I’ve got three amazing daughters. They are so different and their different personalities have been evident from day one.
One of the differences is how they respond when they encounter mindless stupidity like dealing with an inane policy at a private business or when running into endless red-tape at some government bureaucracy. One of my daughters will say, “I felt like shooting someone.” At the other extreme, another daughter will say, “I wanted to shoot myself.”
They are speaking hyperbolically, of course, but the metaphorical extremes of murder and suicide are interesting responses to idiocy.
I can identify with both sentiments. This struggle between wanting to lash out on the one hand and, on the other hand, wanting to crawl into a hole and give up is something I feel on a regular basis over any number of issues. And this tug-of-war has been happening a lot recently over the issue of income inequality.
Income inequality has been an undercurrent in the healthcare debate and became more explicit last week when Max Baucus (D-MT) said (rather in-artfully and in mangled grammer),
Too often, much of late, the last couple three years the mal-distribution of income in America is gone up way too much, the wealthy are getting way, way too wealthy, and the middle income class is left behind. Wages have not kept up with increased income of the highest income in America. This legislation will have the effect of addressing that mal-distribution of income in America.
Income inequality is a perennial issue that crops up in every election cycle. It came up in the 2008 presidential campaign when Obama indicated to Joe the Plumber that income redistribution was an appropriate role for government. John Edwards tried to make the issue of economic inequality the basis of his 2004 presidential campaign with his “Two Americas” theme.
The income inequality issue has also surfaced in my own reading recently. My faith and politics discussion group is reading another book by Jim Wallis (Rediscovering Values) and he devotes a chapter to income inequality. From Wallis, I get the standard left/liberal analysis of the evils of the capitalist system in America that favors the rich and oppresses the poor but with the added twist that this makes Jesus sad and mad.
Ahhhhrrrgggg! I’m resisting the temptation to grab my gun. It would just complicate my life if I did because then I’d have to decide whether to aim it at myself or others!
So let me see if I can respond to this issue in a more productive way. “Going postal” will just land me in jail and blowing my brains out will deprive all of you of my brilliant and insightful analysis of things political and spiritual.
Census Bureau data is often used by those who make the case that there is unjust income inequality in this country. To follow this discussion, you need to know that the Census Bureau divides American households into five “quintiles” based on income. Each quintile contains 20% of the households in the country. From bottom to top, they are called the Bottom, Second, Middle, Fourth and Top quintiles.
Census Bureau data, it is claimed, show that those in the Top quintile have 50% of the income earned in the country while those in the Bottom quintile have only 4% of the income. Said differently, the wealthiest households have $14.30 in income for every $1.00 earned by the poorest households.
But there are three problems with the Census Bureau analysis: (1) It does not include “non-cash” income. (2) It includes unequal numbers of people in each of its five quintiles. (3) It does not take work patterns into account. When these items are factored into the analysis, the income distribution picture looks dramatically different.
Let’s look at each of these issues in turn.
(1) Non-Cash Income: The first problem arises from how the Census Bureau defines income. It only counts “money income”. But people in all the quintiles receive “non-cash” income. A good example is employer paid or subsidized health care.
More importantly, there is a vast social safety network that provides benefits in the form of products and services to those in the lower quintiles. This includes things like food stamps, school lunch programs, public housing, Medicare/Medicaid benefits and so forth.
These benefits are funded almost exclusively by the Top quintile and received as benefits by the bottom three quintiles. In other words, it is only households in the Top quintile that tend to be net tax payers – they pay more in taxes than they receive in benefits. Households in the lower quintiles receive more in benefits than they pay in taxes.
When non-cash benefits are added to the income figures of each quintile, we find that the alleged income inequality has dropped to $8.60 in income for those in the Top quintile for every $1.00 received by those in the Bottom quintile.
(2) Unequal Populations in Each Quintile: A second problem with the Census Bureau analysis is that the quintiles are based on households and not on population. Each quintile contains unequal numbers of people. For example, the Top quintile contains over 24% of all the people in the country while the Bottom quintile contains just 14% of the nation’s population.
