The Five Biggest Myths About Income Inequality

“Inequality is the defining challenge of our time,” according to President Obama. It’s certainly the topic of the day for Paul Krugman, Joe Stiglitz and a whole raft of liberal pundits.

But have you noticed that hardly anyone else is talking about it? When is the last time you heard a shoeshine person or a taxi cab driver complain about inequality? For most people, having a lot of rich people around is good for business. But if average folks are not complaining should they be?

Unfortunately, a lot of what passes as serious commentary is actually myth. What follows are five examples.

Myth No 1: Income for the average family has stagnated over the past 30 years.

Here is an oft-quoted statistic: From 1979 to 2007, taxpayers’ median real income, before taxes and before government transfers, rose by only 3.2%. Cornell University economist Richard Burkhauser, via Greg Mankiw, shows why that statistic is misleading:

  • If we combine the income of all the taxpayers within each household to get household median income, that meager 3.2% rises to a bit more respectable 12.5%.
  • If we add in government transfer payments, that 12.5% number becomes an even better 15.2%.
  • Factoring in middle class tax cuts over the period, the 15.2% figure rises to 20.2%.
  • But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2% to 29.3%.
  • Finally, if we add the value of employer-provided health insurance, the 29.3% figure rises to 36.7%.

So there you have it: real income for the average household actually increased by more than a third over the past 30 years.

This conclusion is consistent with other studies. A CBO study of family income over the same period of time found an increase almost twice that size: the average family experienced a 62% increase in real income.

Economists have a way of measuring inequality that includes the entire population, not just the average family or the top 1%. It’s by means of a Gini coefficient, which varies between 0 (complete equality) and 1 (complete inequality). One study found that between 1993 and 2009, the Gini value actually fell from .395 to .388 — meaning that inequality has actually declined in recent years.

Myth No. 2: People at the bottom of the income ladder are there through no fault of their own.

In a study for the National Center for Policy Analysis, David Henderson found that there is a big difference between families in the top 20% and bottom 20% of the income distribution: Families at the top tend to be married and both partners work. Families at the bottom often have only one adult in the household and that person either works part-time or not at all:

  • In 2006, a whopping 81.4% of families in the top income quintile had two or more people working, and only 2.2% had no one working.
  • By contrast, only 12.6% of families in the bottom quintile had two or more people working; 39.2% had no one working.

The average number of earners per family for the top group was 2.16, almost three times the 0.76 average for the bottom.

Henderson concludes:

“…average families in the top group have many more weeks of work than those in the bottom and, in the late 1970s, the 12-to-1 total income ratio shrunk to only 2-to-1 per week of work, according to one analysis.”

Having children without a husband tends to make you poor. Not working makes you even poorer. And there is nothing new about that. These are age old truths. They were true 50 years ago, a hundred years ago and even 1,000 year ago. Lifestyle choices have always mattered.

Myth No. 3: Government transfer programs, like unemployment insurance, are an effective remedy.

Government transfers can ameliorate the discomfort of having a low income and few assets. But at the same time they tend to encourage people to remain dependent, rather than achieving self-sufficiency. And the loss of benefits as wage income rises acts as an additional “marginal tax” on labor.

University of Chicago economist Casey Mulligan is the leading authority on welfare programs and how they affect employment. At The New York Times economics blog, he wrote:

“As a result of more than a dozen significant changes in subsidy program rules, the average middle-class non-elderly household head or spouse saw her or his marginal tax rate increase from about 40% in 2007 to 48% only two years later. Marginal tax rates came down in late 2010 and 2011 as provisions of the American Recovery and Reinvestment Act expired, but still remain elevated — at least 44%… A few households even saw their marginal tax rates jump beyond 100% — meaning they would have more disposable income by working less… work incentives were eroded about 20% for unmarried household heads… in the middle of the skill distribution, while they were eroded about 12% among married heads and spouses…with the same level of skill.”

Overall, Mulligan estimates that up to half of the excess unemployment we have been experiencing is because of the generosity of food stamps, unemployment compensation and other transfer benefits.

