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Patrick Edwards
3 February 2016
For the hell of it
Politics, Policies, and Inequality Distortions
It seems to be a staple of modern day economics: that the rich grow richer and the poor
grow only poorer. This often repeated claim is taken nearly for granted today, but its a statement
that cant be taken lightly and certainly not as a given. Before we can draw a conclusion and
possible policy solution, we must answer two questions: the first leading to the second. First, is
income inequality at all exaggerated beyond normal? If we acknowledge that income inequality
is exaggerated beyond the amount that is healthy in an economy, then we must ask: what is its
cause? There are many interesting and varied answers to this second question, but today I will
limit myself to the first. Is income inequality at all exaggerated beyond normal? I answer this
question with a resounding maybe, but it certainly isnt the existential threat that many
politicians make it out to be.
Why isnt it such a threat? I believe that many people accept the inequality dogma
because (1) its a narrative theyve been told their whole lives, and (2) they dont see and dont
seek evidence to the contrary. In effect, those who promote the idea of exaggerated income
inequality reach their conclusion first and only after will search for the evidence. The academics
then readily supply this evidence without properly analyzing the data. In this paper, I will seek
to show how current assertions regarding income inequality are exaggerated.
Thomas Piketty, in his new book Capital in the 21st Century passionately argues that
wealth tends to centralize and accumulate in the hands of the wealthy, and he backs up his

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argument with many strong and legitimate statistics from prestigious institutions. His
numbers are honest, but do they really attack income inequality? Many of the statistics used to
legitimize the arguments against income inequality do not actually follow a person over their
lives, but a percentile. To put it another way, these studies follow an artificial category of people
that may grow and shrink over time. The problem with this method is that the boundaries
between one percentile and the next are as porous as a spaghetti strainer. One individual could
start in the bottom percentile at the beginning of their adult life, but then quickly move up
through each percentile before coming to a comfortable, middle aged income in the top 10%.
This person worked his way through each income percentile, but you wouldnt get that from the
Census data. The statistics being tossed around by income inequality opponents rest on the
assumption that each income percentile is as impermeable as a brick wall, and this creates the
persuasive illusion that the rich are becoming richer and the poor are becoming poorer. Nothing
could be further from the truth, and the few organizations that actually follow individuals
through their adult life confirm this.
One such organization has been tracking just this information for decades. Since 1968,
the University of Michigans Panel Survey on Income Dynamic has been tracking over 50,915
Americans in order to determine the level of income mobility in the United States, and the results
are astounding.1 In an effort to save myself time and in a blatant example of laziness, I will defer
analysis to the Federal Reserve Bank of Dallas in their annual report titled By Our Own
Bootstraps: Economic Opportunity & the Dynamics of Income Distribution.2

2 (pgs. 6,8)

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A static portrait of income shares doesnt answer the question of whether low-income
households are getting better or worse off over time. By definition, there will always be a bottom
20 percent, but only in a strict caste society will it contain the same individuals and families year
after year. To decide that upward mobility has been lost in America, the evidence must show that
the poor, for the large part, remain stuck where they are and that theres little hope of climbing up
the income ladder. In short, between opportunity and equality, its opportunity that matters most.
The prospect of upward income mobility is what individuals seekindeed, thats what powers
the whole economic system. Incomes distribution comes second, both in order and importance.
This is important for us to recognize, in fact, I couldnt of said it better myself. What comes next,
though, is utterly fascinating. The Federal Reserve Bank of Dallas goes onto document the
results of the University of Michigan study:
Tracking individuals incomes over time gives a startlingly different view of the forces
shaping Americas income distribution. Lets begin with the people who were in the bottom fifth
of income earners in 1975. The conventional view leads us to think they were worse off in the
1990s. Nothing could be further from the truth. In the University of Michigan sample, only 5
percent of those in the bottom quintile in 1975 were still there in 1991.
Even more important, a majority of these people had made it to the top 60 percent of the
income distributionmiddle class or betterover that 16-year span. Almost 29 percent of them
rose to the top quintile. This is a far cry from the popular vision of a society in which the poor
are getting poorer. In fact, the evidence suggests that low income is largely a transitory
experience for those willing to work, a place where people may visit but rarely choose to live.
(See Exhibit 4.) Theres further evidence that being in the low-income bracket isnt, for a large
majority of people, permanent. Less than 0.5 percent of the sample showed up in the bottom

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quintile every year from 1975 to 1991. Nearly a quarter of those in the bottom tier in 1975
moved up the next year and never again returned. More than three-quarters of the lowest 20
percent in 1975 made it into the top 40 percent of income earners for at least one year by 1991.
In fact, the poor made the most dramatic gains in the income distribution. Those who started in
the bottom quintile in 1975 had a $25,322 average gain in real income by 1991. In the top
quintile, the increase was $3,974. In other words, the rich have gotten a little richer, but the poor
have gotten much richer.
This is truly fascinating stuff, but its not whats reported in the media. Those in the
position to influence public opinion continue to restate the same, old narrative for much the same
reasons that most people believe it: theyve been told the same thing their whole lives and see no
evidence to the contrary.
Now, has anything Ive shared today disprove the argument that income inequality is
exaggerated? Of course not, but it does undermine a major assumption made by those in favor of
implementing massive new government programs designed to redistribute the incomes of those
at the top. The next time you hear the often repeated statistics on income inequality, dont accept
it as fact. Check the sources, examine the statistics, and dig, dig, dig down to the truth. Its easy
to manipulate data to support a desired outcome, its harder to actually ensure that the data is
represented correctly. Make sure you do the latter or you will be building your beliefs on a shaky