also tells a welcome story about the "vanishing" middle class. To the extent that it's shrinking, it's because more people are making more money, not less.
There are more charts and discussion at Perry's invaluable Carpe Diem blog.
It's self-evident (maybe) why politicians want to talk about increasing income inequality and a vanishing middle class. They posit themselves as solutions to such problems, either via regulation and redistribution (on the left) or champions of much-needed economic vitalism (on the right). The media are often willing to play along, perhaps sensing a good story or perhaps simply being bowled over by agenda-driven research. (The latter seems to be the case in Time's recent ridiculous cover package about teachers needing to sell blood plasma simply to get by.) People getting poorer all the time is a variation on "if it bleeds, it leads."
But why are the rest of us so quick to buy in to the idea of eroding standards of living and fairness? At least since 1995, Reason has run some variation of the data Perry pulled together (read "The Good Old Days Are Now") and they almost always show progress. There are times, such as during the financial crisis, when earnings and assets absolutely took a hit, but what's amazing is how resilient the declinist narrative is even in relatively good times. We really, really want to be worse off than we are.
Economists such as Cornell's Robert Frank argue that humans seek relative status above virtually anything else, so that if we're all better off, that doesn't really make us feel any better. That may be part of an answer, but it's odd then that objective increases in well-being rarely get discussed. Even increases in income undersell total compensation. As Reason's Veronique de Rugy has noted, fringe benefits have increased far more over the past 40 years than wages. We probably don't feel richer simply because the value of our employer-provided health insurance has increased by 60 percent.
Perhaps it's an age thing: You don't really appreciate what you have until you reach a certain age and the stories we tell ourselves are mostly written by people too young (or too old) to fully grasp social reality? Or perhaps the data that Perry and others pull are misleading, falling into the category on knowing the price of everything but the value of nothing?
The notions that the "middle class" is on the verge of extinction and that only the super-rich are making bank aren't new, but we are in a particularly intense moment of unreality when it comes to discussions of politics and policy. Trying to get a firm grasp on how people are actually doing is now even more urgent than it otherwise would be.