Are the poor getting poorer? If we believe economist David Peterson, a guest at Ave Maria radio show Kresta in the Afternoon, that is the case. Such reality is to be blamed on the ideas of men such as Frederick Hayek. In effect, if economic thinking in our country has been greatly affected by any economic theory it has been by Keynesian economics but Peterson blames the Austrians!  The myth is that in America, capitalism creates huge disparities that can be solved or ameliorated by massive government intervention to help the poor. To vie for more government intervention, for him, is to be Catholic.

It is true that the share of national income is larger today for the top 20% income earners while the share of the bottom 20% of income earners fell for the last 20 years. Does this mean necessarily that the condition of the poor is worse? Is this a zero-sum game or the result of an economic system capable of creating the greatest mass movement of wealth for the largest number of people in human history? Can we conclude that because the relative share of income goes down then the actual income goes down also? Only if we look at the economy as a static reality, a pie that remains the same and needs to be sliced one way or the other can we conclude that the gain of some needs the loss of others. And only if we think that income is distributed instead of earned can we believe that income is unfairly distributed. If wealth in a society does not change and is distributed by some magic force we can lend some credence to a theory of redistribution.Income redistribution becomes the tool to slice it “better” according to some preconceived notion of justice. But such theory implies even more, that income is a collective property and that the state has a right to distribute what is its property.

But that is not the case at all. In effect, the facts are consistent with an exponential increase in the size of the economic pie as to make a smaller slice of the pie represent more income than a larger slice of the pie would have represented in the past. More importantly, data that compares income in general terms talks of no one in particular but instead of a generic and arbitrary designation of “poor” or “wealthy.”  Such generic comparisons do not serve to analyze the condition of real people in real situations. They take a snapshot at a given moment in time without regard to how real, unrepeatable, and unique persons fare in the economy.[1]

They assume that the “Perez” and “Patterson” families are counted as poor without looking at those families specifically. The implication is that America is a static society, with neat and immobile groups of people destined to a given income distribution; a caste system where the untouchables have no choice but to live forever in squalor. Nothing further from the truth.

When studies are performed by tracking the economic reality of specific families through time, we have a better picture, a personalist picture. Studies tell us that between 1979 and 1988, 86% of households  that where poor in 1979 were no longer poor in 1988. A study from the University of Michigan found that 95% of households that were poor in  1979 were no longer poor in 1991. Because income is mobile in America, the truth is that most poor people can and do fare better as time goes. The poor do get richer.

What is hidden from view is that the average income increase for the period from 1975 to 1991 was larger for the bottom 20% of income earners than it was for the higher 20%.  The poor got richer at a higher pace even as the share of income was much higher for the higher income earners in an economy where the pie got much larger. This is true even without counting benefits, a slice of income always excluded from consideration. When pension, health insurance and government subsidies such as food stamps, the Earned Income Tax Credit (EITC), public housing, school lunch programs, Medicare, Medicaid, and the like are added to give us a picture of total compensation adjusted for household size, We see that low and mid-income earners have gained a 33% increase in income.[2]

Furthermore, the oft repeated theory of higher concentration of wealth in the top 1% of income earners is due some challenging. The ones responsible for this idea are economists Thomas Picketty and Emmanuel Saez who reported estimates using IRS  data in 2002 and 2004. According to their estimates, the top 1% of income earners in this decade receive 15% of all income as compared to 8% in the 60s and 70s. Their study is repeated again and again as proof of a large expansion of income inequality in America. Their estimates were based on tax returns are very popular among those writing on inequality.

One of the main problems with using the study to prove increased inequality is that it does not take into consideration changes in tax law and how they affect elasticity. It has been amply demonstrated that reported income increases when tax rates decrease. People tend to report more income when they know that they will pay less taxes. In fact, their study tells us that the greatest increase in the income of the top 1% occurred in only two years, 1987 and 1988, just after the 1986 Tax Reform Act that changed the top tax rate from 50% to 28%. The share of the income for the “rich” jumped then from 9.1% to 13.2%.  Was there a major shift in income in those years? No. The only thing that happened was that the “rich” reported more income, as economists expect to happen when marginal tax rates drop.[3]

When the law changed, many decided to report income as individuals instead as corporations as it became more advantageous, a phenomenon that was seen also after the Recovery Tax Act of 1981. In the 70s, the individual tax rate was a whopping 70 percent while corporate tax was at 46%. When these tax rates changed, reporting behavior changed by showing more income, not by producing a real life larger disparity of income. In other words, those who use tax returns as proof of changes in inequality miss the point that what they are truly reporting is bookkeeping shifts!

What is most interesting in economist Peterson’s assertions is an implied assertion that those of us who are Catholic and also agree with Hayek and the economic theories of limited government and market economics are somehow violating Catholic doctrine! We are for greed, unfettered markets that abuse the people, and against basic concepts of “social justice.” Nothing further from the truth, but that is for another time…


[1] See “Are the Poor Getting Poorer? By Steve Horwitz here: http://www.youtube.com/watch?v=vDhcqua3_W8&NR=1

[2] See David Weinberger,” Income Inequality, Round Two”, Heritage Foundation (April 2, 2011). You can access the debate here: http://blog.heritage.org/2011/04/02/income-inequality-round-two/

[3] See Alan Reynolds,  “Has U.S. Income Inequality Really Increased?”, Policy Analysis (Cato Institute: Jan. 8, 2007).

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