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The Rich Aren't Dispossessing the Rest

Tags Free MarketsU.S. EconomyInterventionism

11/14/2011Gary Galles
The Congressional Budget Office's just-published Trends in the Distribution of Household Income Between 1979 and 2007 found an increasing concentration of income over that period, ranging from 275 percent income growth for the top 1 percent of households and 65 percent growth for the rest of the top 20 percent down to 18 percent growth for the lowest 20 percent of household incomes.

Left-liberals instantly used the CBO report to repeat their "the rich are getting richer at everyone else's expense" mantra. Representative Sander Levin (D-MI) called it "just the latest evidence of the alarming rise in income inequality in America," and the Washington Post's Eugene Robinson called the result "a nation starkly divided between haves and have-nots."

One obvious issue is whether a year during a housing bubble and stock boom provides valid information about inequality in the current, very different postbubble world.

Unfortunately, there is also a far larger problem. The CBO report cannot support such conclusions. As Thomas Sowell explains,

Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories — and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one category to another over time.

In other words, the increasingly unequal rich-versus-poor class-warfare rhetoric (e.g., the Occupy Wall Street imagery of the 1 percent versus the 99 percent) falsely equates individuals with statistical categories, although they behave very differently.

Perhaps the clearest rejection of the increasingly unequal classes interpretation is in a 2007 Treasury study titled Income Mobility in the U.S. from 1996 to 2005. Following individual tax-return data over a time period when statistical categories showed increasing income concentration at the top, it found far different results.

The Treasury found that those with the very highest incomes in 1996 — the top 1/100 of 1 percent — had their incomes halved by 2005 (missed by using statistical classes, because such decreases move people out of the top category). That hardly shows a class of rich growing ever richer at the expense of other classes.

Other income categories revealed a similar story. From 1996 to 2005, the incomes of those originally in the top 1 percent and 5 percent both declined; the incomes of those originally in the top 20 percent increased 10 percent; but those originally in the bottom 20 percent saw a 91 percent increase in income (missed by using statistical classes, because such increases move people out of the lowest 20 percent).

A 2003 Treasury study of the top 400 income earners from 1992 to 2000 found similar individual mobility between income categories, including "the rich" migrating downward (thus dropping out of the top 400), rather than forming a permanent overclass. Over those years, thousands of different people made it into the top 400, with less than one in seven in that category more than twice, and less than one in four in it more than once.

Earlier studies also found a great deal of income mobility. W. Michael Cox and Richard Alm found that between 1975 and 1991, only 5 percent of those with incomes originally in the bottom 20 percent were still there at the end. In contrast, that same group was more than 15 times as likely to have been in the top 40 percent at least once and almost 6 times as likely to have been in the top 20 percent at least once.

The left-wing interpretation of the latest CBO study is little more than a verbatim repetition of what they have claimed for years. If we consider individual people instead of statistical categories, we must reject the leftists' conclusion that the rich are increasingly dispossessing the rest — as well as the implied need for ever more government redistribution. Why do they keep ignoring that more relevant evidence? Because misrepresentation lets them sell their preferred story line more effectively, buying them more elective offices and power.


Gary Galles

Gary M. Galles is a Professor of Economics at Pepperdine University and an adjunct scholar at the Ludwig von Mises Institute. He is also a research fellow at the Independent Institute, a member of the Foundation for Economic Education faculty network, and a member of the Heartland Institute Board of Policy Advisors.