Misunderstanding Inequality

This entire entry comes from Thomas Sowell’s brilliant landmark work: "Wealth, Poverty, and Politics".

“When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear”.

INCOME STATISTICS

There are two fundamentally different kinds of statistics used to show income trends over time—and these different kinds of statistics produce diametrically opposite conclusions.

Statistics are often cited to assert that incomes of people in the top bracket (“the rich”) are increasing relative to the incomes of people in the bottom bracket (“the poor”) or relative to incomes of people in other brackets in between. Assertions that “the gap between rich and poor has widened in America” have appeared in the New York Times and in innumerable other media outlets, including the Washington Post, where columnist E.J. Dionne described “the wealthy” as “people who have made almost all the income gains in recent years” and added that they are “undertaxed.” Books like The Fair Society by Peter Corning of Stanford University repeat the same theme, that “the income gap between the richest and the poorest members of our society has been growing rapidly.” Although such statements, which abound throughout the media and are echoed in politics and in academia, are phrased as if they are comparing the incomes of specific sets of people over time—“the rich” and “the poor”— they are in fact comparing the incomes of particular income brackets containing an ever-changing mix of people over time, as individuals move massively from one bracket to another in the normal course of their careers, going from entry-level jobs to jobs that pay far more to successively more experienced people. Those who go into business or the professions likewise tend to acquire a larger clientele with the passing years, resulting in rising incomes there as well.

Studies which actually follow a given set of individuals over time reach not only different conclusions, but opposite conclusions from studies which follow income brackets containing ever-changing mixes of people, at very different stages of their individual careers. A study at the University of Michigan that followed specific individuals—working Americans from 1975 to 1991 found that those particular individuals who were initially in the bottom 20 percent in income had their real incomes rise over the years, not only at a higher rate but in a several times larger total amount, than the real incomes of those particular individuals whose incomes were initially in the top 20 percent.

As a result of their rising incomes, 95 percent of those people who were initially in the bottom quintile in 1975 were no longer there in 1991. Twenty-nine percent of the people who were initially in the bottom quintile rose all the way to the top quintile, while just 5 percent remained behind in the bottom quintile where they began. Meanwhile, over that same span of time, those people who were initially in the top quintile in 1975 had the smallest increase in real income by 1991— smallest in both percentage terms and in absolute amount— of people in any of the quintiles. The amount by which the average income of people initially in the top quintile rose was less than half that in any of the other quintiles.

However radically different this empirical pattern is from the many loudly proclaimed assertions that “the rich” have been getting richer and “the poor” getting poorer over time, there is nothing surprising about the mundane fact that people who start out at the bottom, in entry-level jobs, usually rise over the years to successively higher levels of work and pay. Meanwhile, those who have already reached middle age, where their productivity and earnings are highest, are unlikely to see any comparably large further increases in productivity and pay as time goes on.

A later study, using data from the Internal Revenue Service, found a very similar pattern. This study followed those specific individuals who filed income tax returns over the course of a decade, from 1996 through 2005. Those whose incomes were initially in the bottom 20 percent of this group saw their incomes rise by 91 percent during that decade— that is, their incomes nearly doubled. Those whose incomes were initially in the much-discussed “top one percent” saw their incomes actually fall by 26 percent during that same decade. Again, the facts are the opposite of the loudly proclaimed assertions, based on statistics that measure what is happening over time to abstract categories—income brackets with changing mixes of people—which are then discussed as if they were statistics about what was happening over time to a given set of flesh-and-blood human beings.

A more recent study that followed specific individuals over time in Canada, from 1990 through 2009, found patterns very similar to the patterns found in studies of Americans. Those Canadians who were initially in the bottom 20 percent in income had their incomes increase at both a higher rate, and in a higher absolute amount, than those whose incomes were initially in higher brackets. Yet again, what happened over time to a given set of human beings was the opposite of what happened over that same span of time in abstract categories with changing mixes of people. In Canada, as in the United States, the upper brackets’ incomes were rising faster than the lower brackets’ incomes—and, as in the United States, this was spoken of as if it represented what was happening to given sets of people.

Understandable and commendable as it may be to be concerned about the fate of fellow human beings, that is very different from being obsessed with the fate of numbers in abstract categories. To say, as Professor Thomas Piketty does in his much acclaimed book, Capital in the Twenty-First Century that “the upper decile is truly a world unto itself ” is to fly in the face of the fact that most American households—56 percent—are in the top decile at some point in their lives, usually in their older years… The income and wealth statistics that are paraded with such fervor can be perfectly accurate and yet completely misleading.

Thomas Sowell (Wealth, Poverty, and Politics, p 177-181).