We are frequently inundated with frantic cries from the left concerning the widening income gap, or how the rich keep getting richer and the poor keep getting poorer. These are, of course, emotional arguments designed to pluck at our heart strings as opposed to rational arguments based on facts and data.
One of the unspoken assumptions in that emotional argument is that “the rich” are invariably the same group of people and that “the poor” are likewise the same. This implicit assumption is key to the emotional reaction that the liberals are counting on because it evokes images of a huddled mass of helpless and starving poor who are trapped in a system which exploits them on a daily basis, and unfairly so. But does this assumption stand up to rational scrutiny?
A November 13, 2007 Wall Street Journal article titled Movin’ On Up discusses some of the findings in a U.S. Income Mobility Study conducted by the Treasury Department which exposes these emotional appeals as being just “so much populist hokum:”
The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.
Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.
So what does this mean? In the ten year period being studied almost 60% of those who started out in the lowest income group in 1996 had made use of the opportunities afforded them in the United States to significantly improve their circumstances by 2005, with 25% of them having risen to the middle and upper-middle income quintiles, and with around 5.3% having completely reversed their fortunes to move up to the top of the income strata. So rather than a stagnant huddled group of people trapped in poverty, as the liberals would like us to believe, we have significant evidence of a dynamic system which affords a wealth of opportunity for everyone to improve their lives if they so choose.
But what of the rich, you ask? The upper 5% or even 1% of the income earners? Well, as the graphic above illustrates these groups have not faired nearly as well since they are the only groups to experience an actual decline in their median incomes over the study period. The upper 5% had their median incomes decline by 6.8% and the upper 1% had their median incomes decline 25.8%.
In a period where the lowest quintile saw their median incomes increase by 90.5% (almost double) the upper 1% actually lost about 25.8% (about one quarter) of their median income. This is hardly an example of the rich getting richer while the poor are getting poorer. Clearly the group that benefited the most over this 10 year period were the poorest in the nation, not the richest. Yet the liberals persist in claiming exactly the opposite.
Also encouraging is the fact that the after-inflation median income of all tax filers increased by an impressive 24% over the same period. Two of every three workers had a real income gain — which contradicts the Huckabee-Edwards-Lou Dobbs spin about stagnant incomes. This is even more impressive when you consider that “median” income and wage numbers are often skewed downward because the U.S. has had a huge influx of young workers and immigrants in the last 20 years. They start their work years with low wages, dragging down the averages.
In other words, overall the median income (in real, inflation adjusted dollars) increase by 24% which means the everyone benefited to some level. Two-thirds of the workforce did better throughout the study period and the one-third that lost out were predominantly in the higher income quintiles:
Only one income group experienced an absolute decline in real income — the richest 1% in 1996. Those households lost 25.8% of their income. Moreover, more than half (57.4%) of the richest 1% in 1996 had dropped to a lower income group by 2005. Some of these people might have been “rich” merely for one year, or perhaps for several, as they hit their peak earning years or had some capital gains windfall. Others may simply have not been able to keep up with new entrepreneurs and wealth creators.
The key point is that the study shows that income mobility in the U.S. works down as well as up — another sign that opportunity and merit continue to drive American success, not accidents of birth. The “rich” are not the same people over time.
So much for that implicit assumption that the rich are always the same group of people. Clearly they are not. This also deflates the class envy notion that the rich only inherited their money, that they didn’t really work for it. To go from middle or even lower incomes to the upper income brackets takes work and as this study shows the percentages of people moving both up and down the income ladder is significant.
All of this certainly helps to illuminate the current election-year debate about income “inequality” in the U.S. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn’t remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.
And this last point is key. America is NOT the permanently stratified, class based society that the liberals would have you think. The American dream is alive and well and providing opportunities for people of all income levels. As has been the case all along, risk taking and hard work are the keys to success, not the luck of the draw in nature’s parent lottery.