Myth No 4: Raising the minimum wage is an effective remedy.

One of the few policy ideas President Obama has for dealing with inequality is raising the minimum wage. He thinks this will lift people out of poverty. Paul Krugman says the same thing. The difference is that Krugman is an economist who must surely know that the economic literature shows that raising the minimum wage does almost nothing to lift people out of poverty.

Richard Burkhauser and San Diego State University economist Joseph J. Sabia examined 28 states that increased their minimum wages between 2003 and 2007. Their study, published in the Southern Economic Journal, found “no evidence that minimum wage increases… lowered state poverty rates.” Part of the reason is that very few people earning the minimum wage are actually poor. Most are young people who live in middle income households. For example, the economists estimate that if the federal minimum wage were increased to $9.50 per hour:

  • Only 11.3% of workers who would gain from the increase live in households officially defined as poor.
  • A whopping 63.2% of workers who would gain are second or even third earners living in households with incomes equal to twice the poverty line or more.
  • Some 42.3% of workers who would gain are second or even third earners who live in households that have incomes equal to three times the poverty line or more.

Myth No. 5: Income is the best measure of wellbeing.

Why are we talking about income? The implicit assumption is that income limits our ability to enjoy life. But that turns out not to be true. One study found that consumption by those in the lower fourth of the income distribution was almost twice their money income. Moreover, consumption inequality is much less than income inequality.

A Bureau of Labor Statistics study found that:

“…in 2001, the Gini coefficient for consumption was only .280 (almost 30% lower than the Gini for comprehensive income, and about 40% lower than the Gini for money income), indicating that inequality with respect to this most meaningful measure of living standards is relatively modest. Moreover, according to the BLS, during the fifteen-year period between 1986 and 2001, consumption inequality went down slightly; from a Gini of .283 to a Gini of .280.”

Bottom line: the next time you hear someone complain about inequality, make sure they are not repeating these five myths.

— John Goodman
This article originally appeared here on Forbes.com.

  • Open Windows of Opportunity With Jim Rickards

    Open Windows of Opportunity With Jim Rickards

    James Rickards

    by James Rickards
    On Nov 14, 2014

    Are you a deflationist? Or an inflationist? No matter which way you believe the wind will blow, the truth is this: it’s up in the air. But, as Jim Rickards explains, there are things you can do to cover your assets, no matter which one wins the tug-of-war. Read on…

  • Vote for Nobody, and Don’t Buy Gold - You Have Better Things to Do

    Vote for Nobody, and Don’t Buy Gold – You Have Better Things to Do

    Chris Campbell

    by Chris Campbell
    On Nov 4, 2014

    There are two things you shouldn’t do this Election Day: one, vote; two, buy gold. Why? Chris Campbell explores this and more in today’s Laissez Faire Today. Read on…

  • Washington’s Secret Slave Labor Ring: Coming to a Neighborhood Near You

    Washington’s Secret Slave Labor Ring: Coming to a Neighborhood Near You

    Chris Campbell

    by Chris Campbell
    On Sep 26, 2014

    America has about 4% of the world’s population, yet houses 25% of the world’s incarcerated. What’s going on here? Chris Campbell digs deep into the industry to figure out the truth. While many blame the private prison industry, the real culprit, says Chris, begins right outside your door. Read on…

  • The Other Epidemic (and How to Stop it)

    The Other Epidemic (and How to Stop it)

    Chris Campbell

    by Chris Campbell
    On Sep 16, 2014

    “While I heartily subscribe to your premise of pursuing one’s dream,” one reader, Donald J., wrote, “there are alternate perspectives worth considering.”[We’re listening… go on.]“Some wiseguy once said that life is what happens to you while you’re waiting for something better to come along. Milton put it a little more poetically in one of his […]

  • The Only Way to Get Rich: A Zen Proverb

    The Only Way to Get Rich: A Zen Proverb

    Chris Campbell

    by Chris Campbell
    On Sep 10, 2014

    Want to get rich? Don’t listen to financial “gurus,” says Chris Campbell. In today’s Laissez Faire Today, Chris shares a Zen proverb and shows how understanding it is the only real way to get rich (and live a rich life). Read on…