Comparing incomes among groups with differing numbers of people is hardly equitable. You would not be surprised or alarmed to learn that the total income of all Californians (population almost 40 million) exceeds the total income of all those who live in Vermont (with population just over 0.6 million).
When the quintiles are adjusted to contain equal numbers of people, we find that the Top quintile earns $4.31 in income for each $1.00 earned by those in the Bottom quintile.
(3) Unequal Work Patterns in Each Quintile: A third problems remains to be considered. The amount of work performed by people in each quintile varies widely. Households in the Census Bureau’s Top quintile performs 34% of all the paid labor done in the country while the Bottom quintile provides barely 4% of the labor performed each year.
This does not mean that people in the Top quintile are hard working and productive citizens while those in the Bottom quintile are lazy bums. There are some “unequal population” issues that we need to consider here also. Stick with me because this gets a little hairy.
The numbers quoted above for work performed by Top and Bottom quintiles are based on the Census Bureau’s quintiles which contain unequal numbers of people. But you may have realized that there is an even bigger issue in this regard: Not everyone in these quintiles is a worker. The number of working age adults (those aged 18 to 64) in the Top quintile is much bigger than the number of working age adults in the Bottom quintile. In fact, there are 25 workers in the Top quintile for every 10 workers in the Bottom quintile. Obviously, 25 workers are going to make a lot more income than 10 workers even if they are paid the same wage
And there is an additional complication. Not all working age adults work the same number of hours. The typical working age adult in the Bottom quintile only works half as many hours per year as the typical working age adult in the Top quintile.
In regard to this last complication, a concrete example is helpful. Imagine two nurses who make the same hourly wage. One works two shifts per week and the other works four shifts per week. The second nurse makes twice as much money as the first nurse but this is not due to any sort of unjust inequality. One simply works more than the other.
We can adjust for these factors by creating a hypothetical situation where we imagine that all working age adults in all quintiles work the same number of hours. When this factor is added to the adjustments made in Items No. 1 and 2 above, we find that the Top quintile makes $2.91 in income for every dollar of income for those in the Bottom quintile.
(Important Note: The analysis from which I’ve been drawing this information still does not seem to take all the factors into account in regards to this last issue. They note that the quintiles contain unequal numbers of workers but then they do not adjust the quintiles to contain equal numbers of workers. The only adjust the quintiles so that they contain equal numbers of people (see Item No. 2) and then adjust in Item No. 3 for the unequal amount of work per worker. It still seems to me that you’d need to create quintiles with equal numbers of workers. At any rate, I can only point out that doing so would further lessen the income inequality between the Top and Bottom quintiles).
Conclusion: So there you have it. The alleged inequality between the top and bottom of the economic ladder is largely mythical. Instead of the Top quintile receiving $14.30 in income for every dollar earned by the Bottom quintile, a more rigorous analysis shows that the disparity is more like $2.91 in income at the top for every dollar earned by those at the bottom. And even that is still likely to be a bit overstated – see Important Note above.
And there is one more thing to factor into this discussion. We’ve focused on the differences between the top and bottom economic spheres in terms of what they receive. But we might also profit by looking a bit more at what the Top quintile does for the country. (And by the way, if your household income is over $84,000 per year, you are in the Top quintile). Those in the Top quintile not only perform more than a third of all the work but they also pay 82% of the personal income taxes and 67% of all the taxes paid to the federal government. In contrast, the Bottom quintile pays only 1.1% of all federal taxes.
So can we stop all the class warfare? If you feel differently, grab your gun and blaze away at me (metaphorically) and tell me why I’m wrong in thinking that we ought to thank God for the Top quintile.
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Information for this post was taken from an August 2004 study by The Heritage Foundation entitled Two Americas: One Rich, One Poor? Understanding Income Inequality in the United States.
