The Rich Aren’t Getting Richer
Actual super-wealthy households saw their income decline
Are the rich really getting richer? That’s a pretty standard line from the Left. This is not true.
The numbers generally cited in support of this argument do not actually tell us much about what has happened to the incomes of wealthy households over time. That’s because the people who are in the top bracket today are not the people who were in the top bracket last year. There’s a good deal of socioeconomic mobility in the United States — more than you’d think. Our dear, dear friends at the IRS keep track of actual households (boy, do they ever!), and sometimes the Treasury publishes data about what has happened to them. For instance, among those who in 1996 were in the very highest income group isolated for study — the top 0.01 percent — 75 percent were in a lower income group by 2005. The median real income of super-rich households went down, not up. The rich got poorer. Among actual households, income grew proportionally more for those who started off in the low-income groups than those that began in high-income groups.
That wasn’t even an unusually good decade in terms of mobility. During the horrible, horrible Reagan years, as National Review noted back in 1991, the average income growth for actual households in the lowest income bracket was 77 percent over the course of a decade; income growth for actual households in the top group was only 5 percent during those same years. Of those who were in the poorest fifth in 1979, 85.8 percent had moved to a higher bracket by 1988, and 14.7 percent of them moved to the top bracket — which is to say, the poor of 1979 were more likely to be the rich of 1988 than to be the poor of 1988. The poor got richer, and some of them got a lot richer. Reagan’s record has not been matched — Ronald Reagan was the champion of the poor, as it turns out — but economic mobility has been pretty stable for the past 20 years: About 50 percent of U.S. households move from one income group to a different one every decade, and actual households initially in the low-income groups see proportionally more income growth than do actual households initially in the high-income groups.
When somebody says that that top 1 percent saw its income go up by X in the last decade, they are not really talking about what happened to actual households in the top 1 percent. Rather, they are talking about how much money one has to make to qualify for the top 1 percent. All that really means is that the 3 million highest-paid Americans in 2010 made more money than did the 3 million highest-paid Americans in 2000, the 100,000 highest-paid Americans this year made more money than did the 100,000 highest-paid Americans made in 2000, that the 50,000 highest-paid Americans made more money this year than did the 50,000 highest-paid Americans made in 2000, that the 1,000 highest-paid Americans this year made more money than did the 1,000 highest-paid Americans made in 2000, etc., which is not shocking. But, as the Treasury data show: They are not the same people.
* Income mobility of individuals was considerable in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within ten years.
* About 55 percent of taxpayers moved to a different income quintile within ten years.
* Among those with the very highest incomes in 1996 — the top 1/100 of one percent — only 25 percent remained in the group in 2005. Moreover, the median real income of these taxpayers declined over the study period.
* The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
* Economic growth resulted in rising incomes for most taxpayers over the study period: Median real incomes of all taxpayers increased by 24 percent after adjusting for inflation; real incomes of two-thirds of all taxpayers increased over this period; and median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the high income groups.
Or, as the authors of the study put it: “While the share of income of the top 1 percent is higher than in prior years, it is not a fixed group of households receiving this larger share of income"
Poverty Is Easy to Explain
There is very little either complicated or interesting about poverty. Poverty has been man’s condition throughout his history. The causes of poverty are quite simple and straightforward. Generally, individual people or entire nations are poor for one or more of the following reasons: (1) they cannot produce many things highly valued by others; (2) they can produce things valued by others but they are prevented from doing so; or (3) they volunteer to be poor.
The true mystery is why there is any affluence at all. That is, how did a tiny proportion of man’s population (mostly in the West) for only a tiny part of man’s history (mainly in the nineteenth, twentieth, and twenty-first centuries) manage to escape the fate of their fellow men?
Sometimes, in reference to the United States, people point to its rich endowment of natural resources. This explanation is unsatisfactory. Were abundant natural resources the cause of affluence, Africa and South America would stand out as the richest continents, instead of being home to some of the world’s most miserably poor people. By contrast, that explanation would suggest that resource-poor countries like Japan, Hong Kong, and Great Britain should be poor instead of ranking among the world’s richest places.