  • shutterstock_83366287

    The Story of a Reluctant Winemaker

    Joe Maga

    by Joe Maga
    On Dec 15, 2014

    Sometimes life deals you lemons. It’s up to you to make lemonade. This month’s Insider Cellar recommended winemaker had no intention of making wine when his family settled just north of Santa Barbara. When our reluctant winemaker’s father walked his land in the early 1980s, he was probably disappointed when he discovered the soil did not have the nutrients to support his strawberry crop

     

  • HappyFamily

    One Free Website to Keep Your Family Safe

    Chris Campbell

    by Chris Campbell
    On Sep 9, 2014

    Ben Franklin once said, “An ounce of prevention is worth a pound of cure.” In today’s Laissez Faire Today, you’ll learn about one FREE website that has the potential to not only keep your family safe – but also open your eyes to what’s happening in your own neighborhood. Chris Campbell has all the details. Read on…

  • Youre_Incredible

    Use “Power Gaps” to Build Your Own Empire

    Chris Campbell

    by Chris Campbell
    On Sep 8, 2014

    All over the world, power is dying. The dictators and tyrants of the world are no longer able to wield it like they once used to. And they’re losing it to the “little guy.” Chris Campbell shows you how to be the king of your castle by taking advantage of this fact. Today, you’ll learn how to grab “power gaps” in the market and channel them into your product idea or project. Read on…

  • Free Markets and Malaysian Fireflies

    Free Markets and Malaysian Fireflies

    Chris Campbell

    by Chris Campbell
    On Sep 3, 2014

    The fireflies along the tidal rivers of Malaysia show "feats of synchrony that occur spontaneously, almost as if nature has an eerie yearning for order." Chris Campbell tells you where else this might occur in the world. Also, new technology may revolutionize the agriculture industry and what we think of as a farm.

  • Smoking Pot in the Governor’s Mansion

    Smoking Pot in the Governor’s Mansion

    Chris Campbell

    by Chris Campbell
    On Sep 2, 2014

    Jeff Davis is running for Governor in Hawaii and has an interesting campaign strategy. Also, what motivates hackers is revealed and the findings might surprise you. Finally, Ferguson is discussed in a new light. Chris Campbell has more...

  • SHI0115

    The Only Path to the American Dream

    Ryan Cole

    by Ryan Cole
    On Dec 10, 2014

    This month, I’m going to tell you a hard truth. It’s one that Wall Street brokers and financial analysts try to hide. It’s one that most newsletter writers choose to ignore. In fact—when it comes to the financial world—this is a “secret” that everyone knows… but no one will mention.

     

  • The End of Money

    The End of Money

    Bill Bonner

    by Bill Bonner
    On Aug 22, 2014

    When the government pumps trillions of dollars into the economy, they’re not actually printing the money. It enters as digital entries in banks across the country. It’s made the system fast, responsive, and, unfortunately, vulnerable. Now our money is no longer something we hold in our hands, but something that exists on a very susceptible network.

    An article in , ,

  • 4 Ways the Government Is Set to Take Your Money

    4 Ways the Government Is Set to Take Your Money

    Byron King

    by Byron King
    On Aug 21, 2014

    The so-called recovery is only built on debt and printed cash declares our own Byron King. In the long term, the only option for the government to continue financing it's operations is to print too many dollars. Money printing has it's limits, however. It's Byron's opinion that at some point, perhaps very soon, the government will have to turn to more desperate measures. Namely, capital controls. In the following featured essay, Byron outlines 4 probably ways the government will take your cash and one play you can buy through your broker to prepare today. Read on...

  • America Needs More Tax Inversion

    America Needs More Tax Inversion

    Clem Chambers

    by Clem Chambers
    On Aug 20, 2014

    Americans expatriate because they want to get out of the country. Corporations expatriate for similar reasons. Clem Chambers explains...

