Industrial Insight

We are more equal than we think… | October 7, 2010

http://www.realclearmarkets.com/articles/2010/10/07/the_wealth_inequality_mirage_98706.html
October 7, 2010

The Wealth Inequality Mirage

By Diana Furchtgott-Roth

Mr. Reich is wrong. He and other levelers exaggerate economic inequality, eagerly, because they rely on pretax income, which omits the 97% of federal income taxes paid by the top half of income earners and the many “transfer payments,” such as food stamps, housing assistance, Medicaid and Medicare.

The Labor Department data, which are published every year, track spending by income group. Spending is vital because it determines our current standard of living and our confidence in the future. It shows how much purchasing power Americans have. The usual pretax measures of income, on which most inequality studies are based, don’t show how much purchasing power some Americans have because they omit other benefits, and so don’t provide an accurate measure of purchasing power inequality.

Further, income quintiles have different demographic characteristics, so comparisons of quintiles can be misleading. In 2009, households in the lowest fifth had an average of 1.7 people, and in half these households there were no earners. The highest fifth, however, had 3.1 persons per household, with 2.0 earners.

Household size at the bottom has been shrinking faster than at the top, adding to a false perception of inequality. Over the past 20 years, the size of households in the bottom quintile has declined by 5.6% and the middle quintile by 3.8%, whereas the size of the top-quintile household has been unchanged. This is due not only to the increased longevity of today’s seniors, but also to the higher numbers of divorced couples and single-parent households.

Calculating spending on a per-person basis (these are my calculations, from the official data) produces comparable measures. The average annual spending for a household in the lowest quintile was $21,611, or $12,712 per person. In contrast, the average spending for a household in the top quintile was $94,244, or $30,401 per person.

On a per person basis, the new Labor Department numbers show that in 2009 households in the top fifth of the income distribution spent 2.4 times the amount spent by the bottom quintile. That, Professor Reich might note, was about the same as 20 years ago. The top quintile spent 1.8 times what the middle quintile spent per person. And that ratio has not been increasing.

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