Another unsatisfactory explanation of poverty is colonialism. This argument suggests that third-world poverty is a legacy of having been colonized, exploited, and robbed of its riches by the mother country. But it turns out that countries like the United States, Canada, Australia, and New Zealand were colonies; yet they are among the world’s richest countries. Hong Kong was a colony of Great Britain until 1997, when China regained sovereignty, but it managed to become the second richest political jurisdiction in the Far East. On the other hand, Ethiopia, Liberia, Tibet, and Nepal were never colonies, or were so for only a few years, and they rank among the world’s poorest and most backward countries.
Despite the many justified criticisms of colonialism and, I might add, multinationals, both served as a means of transferring Western technology and institutions, bringing backward peoples into greater contact with a more-developed Western world. A tragic fact is that many African countries have suffered significant decline since independence. In many of those countries the average citizen can boast that he ate more regularly and enjoyed greater human-rights protections under colonial rule. The colonial powers never perpetrated the unspeakable human rights abuses, including genocide, that we have seen in post-independence Burundi, Uganda, Zimbabwe, Sudan, Central African Empire, Somalia, and elsewhere.
Any economist who suggests he has a complete answer to the causes of affluence should be viewed with suspicion. We do not know fully what makes some societies richer than others. However, we can make guesses based on correlations. Start out by ranking countries according to their economic systems. Conceptually we could arrange them from more capitalistic (having a larger free-market sector) to more communistic (with extensive State intervention and planning). Then consult Amnesty International’s ranking of countries according to human-rights abuses. Then get World Bank income statistics and rank countries from highest to lowest per capita income.
Compiling the three lists, one would observe a very strong, though imperfect, correlation: Those countries with greater economic liberty tend also to have stronger protections of human rights. And their people are wealthier. That finding is not a coincidence, so let us speculate on the relationship.
Rights and Prosperity
One way to gauge human-rights protection is to ask to what extent the State protects voluntary exchange and private property. These signify the rights to acquire, keep, and dispose of property in any fashion so long as one does not violate the rights of others. The difference between private property rights and collectively held rights is not simply philosophical. Private property produces systemically different incentives and results from collective property.
Since collectivists often trivialize private property rights, they are worth elaborating. When property rights are held privately the costs and benefits of decisions are concentrated in the individual decision maker; with collectively held property rights they are dispersed across society. For example, private property forces homeowners to take into account the effect of their current decisions on the future value of their homes, because that value depends, among other things, on how long the property will provide housing services. Thus privately owned property holds one’s personal wealth hostage to doing the socially responsible thing—economizing scarce resources.
Contrast these incentives to those of collective ownership. When the government owns the house, the individual has less incentive to take care of it simply because he does not capture the full benefit of his efforts. It is dispersed across society instead. The costs of neglecting the house are similarly spread. You do not have to be a rocket scientist to predict that under these circumstances, less care will be taken.
Nor is nominal collective ownership the only force that weakens social responsibility. When government taxes property, it changes the ownership characteristics. If government were to impose a 75 percent tax on a person selling his house, it would reduce his incentive to use the house wisely.
This argument applies to all activities, including work and investment. Whatever lowers the return from or raises the cost of an investment reduces incentives to make that investment in the first place. This applies to investment in human as well as physical capital—that is, those activities that raise the productive capacity of individuals.
To a significant degree the wealth of nations is embodied in their people. The starkest example of this is the experience of the Germans and Japanese after World War II. During the war, Allied bombing missions destroyed nearly the entire physical stock of each country. What was not destroyed was the human capital of the people: their skills and education. In two or three decades, both countries reemerged as formidable economic forces. The Marshall Plan and other U.S. subsidies to Europe and Japan cannot begin to explain their recovery.
Proper identification of the causes of poverty is critical. If it is seen, as is too often the case, as a result of exploitation, the policy recommendation that naturally emerges is income redistribution—that is, government confiscation of some people’s “ill-gotten” gains and “restoration” to their “rightful” owners. This is the politics of envy: bigger and bigger welfare programs domestically and bigger and bigger foreign-aid programs internationally.