    An article in ,

  • Central Planning by Central Bankers

    Central Planning by Central Bankers

    Gary North

    by Gary North
    On Aug 15, 2014

    In a 2009 article, the Huffington Post went into considerable detail about the number of people with PhD degrees in economics employed by the Board of Governors of the Federal Reserve System. This is the government’s branch of the Federal Reserve. It is not one of the 12 regional Federal Reserve banks, all of which […]

  • TimeBomb

    Three Time Bombs in Your 401(k)

    Dave Gonigam

    by Dave Gonigam
    On Dec 4, 2014

    They lurk somewhere in everyone’s 401(k) program. Tick, tick… And it might be years before you discover them. Tick, tick… By the time you do… Kaboom! It’s too late. They’ve already blown up your retirement.

     

  • 6 Major Flaws in the Fed’s Economic Mode

    6 Major Flaws in the Fed’s Economic Mode

    James Rickards

    by James Rickards
    On Aug 12, 2014

    The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in […]

  • How to Die Poor

    How to Die Poor

    Bill Bonner

    by Bill Bonner
    On Aug 8, 2014

    The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance or the get-rich-quick adventurer. They will die poor.– Jesse Livermore, How to Trade in StocksThe trouble with capitalism’s guardians is that they have no […]

    An article in , ,

  • Will Mandates for Doctors Come Next?

    Will Mandates for Doctors Come Next?

    Barton Hinkle

    by A. Barton Hinkle
    On Aug 6, 2014

    John Foust, a Democrat running for the 10th congressional seat in Northern Virginia, is — like Gov. Terry McAuliffe and other state Democrats — gung-ho to expand Medicaid. His wife’s position is, shall we say, a bit more nuanced.Foust has slammed his opponent, Republican Del. Barbara Comstock, for her opposition to expansion. He has spoken […]

    An article in , ,

  • No Matter Who Wins, a Sociopath Is Elected

    No Matter Who Wins, a Sociopath Is Elected

    Doug French

    by Doug French
    On Aug 5, 2014

    The midterm election season is upon us, and it’s a tossup whether the Republicans will win the Senate, or if President Obama, seemingly oblivious as conflict flares up around the world, will, through his continuous campaigning, keep Harry Reid in his majority leader seat.The only thing we know for sure is that sociopaths will be […]

    An article in ,

  • SHI_December2014

    This Sector Is Ready to Explode 1,000% Higher

    Ryan Cole

    by Ryan Cole
    On Dec 1, 2014

    One industry is expected to grow from an estimated $77 billion sector by the end of 2014… to around $700 billion in 2024. And that, frankly, is a conservative estimate, as you’ll see below. This isn’t because of some resource boom or new discovery. This isn’t because of funny business or a trader play. This is real spending, done by real companies to combat a very real threat. It’s already an established industry but poised for exponential growth. Because the problem it combats is growing exponentially.

     

  • Linking The Dollar To Gold: The Recipe for an American Economic Boom: Part 1

    Linking The Dollar To Gold: The Recipe for an American Economic Boom

    Peter Ferrara

    by Peter Ferrara
    On Aug 4, 2014

    Alexander Hamilton was America’s first Secretary of Treasury under President George Washington. When he first entered office in 1789, America was an agricultural nation of just 4 million still broke from its financially costly victory over the British Empire in the Revolutionary War.The states had accumulated relatively massive debts to finance that war, which mostly […]

  • The Bitcoin Dinner Solution

    The Bitcoin Dinner Solution

    Jeffrey Tucker

    by Jeffrey Tucker
    On Jul 29, 2014

    A great technology solves a problem that we didn’t know we had. It makes us aware of deprivations we didn’t know existed until we discover the new thing. Once discovered, we can’t go back.People in the 1950s, for example, never missed the smart phone. They were pleased to have a phone at all. But today, […]

  • Advance Notice of the Next Market Crash

    Advance Notice of the Next Market Crash

    Chris Mayer

    by Chris Mayer
    On Jul 28, 2014

    Fifty years after the 1929 crash, a group of money managers and investment thinkers put together a collection of essays looking back at that experience. The result was a distillation of some pretty fine investment wisdom. Timely, I think, to review now.One of the contributors was Arthur Zeikel, then with Merrill Lynch. The title of […]

