Fallacies abound about economic inequality, but one of the worst is confusing income categories with human beings.
Presidential candidate Bernie Sanders recently perpetrated this confusion:
“Our economic goals have to be redistributing a significant amount of [wealth] back from the top 1 percent … Unchecked growth – especially when 99 percent of all new income goes to the top 1 percent – is absurd,” he fulminated.”
But the “top one percent” and the “bottom 99 percent” are statistical categories — not living and breathing human beings. Confusing the one with the other encourages fallacious thinking.
The late economist Joseph Schumpeter compared income groups to hotel rooms: Just as the former ranges from high to low, so the latter ranges from high-end to low-end. But the different categories fail to reflect who occupies them and whether occupants move to higher categories over time.
For instance, occupants of lower-end categories may primarily be young adults starting out in the workforce and who have yet to move up the income scale. Conversely, occupants of higher-end categories may primarily be older-aged adults who have decades of work experience and savings under their belt. If people become wealthier over time, then moving up the ladder is hardly untypical, and the notion that people remain stuck in an income category is false. But statistical categories disguise these realities.
Indeed studies that have followed individuals over time reveal that it is not at all uncommon to rise. A major study out of the University of Michigan, for example, followed tens of thousands of individuals over a period of decades. As Thomas Sowell notes from the study:
Among individuals who are actively in the labor force, only 5 percent of those who were in the bottom 20 percent in income in 1975 were still there in 1991, compared to 29 percent of those in the bottom quintile in 1975 who had risen to the top quintile by 1991. More than half of those in the bottom quintile in 1975 had been in the top quintile at some point during these years.
A similar study conducted by the U.S. Treasury in 2007 agreed:
Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005. … There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.
And nor are the “the top one percent” permanent members of that category:
Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.
Lest one think these are cherry-picked studies, the Treasury report concluded that “the degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility.” The Federal Reserve annual report from 1995, which also followed individuals over time, reinforced the conclusion of high economic mobility.
Another mistake is to assume that, because the top categories grow while lower ones shrink, the “rich are getting richer” while everyone else stagnates or worse. The reality may in fact be that upper categories expand while lower categories contract simply because more people are becoming wealthy—another phenomenon statistical categories mask.
Progressive economist Stephen Rose, who has examined the evidence, notes precisely that:
True, fewer people today live in households with incomes between $30,000 and $100,000 (a reasonable definition of “middle class”) than in 1979. But the number of people in households that bring in more than $100,000 also rose from 12 percent to 24 percent. There was no increase in the percentage of people in households making less than $30,000. So the entire “decline” of the middle class came from people moving up the income ladder.
Too many Americans have been misled by influential studies on inequality that examine income categories rather than living and breathing human beings. While these studies may provide cover for lofty egalitarian visions, the reality of individuals contradicts those visions.
David Weinberger formerly worked for the Heritage Foundation. He currently resides in the Twin Cities, and blogs at diversityofideas.blogspot.com.