From one Top Quintillian to another, thank you for this analysis. For the most part, those in the top quintile got there through hard work. And think of the range of incomes that exist in that top quintile–$84,000 is a LONG way from Bill Gates’ income. Although I’d love to be burdened with Bill Gates’ wealth, I don’t resent him for being so much wealthier than I am. In fact, I am grateful to him multiple times a day for what his entrepreneurship has done to enrich my life.
One of the principles upon which America is built is that everyone, no matter how humbly born, can potentially become a Bill Gates. No one is condemned to earning minimum wage simply due to the circumstances of his birth. Not only are the top wage earners the top tax payers; they are also the most generous as far as charitable giving.
Income redistribution destroys the incentive to work more and to earn more. The higher the marginal tax rate, the greater the negative effect on the entrepreneurial spirit. We once had a 90% top marginal income tax rate. Who wants to bother to put out the effort to earn the next dollar if he knows that 90% of it will go to the government, and a government that cannot seem to rid itself of deadwood, waste, and inefficiency?
Unfortunately the folks like Max above don’t have the intellectual capacity to understand any of what you just said. Their response would be, “Yeah, but it ain’t fair on the poor people.”
Which leads me to wonder why, as a country, we keep electing “those people”?
Love your analysis…keep at it, even if only for the cathartic benefits.
Mike,
Complicated analysis…but the fact remains America is the place where a Bill Gates or a Mike Cooke can earn a good income if they are willing to work hard. Perhaps Gates is brighter than Cooke…therefore earns more but that is no reason to take away the opportunity…some have better “connections” than others , and work at that, but again not a reason to take away the oportunity. The problem is when because of your family or race you can go only so far…that is not fair and hopefully in America those restrictions or advantages have been eliminated.
Where else would you rather live.
Tom
Not buyin’ it, Mike. As I was reading the numbers, I was wondering where they came from–thanks for the citation. The census statistics are a reasonable source for raw information, but with a little time and analysis, I’m quite certain a thinking person could draw diametrically opposite conclusions based on more solid logic. Unfortunately, I can’t spare the time right now to do so, even though it would be a fascinating exercise. It’s not my style to just take a few potshots (metaphorically speaking) and run, but that’s all I have time for right now.
1. The main problem is that the classic idea of capitalism that we all grew up with (the idea that anyone can rise to the wealthy class through hard work and ambition) is a patently false fantasy. Sure, hard work improves your odds a bit, being ambitious doesn’t hurt, and there are many examples of people who did indeed make it from the bottom to the top. But the fact is, the less rich (the bottom 19 percent of that top quintile–folks like you and me) do indeed work hard, and many of us do manage a comfortable standard of living, but do any of us REALLY believe we can–through hard work–become a ten-billionaire, or even a billionaire? Are we all just such slackers, or have we *chosen* to bust our tails for relatively small returns? (Maybe we don’t really want wealth, but if so, why don’t we just work a lot less and enjoy the same level of income?) Are any of us truly convinced that those who are extremely wealthy are, in fact, thousands of times smarter or harder working than we are? Like I said, I’m not buyin’ it.
2. I’m part of the top quintile too, but I’m much more concerned about the top percentile than the top quintile. I don’t have numbers and sources at hand, but I believe that an astonishingly inordinate amount of the wealth and the means of producing wealth are concentrated in that top one percent–and the imbalance has been getting worse at an exponential rate only in the past thirty years. That worries me. A lot.
3. I believe an examination of the facts will reveal that most of the people in that top one percent really didn’t get there by hard work, nor do they pay anywhere near the taxes that their high tax rate would imply. Most (not all) got there through privilege, greed, taking unfair advantage of others, manipulation, and other traits that don’t seem to fit Christian values (or the moral principles of secular humanists, for that matter). Granted, a handful (like Bill Gates) got there with luck, boldness, conviction, and a good idea. But most got there on the backs of people like us. Once a person reaches a certain level, the climb gets easier, because the wealthy have the clout to tilt the playing field in their own favor, and they do. Face it, the actual written-down rules for wealthy investors are radically different than for poor “top quintile” folks like you and me. Could they have amassed their fortunes without hedge funds, short selling, credit default swaps, and all those derivatives (unavailable to us) that led to the financial crisis? Do you honestly believe that they plan their investments with the economic welfare of the nation at heart, rather than for personal gain?