    An article in ,

  • Obamacare… A Caring Solution for Opting Out

    Obamacare… A Caring Solution for Opting Out

    Jud Anglin

    by Jud Anglin
    On Jul 25, 2014

    Although the mainstream media have turned its attention away from the wreckage of Obamacare, don’t think for a second that all is well.As the politicos in D.C. focus their attention on the midterm elections in November, now is a great time to study, prepare, and seek out the most affordable, accessible, and highest quality options […]

  • EightUnusual

    8 Unusual Rules for Investing

    Chris Mayer

    by Chris Mayer
    On Nov 4, 2014

    Where do great investors come from?I’m not sure what the hurdle rate for greatness is, but Guy Spier has put up impressive results. His Aquamarine Fund has returned 463% since inception in 1997, versus just 167% for the S&P 500 (a broad proxy for the market). Put another way, $1 million invested at inception is […]

     

  • The Battle Against Economic Stupidity

    The Battle Against Economic Stupidity

    Doug French

    by Doug French
    On Jul 24, 2014

    Turn on the tube and economic ignorance seems to be everywhere. There is constant shilling for more government. Business is demonized. Man is said to be trashing the environment. “Workers and women are oppressed” is the constant mantra.And members of the clueless media nod their heads in unison.Only John Stossel has provided the fresh air […]

  • The Dollar’s 70-Year Dominance Is Coming to an End

    The Dollar’s 70-Year Dominance Is Coming to an End

    Liam Halligan

    by Liam Halligan
    On Jul 22, 2014

    In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]

  • Free Market Capitalism v. Crony Capitalism

    Free Market Capitalism v. Crony Capitalism

    Richard Ebeling

    by Richard Ebeling
    On Jul 21, 2014

    In the minds of many people around the world, including in the United States, the term “capitalism” carries the idea of unfairness, exploitation, undeserved privilege and power, and immoral profit making. What is often difficult to get people to understand is that this misplaced conception of “capitalism” has nothing to do with real free markets […]

  • Big Banks Look To Cash In Using D.C.’s Revolving Door

    Big Banks Look To Cash In Using D.C.’s Revolving Door

    Richard Osborne

    by Richard Osborne
    On Jul 16, 2014

    Some people are saying it is just what the doctor ordered. Others are saying that the cure is worse than the disease.The Affordable Care Act? Reengagement in Iraq? Tea Party bullying in the GOP?Not this time. Just as protracted in the corridors of Congress and the White House is the debate over the proposed reform […]

    An article in , ,

  • SHI_November2014

    A Double-Digit Winner That’s Attacking America’s No. 1 Killer

    Ryan Cole

    by Ryan Cole
    On Nov 1, 2014

    I made a choice five months ago. And that choice has saved my life. This wasn’t some instantaneous decision, with danger near. It wasn’t some great “eureka” moment, either. There probably isn’t a person out there who would question what I did. In fact, more and more people are making the exact same choice every day. And each one does it to the sound of applause.

     

  • The Only Prescription for a Real Economic Recovery

    The Only Prescription for a Real Economic Recovery

    Dan Amoss

    by Dan Amoss
    On Jul 15, 2014

    In 2012, money mandarins running the European Union chose stagnation over restructuring. Here’s a consequence of that choice: expectations for a self-sustaining economic recovery keep getting crushed.Two years ago, European Central Bank (ECB) chief Mario Draghi promised to do “whatever it takes” to hold the eurozone together. He bluffed nervous investors into believing in a […]

  • Allowance

    The Family Is A Machine For Destroying Wealth

    Phil Demuth

    by Phil DeMuth
    On Jul 9, 2014

    People jacked up about income inequality can find a new hobby. The 1% are victims of a doomsday machine, and the countdown is ticking. Machine, thy name is “family.”This came to mind as I was reading a preview of Columbia Professor Andrew Ang’s forthcoming, must-read book on Asset Management. Ang is that oxymoron, an exciting […]