An Unnecessary Concern About Income Inequality

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Posted: Oct 06, 2020 10:49 AM
An Unnecessary Concern About Income Inequality

Source: AP Photo/Ted S. Warren

A concern with income inequality is that the gap between the top 1 percent income earners and the bottom 99 percent has become astronomically wider since the 1970s – increasing by 275 percent from 1979 to 2007.[1]  This data indicates the phenomenon described in my previous article, No Longer Operating Under the Original Intent.[2]

In fact “the top 0.01 percent earned 400 times more than the average” income earner in 1915, only 50 times the average in 1970, and up to 250 times the average income in 1998.[3] This means that the income inequality has drastically improved since 100 years ago. But another key is that all income ranges increased – top 99 to 80 percent by 65 percent, the middle 79 to 21 percent by 40 percent, and the bottom 20 percent by 18 percent.[4]  This might seem “unfair,” being that top range increased considerably more than the others, but it is expected when analyzed based on the simple math model I discussed here, A Simple Math Model and the Numbers. Additionally, the share of wealth held between the top 1 percent and bottom 99 percent historically over the past century shows that the difference has not changed in the past century, and that the increase since the 1970s is only an adjustment back to what had previously existed.

Another impact which diminishes the income inequality argument is studying the actual purchasing behaviors and purchase prices between the upper income levels and lower income levels. Prices of products more commonly purchased by low-income consumers compared to products purchased by higher-income consumers, have fallen at a higher rate. Therefore, the “real” income of lower-income consumers has had significant improvement. “This means that much of the rise of measured income inequality has been offset by a relative decline in the prices of products that poorer consumers buy.”[5] Americans do not purchase the same products and different products do inflate at different rates. Moreover, products and services that were not available to low-income consumers have become common purchases for them as the prices drops and demand and consumption greatly increases.

For example, in 2003, 70 percent of non-food spending by low-income consumers were products that did not exist in 1994. For the higher-income consumers it was under 50 percent. Also, food inflation rates were substantially higher for high-income consumers compared to low-income consumers as a result of the purchasing behaviors.[6]

The concern of income inequality does not equal the rhetoric we so often hear from the media and politicians. While there are always improvements we can and should make on the economic front, to fully understand where to improve a dive into the historical data can be revealing and helpful.

[1] Peter Wehner and Robert P. Beschel, Jr., Spring 2012, “How to Think about Inequality,” National Affairs, Number 11, p. 96.

[2] Similar data and discussion is given in David R. Henderson, June 2008, “Economic Inequality: Facts, Theory and Significance,” NCPA Policy Report No. 312, (National Center for Policy Analysis: Dallas, TX), p. 1 for specific data since 1970, and the entire report gives an excellent discussion on the overall lack of inequality and actual wealth improvement of most all Americans.

[3] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 13.  See Figure III on page 14 which shows the percent income share of top 0.01 percent and that in 1998 it remained significantly lower than it was in 1913 thru 1915.

[4] Peter Wehner and Robert P. Beschel, Jr., Spring 2012, “How to Think about Inequality,” National Affairs, Number 11, p. 96.

[5] Christian Broda and John Romalis, July 4, 2009, “The Welfare Implications of Rising Price Dispersion,” Working Paper, [http://www.johnromalis.com/wp-content/uploads/2012/07/Draft_v7.pdf], see pp. 2, 8, 13, and 20.

[6] Christian Broda and John Romalis, July 4, 2009, “The Welfare Implications of Rising Price Dispersion,” Working Paper, [http://www.johnromalis.com/wp-content/uploads/2012/07/Draft_v7.pdf], p. 1.