President Obama has made “income inequality” the central theme of most of his recent speeches, touching on it again and again. He’s done it so often that he’s been accused of trying to change the subject away from Obamacare. Maybe so, but the question is still worth discussing.
Economists divide households into five economic groups, called quintiles. To make his case that income inequality is now one of our most serious problems, the President quotes salary statistics that show that the income differential between those in the highest quintile and those in lowest one is greater than it has ever been. The clear implication is not only that the rich are getting richer while the poor are getting poorer, but also that the rich are getting richer at the expense of the poor. He speaks of the ratio between them as if it were a “sum zero game,” where one side can only gain points by taking them away from the other.
Is that really what’s going on? Let’s start with an examination of non-economic differences between households. These statistics come from Diane Furchtgott-Roth, former chief economist of the US Department of Labor. The average number of people per household is greater in the top quintile, at 3.1, than in the bottom, where it is 1.7. At the same time, the percentage of people who live in homes without a mortgage is greater in the bottom quintile than the top.
These facts reflect the fact that a higher percentage of Americans are living in retirement than ever before. Their incomes have gone down, but so have their needs. The kids are out of college and the mortgage has been paid off. I am not suggesting that the lower quintile does not contain people in real need and is made up entirely of retirees, but there are enough of them in it to skew the statistical case Obama is trying to make.
Next, his analysis disregards the impact of taxes and benefits, both of which affect a household’s ability to spend. The top 5 percent of earning households pay 60 percent of the income taxes, which reduces their spending power accordingly. They also do not participate in benefits that raise the spending power of those at the bottom, such as food stamps, the Earned Income Tax Credit, housing subsidies and Medicaid. Furchtgott-Roth believes that spending power is a better indicator of inequality than pre-tax income and has measured it over the past 25 years. On that basis, she suggests that there has been a narrowing rather than an expansion of inequality during that time.
Between 1987 and 2012, in constant dollars, spending by the highest quintile went up by 9.2 percent. However, in the lowest quintile, it went up more — 12.1 percent. The pattern has held in bad times. In the current recession, between 2007 and 2012, spending by the highest quintile dropped by 4.3 percent. The drop off in spending the lowest quintile was less — 2.3 percent.
Look at annual totals. Twenty-five years ago, average annual per person spending by people in the highest quintile was two and a half times more than that by people in the lowest one. Today’s numbers — $32,054 and $13,032, respectively — are holding steady at two and a half times. The rich are not getting richer on the backs of the poor.
If President Obama really wants to help the poor in America, he should focus more on ways to create additional wealth rather than on ways to redistribute what we now have. The lessons learned from other countries, about which I wrote last week, apply to America as well.
Robert Bennett, former U.S. senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.