Business Ethos Blog

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.

Comments
  1. Sue Foltin

    5 years ago

    Consumption? Perhaps I missed where the assumption is made that by consumption those items are paid in full? Is it possible that the low and middle income purchase these items on CREDIT, because they are needed to function in today’s society. So they are earning less and more in debt. Yeah… so let’s compare people’s ability to consume with cash vs those in debt.

    PS… As someone who was recently unemployed for a year and a half, don’t forget the “safety nets” provided to us are taxed at the end of the year. It was no easy ride. And I now have a job that provides a 2% annual increase in pay – regardless of performance. I’m pretty sure that inflation is rising higher than that. So while my pay does increase every year, I’m falling behind in my ability to consume products.

    • Dr. David Mielke

      5 years ago

      Thank you for your comment. Given the new legislation passed to regulate the financial markets, it is highly doubtful that the lower income people especially without a full-time job, would be able to get credit. So I doubt that credit has maintained the ability to consume—and perhaps consume more given the expanded safety net. I expect many of those receiving medicaid and welfare might also be receiving tax credits—not paying tax. Did you hear the news today—highest increase yet in number of food stamp recipients?

      If you have a chance listen in next week—the topic will be the number of part-time jobs that have dominated the so called “job increases” over the past 3 years.