7 reasons why Obama is wrong on income inequality « The Enterprise Blog http://blog.american.com/2011/10/7-reasons-why-obama-is-wrong-on-i...

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7 reasons why Obama is wrong on income inequality
By James Pethokoukis
October 26, 2011, 6:04 pm
Categories
Economic Policy (1842)
As if ordered up directly by the Obama White House and Occupy Wall Street, the Congressional Budget Office has Energy and Environment (364)
produced a timely report looking at income inequality. The CBO found that between between 1979 and 2007, average
Energy Fact of the Week (36)
real after-tax household income grew by 275 percent for the top 1 percent of households, 65 percent for the next 19
Entrepreneurship (41)
percent, just under 40 percent for the next 60 percent, and 18 percent for the bottom 20 percent.
Financial Services (50)
Fiscal Policy and Taxes (153)
Media and Technology (101)
Monetary Policy (35)
Regulation (125)
Retirement and Social Security (151)
Trade (77)
Education (241)
Foreign and Defense (1164)
Africa (30)
Asia Pacific (133)
Critical Threats (16)
Development (21)
Europe and Russia (75)
Latin America (27)
Middle East (207)
South Asia (92)
War on Terror (285)
Blogger Derek Thompson of TheAtlantic.com, always worth reading, draws this conclusion from the CBO study:
Bin Laden (51)
This is complicated stuff, and I’d be lying to you if I said I understood all of it. But let’s all agree about square General (374)
one. Income inequality is not a myth, so what do we think we should do about it? If we can’t agree on the Health Policy (290)
question, we’ll never find an answer.
Global Health (45)
Like Obama and OWS, Thompson is worried. I am far less so. Here’s why: Law and the Constitution (97)
Supreme Court (27)
1. Liberals frequently claim the average American family has been losing ground for the past three decades—or at least
since Ronald Reagan took the presidential oath in January 1981. (As if the 1970s with its sky-high Misery Index was a
Politics and Public Opinion (614)
great economic time.) The CBO refutes this. Its data show real median after-tax household income (half of all Society and Culture (467)
households have income below the median, and half have income above it) grew by 35 percent over the past three U.S. Politics (40)
decades. Uncategorized (111)
U.S. Economy (37)
Indeed, look at this chart from Jim Sullivan of Notre Dame and and Bruce Meyer of the University of Chicago (via recent
presentation at AEI):

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7 reasons why Obama is wrong on income inequality « The Enterprise Blog http://blog.american.com/2011/10/7-reasons-why-obama-is-wrong-on-i...

2. The CBO fails to factor in that American households in the top income quintile have, on average, almost five times
more family members working than the lowest quintile. (Analysis by AEI blogger Mark Perry.) Those folks are also far
more likely, as Perry notes, than lower-income households to be well-educated, married, and working full-time in their
prime earning years. Perry also notes that “individuals are not stuck forever in a single income quintile but instead move
up and down the income quintiles over their lifetimes.” (Indeed, a Treasury study on income mobility found that starting
in 1996, half of taxpayers who started in the bottom 20 percent had moved to a higher income group by 2005.)

3. Price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to
overstate the growth of real income of the rich vs. the poor.

4. Apples-and-oranges kinds of issues—such a differences in household size and inflation indexes—has led highly
respected Northwestern University professor Robert Gordon to conclude that the “rise in American inequality has been
exaggerated both in magnitude and timing.”

5. The Minneapolis Federal Reserve concluded—after taking into account household size and differing price indexes
—median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In
addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

6. As technological change accelerates and becomes more pervasive, the market will reward workers with more
education and skills. As CBO notes: “Numerous researchers have concluded that, on balance, the technological
changes of the past several decades—and perhaps the entire past century—increased employers’ demand for workers
with higher skills and more education. That increase, along with a smaller increase in the supply of workers with higher
skills and more education, generated substantial gains in the relative wages of more-educated worker. In the past
decades, inequality has been going up everywhere.” It is a global phenomenon.

7. And why did the top 1 percent do particularly well? One potential explanation from CBO: ”The compensation of
‘superstars’ (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique
characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible
for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in
income for such people.” The CBO also mentioned ”changes in the governance and structure of executive
compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities” as
possibilities.

My bottom line: a) income inequality has increased somewhat in recent decades, but not exploded; b) that increase is
natural given technology and globalization; c) incomes could have risen faster with a better educated workforce (that
also didn’t have to compete with an influx of workers from Asia), but did O.K.; d) we need to boost education to keep up
with advancing technology and productivity; e) the past decade was one of slow growth followed by a nasty recession.
No argument there. Looking forward, America will need a pro-growth tax system, smarter regulation and far better
human capital (helped by higher teacher pay in exchange for eliminating tenure, more skilled immigration, etc.). That
way, incomes won’t just be more equal, they’ll be growing.

