The Myth of Income Inequality
Dr. David Mielke, Retired Dean of the College of Business, Eastern Michigam University
We have heard a lot during the campaign that income inequality has increased over the past several years. It is one of the reasons used to justify taxing the rich—the millionaires and billionaires–although that is defined as any couple earning more than $250,000. But is income a valid measure to use to determine inequality? Is the better measure to use consumption? I propose that it is the “Right Thing to do” to use consumption. Here are the issues:
1. The standard line we hear is that gains from economic growth accrue to the highest income earners while the standard of living of the poor and middle class stagnates and the gap between the richest and poorest grows even wider. We do know that during the past 4 yeas the incomes of middle class Americans has fallen about $4,000.
2. When we think about inequality aren’t we most concerned about people able to consume and acquire goods and services?
3. The studies on income inequality largely focus on pretax incomes while ignoring transfer payments and spending from unemployment benefits, food stamps, Medicaid and other safety net programs.
4. In general, people’s income rises over their working life. They may have low incomes while pursuing higher education. Thus, a snapshot of incomes at one point in time can be misleading.
5. A recent study of consumption inequality found that consumption across various income groups has remained relatively stable over time. In 2010, the bottom fifth consumed 8.7% of overall consumption, the middle fifth 17% and the top fifth 38.6%. In 2000, the bottom fifth was at 8.9%, middle fifth 17.3% and highest 37.3%
6. While this stability is a good thing, from 2000 to 2010 consumption has increased 14% for the bottom fifth, 6% the middle fifth and 14.3% for the highest. This is despite the terrible economy at the end of the decade.
7. If we look at the ability of the lowest income households to acquire “devices” we find that of those earning less than $20,000, 47.7% have computers, up from 19.8% in 2001, air conditioning rose from 65.8% to 83.5%, dishwashers from 17.6% to 30.8%, microwaves from 74.9% to 92.4% and 75.5% have cell phones and of those over 25% have Internetaccess through their phone.
In general, are the lowest income earners worse off than in 2001? It doesn’t look like it. We have a vast safety net that adequately serves the poor–and the middle class–to maintain significant consumption growth despite the stagnated incomes. To talk only about the so-called income inequality is not the “Right Thing to do”. We must take into consideration the ability to consume. Taxing the rich will not aid consumption—except by the government.