4. (Last shot, although I still have lots more bullets…) It is awfully easy for those of us who enjoy so many advantages to blame the poor for their poorness. “If only they would quit being so lazy and work hard they could be successful.” That’s the promise of capitalism, isn’t it? But we tend to forget that we ourselves had a huge head start–we were born with whole minds and bodies, our parents had high expectations of us, we went to good public schools, we had encyclopedias at home and continuous exposure to a rich cultural environment, most of us went to college, we had the means to dress well enough and speak well enough to win decent jobs, and we enjoyed friendships, knowledge, and networks that are simply not available for those in the lower quintiles. I just got back from a nice vacation. I thought a lot about the people making the beds in our motel room, preparing and serving our food in restaurants, cleaning the airplanes between flights. One single mother we talked to was working three different jobs, 15-16 hours a day, six and seven days a week. Tell me–do you really think her hard work will make her a billionaire? A millionaire? A top quintiler?
Yes, I still love my country and I still believe in (a saner version of) capitalism. But I strongly believe that things have gone way out of kilter in the past 30 years, and the very concept of our “land of opportunity” is rapidly disappearing unless we turn things around.
Chuck — so good to hear from you. Thanks for weighing in. I identify with not having enough time to stop and do the research to present an opposing point of view. This blog is my outlet for those times when I do create some time (all too rare) to delve into an issue. Thanks for throwing out your intuitions on the matter … and for your passion. I value your friendship.
To some extent, I think both sides of the income inequality issue are presented in this post. The Census Bureau puts out the interpretation typically offered by those on the left — namely, that income inequality is severe and worsening. The Heritage Foundation analysis is the alternative look at the same data and they present the view of those on the right.
I’m in one of those time constrained moments so I can’t do anything like a thorough response but will offer a few comments.
I agree that there is a lot of nonsense about “anyone can be anything they want to be”. I don’t believe that. Michael Jordan was a fabulous basketball player, a superb athelete and had all the success mindsets but he could not make it as a professional baseball player. He never even succeeded at the minor league levels.
At the same time, while we can’t be “anything we want to be”, I do believe that most of us are less than we could be. We all limit ourselves in ways and this is often due to wounds and other life events that happen to us that can be overcome (we need Kelly here).
You speak quite a bit about the top 1%. I think the top 1% are not a monolithic group. Household income of something around $375,000 puts you in the top 1%. About 1.35 million households enjoy such income levels.
I’ve seen data on the top one-tenth of one percent and it seems that income in the $1 million to $2 million range puts your there (I’d need to check to be sure). When we get to the top tenth of one one percent, we are talking about 135,000 households and most of these people are light years below the wealth of a Bill Gates and George Soros.
So I think that the uber-wealthy that are mainly the target of your concern are a very, very small group. Undoubtedly you are right — at least some did not earn it or earned it dishonesty. For example, I think George Soros has been guilty of massive market manipulation. It might, however, be interesting to discuss if your generalizations about the super rich are as widespread as commonly imagined.
Also, the top 1% of wage earners pay 40% of all the personal income taxes collected by the federal government. The top 10% pay 70%. The bottom 50% of wage earners pay less that 4% of the federal income tax burden. Also, I calculated how much money would flow to the government if all income over $375,000 per year went to the government, and it was around $800 billion which at the moment would not even cover the yearly deficit. And of course would the government spend it wisely and well? Is big government not as inept and greedy as big corporations?
Capitalism certainly has some problems. It is not the kingdom of God. But as I look around the world and look at alternatives both contemporary and historic, I see they have produced even greater economic inequality. I worry that legitimate criticisms of the current system will lead us to adopt policies that make things worse instead of better.
Oh man — this response is so inadequate. These are just some thoughts that occur to me off the top of my head. Thanks again for commenting. I love getting comments from people who disagree. Makes for an more interesting engagement.