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Tags: economic growth, income inequality, Obamanomics

Email to Author | Permalink | Comments (9) | Categories: Economic Policy, U.S. Economy

9 Responses to “7 reasons why Obama is wrong on income inequality”

critical thought says:

October 27, 2011 at 9:29 am

I also think that re: #2, that just using a quintiles share of income is not appropriate. In a period of extensive
immigration, where literally millions of new, very low income workers arrive in a country, the lowest quintile CANT show
any growth.

Reply

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7 reasons why Obama is wrong on income inequality « The Enterprise Blog http://blog.american.com/2011/10/7-reasons-why-obama-is-wrong-on-i...

Anon says:
October 27, 2011 at 9:05 am

“You cannot make the poor rich by making the rich poor”

Abraham Lincoln

Reply

Nic gibson says:

October 27, 2011 at 8:49 am

It would be great to plot these out in relation to inflation or to make the relation to inflation explicit. It seems
like, since consumption rates have been rising for everyone, that there are real gains for everyone. On fault I’d find with
the article is that there isn’t quantification of the response arguments. When the growth rate differences is 275 vs 18
people are going to feel like the poor have been treated ‘felonously’- even if that is just sentimentalism and shoddy
thinking since it isnt distinguishing between rent seeking and the fruit of true innovation that makes everyone more
wealthy or well off. There are two major questions that need to be agreed upon: what is the real differences in wealth
earning when all these variables are taken into account in competing equations that we can look at? And 2. Is income
difference inherently immoral or is it immoral if achieved through certain means that are illegal, rent seeking, or
discriminatory? It seems to me that the latter is the more reasonable opinion- but the harder to enforce and not be a
hypocrite about since all classes engage in rent seeking.

Reply

steveegg says:
October 27, 2011 at 8:11 am

Allow me to add an 8th reason – all five quintiles saw their real after-tax income increase. For those of you
who are a bit slow on the uptake, that means that, in general, every group of Americans had more money to spend
after the effects of both inflation and taxes in 2007 than they did in 1979.

Reply

Karl Smith says:

October 26, 2011 at 11:17 pm

I know the enterprise blog does a lot of sensationalism with its title but if your post is going to be named “7
Reasons Why Obama is wrong on income inequality” wouldn’t you want to – at some point – state the thesis you are
seeking to refute. What is it exactly that Obama is claiming?

Perhaps, I’m old fashioned about these things.

Reply

Randall Hoven says:

October 26, 2011 at 8:57 pm

On an annualized basis, the income of the top 1% went up 4.8% per year; that of the bottom quintile went up
0.6% per year. I have no idea why that would be either good or bad. Were we supposed to expect they would be the
same?

Reply

MT says:
October 26, 2011 at 8:40 pm

Your refutation is wrong. The rich frequently like to dampen the appearance of wealth by using household
income. Individual income of the wage earners (not zeroing in the non-working members of thehousehold) is the right
way to do the math.

The richest 1% control the largest percent of wealth in recent history. Had they been less felonius towards the rest of
society, they might not be on the hot-seat.

Reply

Ken M says:
October 27, 2011 at 8:31 am

Did you read (or are you capable of understanding) what you just wrote? It’s household income that
shows the large differences against which you rail, while individual income of wage earners (which you
advocate as the proper method of analysis) is exactly what the author suggests as a more appropriate way to
view things, and which shows substantially smaller differences between the richest and the poorest.

If the plight of the poorest continues to improve (and improve more rapidly and substantially than it has over
any time in human history) why should the situation in which the wealthiest find themselves be such a source of
discontent? Is there any rational basis for believing that pulling them down would in any real way improve the
lot of the poor, or is it simply envy? Do you have any real basis for your bald assertion that the rich have
actually been “felonious”, or do you consider anyone being better off than you to be wrong in and of itself?

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Reply

SK says:
October 27, 2011 at 9:15 am

(1) If the 99% would like to stop the 1% from dampening the appearance of wealth by using
household income statistics, they should not use the household income data to demonize them.

(2) Original wealth is created by work and investment. If one creates wealth, shouldn’t one be able to keep it
and control it? If I have less than you, do I have a right to some of yours? I fail to see the felony under the
scenario of wealth creation.

(3) Wealth acquired by any other means than creation or inheritance of created wealth, is collected by theft,
coersion, deception, or law. Corrupt people, corporations, and governments are allowed to flourish (take other
people’s created wealth) at our expense as long as we re-elect the politicians that perpetuate laws and
enforcement that allow corruption. You may be confusing corruption with wealth. Corrupt people are either in
jail, not successfully corrupt, or wealthy. The corrupt we see, are generally wealthy. So, you may be assuming
that wealthy people are corrupt. The logic is invalid: Corrupt people are wealthy. Therefore, wealthy people are
corrupt.

Felonies are being committed daily by our government, a government that arrogantly spends other people’s
money (ours) for their own gain and political security under the guise of noble public service and self-sacrifice,
at the expense of our personal freedom and at the risk of losing our sovereignty as a free people.

Don’t blame people for having things – I’m sure you have some. Blame the corrupt ones for how they got them.
The universal disdain for injustice will re-unite our country, but let’s not mis-understand where the injustice
resides.

Reply

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