Economics 101: The False Fears of Income Disparity
The media is ripe with hyperbolic aggrandizement of the growing gap between the rich and the poor. The left has made it a false flag to rally troops for class warfare which is neither healthy, productive, or beneficial for anyone involved. If this offends you or sounds counter-intuitive then I encourage you to read on and find a fault on merit rather than tired of mantras like, “the wealthy don't work for their money” or “the rich get richer and the poor get poorer.” These are examples of bumper sticker economics that aren't substantiated by fact or reason. Consider first the idea that the wealthy don't work for their money. Many pundits would have you believe that wealth is largely inherited which makes the rich stay rich and the poor stay poor like some medieval serfdom. The inconvenient truth is that old money is for the most part, a thing of the past.
Professor Edward Wolff conducted a study of the nation's top one percent using Federal Reserve data and found that inherited wealth accounted for only nine percent of their net worth in 2001. This was down from twenty-three percent in 1989.
A study by Prince & Associate found that less than ten percent of multi-millionaires in 2008 cited inheritance as their source of wealth.
Finally, a study by Spectrem Group, also in 2008, found that inherited wealth among millionaires accounted for just two percent of their total wealth.
These studies varied in methodology and samples but they all conclusively tell a story that inheritance is not the main driver of wealth in America. Consider that the number of millionaires and billionaires have doubled in the past decade we can conclude this isn't just the same old folks passing the hat. Even more importantly, the rich are becoming more numerous. This should put to rest the false fear that there is a secret club of the super rich in America holding others down and pulling their strings.
Now let us consider the popular fallacy that “as the rich get richer, the poor get poorer.”According to the US Census Bureau in 1967 the lowest fifth of income earners made $16,909 (adjusted to 2008 $). In 2008 they made $20,712 (2008 $). That is a 22.5% increase in income. The top 5% of income earners over the same time period went from $107,091 to $180,000 for an increase of 68.1%. If we drill down the content we find that there are three years where the poor got richer and the rich got poorer (1974, 2000, 2004), there are seven years where the rich got richer and the poor got poorer (1970, 1977,1982, 1992, 1996, 2001, 2003), and 31 years where the rich and the poor either got richer or poorer together. The overall finding is that from 1967-2008 that the rich are certainly richer but the poor are also richer. In short, there is a growing disparity between the rich and the poor but we are all becoming richer!
While the ratio of income growth for the poor may be lower than the rich it is important to realize that they both have grown. Frankly, income disparity doesn't matter. Whether people are "better or worse off" does matter. The evidence shows a strong correlation between the rich and the poor. Over the past 41 years 76% of the time the poor benefit from the rich getting richer or suffer from the rich getting poorer. Only 7% of the time did the poor get richer while the rich got poorer. Considering those odds, why would anyone think that punishing the rich is at all likely to help the poor? It may be good politics to create class warfare but it isn't good for the economy.
Tyson Bam
August 31st, 2010
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