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Delusions of Disparity: Distorting the truth about income inequality.
National Review Online ^ | September 28, 2004 | J. A. Foster-Bey

Posted on 09/28/2004 9:00:30 AM PDT by xsysmgr

The slower-than-anticipated growth in payroll jobs during the current economic expansion has raised new concerns from many quarters about the rise in income inequality and the disappearance of the nation's middle class. John Kerry's presidential campaign has attempted to use this theme to underscore what Democrats say are the economic failures of the current Bush administration. The mainstream media has joined in, running several stories purporting to document the growth in the income gap and the resulting squeeze of the middle class.

One of the latest entries is an article in the Washington Post by Griff Witte, the first in a planned occasional series that will examine the changes facing middle-income workers. Witte's article argues that the middle-class is shrinking and as a result the income gap is widening. He attempts to integrate statistics on the changing labor market and household income with portraits of workers and their families experiencing hardships due to technological changes and global competition. Witte paints a fairly dismal picture of what is happening to the middle class. But the statistical evidence he presents does not support his conclusions, and a careful reading suggests his interviews may be intended merely to illustrate a conclusion he had come to before examining the data.

The article focuses on the decline in median-income households — that is, households with total income between $35,000 and $50,000 annually. Examining data from the U.S. Census Bureau, Witte notes that after controlling for inflation the proportion of such families declined by almost 33 percent from 1967 to 2003.

There are two questions that need to be asked about this claim:

What happened to all those median-income households? Did they all become poorer?
Is this decline in median-income households, as defined by Witte, a problem that needs to be addressed?

Let's examine the first question. By interviewing only struggling families, Witte implies that income insecurity and falling wages are now commonplace among the middle class. The reader is encouraged to conclude that the decline in the proportion of median-income households signals that the middle class is shrinking, and that the proportion of lower-income households has dramatically increased. The problem is, that conclusion is wrong. In fact, over the period covered in the article, the proportion of households with incomes under $35,000 declined by almost 23 percent, while the percentage of households making over $50,000 increased by over 77 percent. Indeed, the percentage of families earning over $75,000 rose by 218 percent between 1967 and 2003.

This hardly supports the claim that the middle class is being financially squeezed. In fact, since 1967, households have on average gotten richer, not poorer. After controlling for inflation, median household income has risen by almost 30 percent from 1967 to 2003. As a result, most median-income and lower-income households improved their overall income and moved up, not down, in the national income distribution. The struggling families Witte interviews for his article may be the real shrinking class.

While the data does not support the premise that there has been a decline in the absolute economic well being of the middle class, it may represent some other problem. The real point of the Post article seems to be that if the proportion of median-income households is declining while the percentage of higher-income households is rising, income inequality must be growing. The result is a bifurcated national income distribution. But there are also several problems with this line of thinking.

First, as indicated above, not only is the proportion of median-income households (earning between $35,000 and $50,000) shrinking, but the percentage of lower-income households (earning less than $35,000) is also falling. In absolute terms, everyone is doing better. The available census data support this: After adjusting for inflation, households in each fifth of the income distribution from the bottom fifth to the top fifth enjoyed wage increases from 24 percent to 75 percent from 1967 to 2003. Witte implies that because higher-income households received larger average wage increases than lower-income households, the income gap has widened. However, it must be noted that on average everyone's standard of living has increased. This hardly supports the assertion that the middle-class is being squeezed.

The second problem with Witte's line of thinking is that it implies we are looking at the same families and households from year to year. In fact, the data that Witte used in his article is not panel data following changes in income for the same household from one year to the next. Instead, it represents a snapshot of all families at a given point in time. Households that fell in the median-income range in 1967 are not likely to be median-income households in 2003. Households move up and down the income distribution from year to year; a low-income household in 1967 might be a very well-to-do household in 2003. In order to understand whether income inequality is worsening it is important to examine whether the rate of income mobility has declined since 1967. If it has become more difficult for American households to move up the income distribution, this may represent a real structural issue. However, there is little if any evidence that income mobility has slowed. Indeed, the data presented in the Post article suggests a fairly high level of income mobility.

Given the actual data, Witte's selection of families to illustrate the plight of the middle class is misleading. It would have been fairer and more representative of reality to provide a sample of families that included those whose incomes have improved as well as those who've experienced economic problems. In fact, the right balance would have included a majority of interviews with families who've managed to improve their economic status.

Witte's article is just one in a long line of mainstream-media reports providing an increasingly distorted picture of the U.S. economy. The truth is that despite globalization, technological change, and the challenges associated with recovering from the 2000 recession, the U.S. economy has performed surprisingly well. While there are still some areas of concern, such as the slower-than-expected growth in payroll jobs, the strong growth in GDP over the last year indicates that current economic policies have positioned the U.S. economy to successfully compete. And, if we're lucky, we will continue to see the type of improvement in household income that apparently concerns journalists like Griff Witte.

J. A. Foster-Bey was formerly a senior researcher and director of the Program on Regional Economic Opportunity at the Urban Institute.

TOPICS: Business/Economy; Editorial
KEYWORDS: middleclass

1 posted on 09/28/2004 9:00:30 AM PDT by xsysmgr
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