Combatting Myths: Income Inequality, Part 2

| January 26 2011
Christopher Cook

Part 2: A First Response

In yesterday's Combatting Myths: Income Inequality, Part 1, we discussed the use of oversimplified, out-of-context statistics as a way of making misleading points on issues of politics and economics. These techniques are powerful, albeit dishonest . . . and in many cases, while the rank-and-file don't know these myths and sound-bites are based on such misleading information, the purveyors of said information do know; they're doing it intentionally, to achieve some aim or another.

The theme we are building, for which yesterday's piece was an introduction, is the development of a counter-argument to the left's very effective "the rich are getting richer and the poor are getting poorer" meme. Among the things we discussed, though, is the fact that a statistical lie, if it is simple and viscerally effective, can get halfway across the world while the statistical truth that counters it is often more complex and takes a while to get its boots on. (Simple and visceral—take note of those adjectives for Part 3.)

The example we used was Senator Tom Daschle's absurd bit of political theater vis-a-vis the Bush tax cuts a decade ago:

"If you're a millionaire, under the Bush tax cut you get a $46,000 tax cut, more than enough to pay for this Lexus. But if you're a typical working person, you get $227. And that's enough to buy for this muffler."

That was an incredibly misleading way to frame the discussion, and Daschle undoubtedly knew it. But he also knew how well it would work, and he was right.

This sort of argument fits well with the left's tilt towards the acquisition of power through the stoking of class resentment. That said, they are only able to use it with any real effect when tax cuts are being discussed. The "the rich are getting richer and the poor are getting poorer" meme will work anytime, so long as there is a statistic that can be used to justify it, however inaccurate that statistic may be in describing the actual situation.

Back in 2008, the Census Bureau gave them the stat they needed. Here is an excerpt from an indispensable article by Brad Schiller from March of that year:

"The annual release of census data on household incomes provides the foundation for the 'two Americas' thesis. The latest figures tracked changes in incomes all the way back to 1967. Two observations grabbed the headlines. First, the data indicate that the top-earning 20% of households get half of all the income generated in the country, while the lowest-earning 20% of households get a meager 3.4%. That disparity has widened over time: In 1970, their respective shares were 43.3% and 4.1%. These income-share numbers buttress the popular notion that the 'rich are getting richer while the poor are getting poorer.'

Schiller then goes on to describe several different ways in which this information is misleading and allows the wrong conclusions to be drawn. And he does a great job of it. The first one I want to focus on is the most basic, and in my view, the most effective of his responses:

First, we can easily dismiss the notion that the poor are getting poorer. All the Census Bureau tells us is that the share of the pie consumed by the poor has been shrinking (to 3.4% in 2006 from 4.1% in 1970). But the 'pie' has grown enormously. This year's real GDP of $14 trillion is three times that of 1970. So the absolute size of the slice received by the bottom 20% has increased to $476 billion from $181 billion. Allowing for population growth shows that the average income of people at the bottom of the income distribution has risen 36%.

This is, or ought to be, dispositive. The left's error (it is usually the left, though not always) stems from what is called the Fixed Pie Fallacy. One of the principles that appears to undergird many of their arguments is this idea that the size of the "pie" (the total available resources, wealth, and wages) is fixed and does not grow. In many cases, they may not even know that they are engaged in this fallacy—it may be a subconscious belief they are unaware they have, perhaps even something they carry with them from childhood—but it nonetheless is the fuel that drives a number of their arguments.

Usually, the fallacy manifests itself in general economic commentary being used to bolster class warfare arguments, redistributionist policies, and increases in the size of government. It goes like this: If a rich person gets richer, someone else is automatically getting poorer. If the pie can never get any bigger, then this has to be the case. This guy gets a bigger slice, so that guy automatically gets a smaller one.

The problem with this notion is that it is ignorant of the most basic economic facts. The pie is never fixed. If the pie were fixed, we'd have the same five jobs and the same nine pretty seashells being used as money by some group of cavemen somewhere. But that's not how things work. Assuming a healthy economy, new jobs are being created all the time. New wealth. New wages. New innovations, services, and products create more economic activity, more jobs, and . . . yes, more rich people, as well as taking more people who were poor and making them middle class, and more people who were middle class and making them affluent, etc.