If poverty is correctly seen as a result of the unwise government intervention and lack of productive capacity, more effective policy recommendations emerge.
Obama vs. Palin
The contrast between the speeches they gave last week suggests that when the 2012 presidential campaign begins in earnest, the news media will have difficulty maintaining the story lines they've been pushing about Barack Obama and Sarah Palin.
Mr. Obama is "a great leader in the mold of Abraham Lincoln and Franklin D. Roosevelt," we were told during the last presidential campaign.
The journalists who assured us of this based their assessment on Mr. Obama's oratorical skills rather than upon his actual accomplishments, which were meager.
His opponents agree Mr. Obama is a better speaker than he is a president. But the fiscal policy speech he made at George Washington University last Wednesday (4/13) -- during which Vice President Joe Biden nodded off -- indicates he's not that terrific an orator, either.
The speech "was not just weak, but pitiful,' a "waste of breath," said Clive Crook, editor of the Atlantic magazine.
Comedian Stephen Colbert thought the speech was "boring." Comedian Jon Stewart mocked the tortured manner in which Mr. Obama tried to avoid describing the tax increases he was proposing as tax increases.
And these are supporters of the president.
Mr. Obama went to GWU to make up for an earlier failure of leadership. In February, he submitted a proposed budget so frivolous no one paid attention to it. This permitted House Republicans to capture the initiative in the debate with the very substantial budget plan authored by Rep. Paul Ryan.
The president invited Rep. Ryan to attend the speech, which he did, expecting to hear a serious counterproposal. What he heard instead was "the sort of harangue one would expect from a rabidly devoted partisan hack, with no relation whatever to the thoughtful appeals to reason and common values that historically have characterized presidential leadership," said the Washington Examiner.
Mr. Obama grossly misrepresented Mr. Ryan's plan and called him names, but offered no real plan of his own to reduce our $14 trillion national debt.
The president's speech was "dishonest even by modern political standards," said the Wall Street Journal.
It was churlish of the president to invite Rep. Ryan to the speech, and then to attack him from the podium. It was also cowardly to attack a political opponent in a forum in which he could not respond.
Barack Obama these days speaks only before friendly audiences. On Saturday (4/16), Sarah Palin journeyed to Madison, Wisconsin where she braved snow, cold, and union protesters who tried to disrupt her Game On! speech by beating drums and blowing whistles.
"Sarah Palin rides to the sound of the guns," noted Reuters columnist James Pethokoukis.
After her surprise selection as John McCain's running mate and subsequently, many in the news media have described the former Alaska governor as an ignorant bumpkin with extreme views.
Ms. Palin sure didn't sound that way in Madison. In a 15-minute speech Mr. Pethokoukis described as "powerful, pugnacious and presidential," Ms. Palin vigorously defended Wisconsin Gov. Scott Walker in his battle with public employee unions; slammed President Obama for his attack on Paul Ryan, and criticized Congressional Republicans for being too timid in opposing Mr. Obama's spending.
"She was feisty. She was bold. She was gutsy," said Jedediah Bila in the Daily Caller.
Ms. Palin was also concise and funny. Of President Obama's budget, she said: "We're flat broke and he thinks these solar shingles and really fast trains will save us. So now he's shouting ‘all aboard' his bullet train to bankruptcy. Win the Future? WTF is about right."
"If Sarah Palin's not running for president, what a terrible waste that would be of the best stump speech I've heard since, well, Palin's ‘08 convention speech," said John Nolte of Big Government.
Ms. Palin scores low in polls today, chiefly because of how thoroughly the news media have maligned her. But the Sarah Palin on display in Madison was nothing like the media caricature. As more Americans see that Sarah, her numbers will change.
Barack Obama also is nothing like the news media's description of him. As Americans see more of the detached, petulant, clueless and spiteful little man on display at George Washington University, his numbers will change, too.
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