The Haves and the Have-Lesses - income gap - Brief Article

National Review, March 6, 2000 by Stephen Moore

Dealing straight about the income gap

SOME people just can't stand prosperity. In January, two of Washington's most liberal think tanks, the Center on Budget and Policy Priorities and the Economic Policy Institute, released their annual joint study in which they proclaim, as usual, that the income gap between rich and poor is widening. The media trumpeted the bleak "findings" to virtually every living room in America.

What they didn't report is that the study was more propaganda than scholarship. It actually distorts what are, in reality, highly encouraging trends in wealth and poverty.

The study's data come from census statistics on income and poverty trends. But a recent Census Bureau report actually contains good news about the extent to which the gains from the current expansion are being widely shared across all income groups. The number of poor households is down, from 35.6 million to 34.5 million. The poverty rate is also down, from 13.3 percent to 12.7 percent. Median household income--adjusted for inflation--is up 3.5 percent, to a new all-time high of $38,885. Every income group, even the poorest Americans, saw real gains in income in 1998, and in 1997 as well.

Daniel Weinberg, the principal author of the Census Bureau report, told me that in the ten years he has been working on this subject, "this is the most upbeat income report I've ever seen."

In essence, the income-redistributionists have taken the good news (every income group is doing better) and contorted it into bad news (some groups are doing better than others); but they exaggerate even this. In an economic expansion, of course, wealth gains are never going to be Mr. Moore is director of fiscal policy studies at the Cato Institute. shared in exactly the same measure by all groups. But it turns out that the claim that the disparity between rich and poor is widening is flat-out contradicted by the recent data. The standard (though flawed) statistic that social scientists use to measure income inequality is called a "gini coefficient." The larger the coefficient, the greater the income disparities between rich and poor. In 1998, the gini coefficient fell from 0.459 to 0.456. That's a very slight decline, but a decline nonetheless.

Nor are there any other measures indicating growing inequality. Virtually all of the Census Bureau's yardsticks show a small narrowing of the gap between rich and poor in 1998. For example, the share of total income earned by the richest fifth of Americans fell from 49.4 to 49.2 percent. Similarly, the income ratio of the top 5 percent to the poorest 20 percent declined, from 8.22 to 8.20.

These are all, to be sure, very small reductions in inequality. But the important point is that they are reductions. An accurate description of the census findings would have been, "Income Gap Between Rich and Poor Narrows Slightly in 1998."

But, say the class-warriors, the longer-term trend is toward greater inequality. Well, yes--and no. Social scientists agree that in the 1970s and 1980s the income gap between rich and poor widened. This is hardly news. What is news is that in the 1990s the income gap appears to have stopped widening. "Regardless of the measure used," says the census report, "it seems clear that income inequality rose substantially between 1967 and the early 1990s but has remained unchanged since then."

The census report also tells us that some of the apparent widening in income between rich and poor in the 1970s and 1980s is an artifact of a decline in average household size owing to social factors, such as higher divorce rates and more out-of-wedlock births. For example, a family of four with an income of $60,000 becomes--as a result of divorce--two separate households whose average income is $30,000. They appear a lot poorer, even though the total income is the same.

Starting in 1993, the Census Bureau corrected this methodological defect, and found that about one-third of the so-called "income gap" vanished.

The redistributionists' study also fails to mention that low-income households are making gains in real income. Between 1995 and 1998, the inflation-adjusted income level of the average poor family rose by almost $300, from $8,930 to $9,223. If we go back all the way to the start of the Reagan years, we find that the lowest income quintile has seen income gains of $1,100, after inflation, from 1980 to 1998. The popular mantra "The rich get richer and the poor get poorer" is false.

Nor is it true that the middle class is stuck on an income treadmill. Since the current expansion began in the early 1980s, the typical working-class family has seen real income gains of almost $4,000--an improvement of about 10 percent--after inflation. Further, this progress is severely understated, perhaps by as much as half, because almost all economists now agree that official inflation figures over the past 20 years have been vastly overstated.

In addition, the black-white income gap has been sharply reduced over the past 15 years, and is now smaller than ever before. In 1990, the average black woman earned about 85 cents for every dollar earned by a white woman. By 1997, that gap had closed to 95 cents on the dollar. For men, the black-white income gap narrowed from 60 cents to 69 cents on the dollar. That's a lot of ground toward equality made up in just eight years.