None of that comes at anyone's expense.

Yes, occasionally, you'll have a new innovation that renders a previous industry obsolete. One instance often cited is when the automobile put the horse and buggy manufacturers on the road to economic oblivion (not to mention the workers who cleaned horse manure from the streets, etc.). That phenomenon is an ongoing part of life, and it will always be with us as long as we are advancing. It is painful, but no one (except perhaps the Amish and a few anarcho-primitivists) thinks the roads should go back to being traveled by horse and buggy only (not to mention being covered in horse manure) again. It happens, yes, but it only happens when it happens—it is not the everyday norm of economic growth.

Most of the time, economic growth means just that—growth. The pie GROWS. There is more to go around, and lots of people benefit.

Unfortunately, like the horse pulling the buggy, the person advocating for these class-envy positions is usually wearing blinders, and will march merrily on making arguments that presume that we have one pie, for all time, and that bits of it are merely being transferred and re-allocated again and again. You get it with the taxes argument, where if a tax cut allows a "rich" person to save $70,000 on a tax bill, somehow, somewhere, some "poor" people must be $70,000 poorer. No matter what it is, when the fatcats get fatter, somehow, somewhere, some scrawny alley cat is deprived of a mouse. They rarely explain the mechanism behind this magical phenomenon. Mostly because it's hard to explain something that isn't real.

So Schiller hits the nail on the head.

  • Yes, the share of GDP (the pie) consumed by the lowest quintile has dropped—slightly—from 4.1% in 1970 to 3.4% in 2006.
  • However, this does not take into account what GDP was in 1970 vs. what it was in 2006, namely three times as much.
  • Taking that into account, as one MUST do, (and factoring in population growth), Schiller gives us a figure of a 36% increase in income for people in the lowest quintile over that period.

Basically, we have dealt with one aspect if the argument: the poor are NOT getting poorer.

In fact, we can see that this trend goes back well before 1970:

http://stossel.blogs.foxbusiness.com/files/2010/02/GDP.JPG

Things are getting better in this country. There are ups and downs, and individual stories will always provide gut-wrenching excpetions, but by and large, incomes are growing for everyone.

Looking at the lowest quintile, we see growth even there (indicating that it's not just the "rich" who are throwing off the averages):

http://stossel.blogs.foxbusiness.com/files/2010/02/poor-getting-richer.JPG

Looking at the graph above, we do see dips that roughly correspond to the economic downturns of the late 70s, late 80s, and the dot-com bubble-burst/9-11 period, but the trend is a rising one. We would expect to see more vulnerability in the lowest quintile than the highest, and yet even there, the trendline is unmistakably up.

Things have been getting better in America for a long, long time. For everyone.

This should also be obvious when looking at things like standard of living in the past vs. today in the U.S., and comparing current standards for U.S. "poor" vs. the standards for the poor in other nations. Schiller does that, and moving forward, we will be taking a further look at this aspect of the question.

Another thing we will be taking a look at is the issue of the gap. Though it is clear by any sensible measure that the poor are not getting poorer, we still have to address the widened gap. Again . . .

First, the data indicate that the top-earning 20% of households get half of all the income generated in the country, while the lowest-earning 20% of households get a meager 3.4%. That disparity has widened over time: In 1970, their respective shares were 43.3% and 4.1%.

We will also be looking at this gap as we move forward.

That won't, however, be in Part 3. In part 3, I take a slight excursion to point out that we can come up with all the counter-arguments we want, and even if they are strong, accurate, and—when examined with intellectual honesty—irrefutable, it's next to meaningless unless we change our messaging style. Simply put, our messages need to be simple, visceral, and they need to be offensive rather than defensive. If we ever hope to counter these class-warfare arguments in a way that will actually change a majority of minds and undo the decades of damage to people's thinking, wonkish counters will never be sufficient, no matter how true they are.

Stay tuned for all of that in Part 3.

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