Nathan Sass

Exploding the Myth That “The Poor Got Poorer”

In Economics, Politics, Tax Policy, Theology on December 15, 2011 at 6:00 AM

The occupy crowd and liberals everywhere repeat the mantra of “the rich get richer and the poor get poorer” to justify their continued calls for income redistribution and taxing “the rich” at ever higher levels.

But does the data support their claims?  Statisticians have developed convoluted and overly complicated equations to determine “income inequality”, and they  show that the distribution of wealth is indeed unequal (not surprisingly since most are probably lefty professors).

My observations of the world around me conflict with this conclusion, so I tried to do my own investigation using US Census Bureau numbers or other “official” sources, and let the data tell me the truth.  (Advance warning, there are a lot of numbers in the post and it’s kinda long, but I promise it is worth the read.)

The conclusions I drew seem more in line with what I (and probably you) see everyday.  The US has (by far) the wealthiest “poor people” in human history.  Furthermore, while the “rich have gotten richer”, so have the poor, just at a slower rate.

Understanding a few basic terms is essential before I continue.  The data I collected is based on “quintiles” of “income” in “constant 2010 dollars”.

A quintile is nothing more than 20% of a whole, or 1 in 5.  If you have 100 incomes, you can divide them up into 5 equal groups of 20 each.  There are always the same number of incomes in a quintile when you compare them, no matter what the incomes are or how many people we are counting in total.

Income is nothing more than the amount an individual earns in a year from work.  It is NOT wealth.  Wealth is “net worth” or how much money (or stuff worth money) you have collected over your lifetime and have right now.

Wealth is a very different thing and very hard to measure on a large scale since people own a lot of things worth some money (including your TV, your shoes, and also your 401k and savings bonds) and you need to add it all up.  Remember that people that we think of when we say “rich” usually have a lot of wealth and not much income.  They have stuff worth money and probably don’t work for an income as big as their stuff (like stocks and bonds) is actually worth (i.e. Bill Gates).

Finally, constant 2010 dollars means that the value of $1 is the same in every year we look at.  It means that we have accounted for inflation and the changing buying power of money over time.  (you know, like a Coke for a nickel and other stuff your grandparents told you about).

(I know that was dry stuff, so I hope you still with me so far.)

So, what does the data say about quintiles of income in constant 2010 dollars since 1967?  Quite a lot, actually.

We can see the difference in top incomes in each quintile between 1967 and 2010:

Income
Quintile 1967 2010 Top Income Increase
0-20% $1 – $ 17,123 $1 – $ 20,000 $ 2,877
21%-40% $17,124 – $ 33,390 $20,001 – $ 38,043 $ 4,653
41%-60% $33,391 – $ 47,391 $38,044 – $ 61,735 $ 14,344
61%-80% $47,392 – $ 67,579 $61, 736 – $ 100,065 $ 32,486
81%-94% $67,580 – $ 108,445 $100,066 – $ 180,809 $ 72,364
source: US Census Bureau –
http://www.census.gov/hhes/www/income/data/historical/household/2010/H01AR_2010.xls
 

Ok…..that’s a lot of numbers and really can be confusing, so lets talk about what these numbers really mean.

Imagine a room with 100 people in it, and they all have incomes.

In 1967, 20 of those people would make $17,000 a year.  In 2010, those same 20 people now make $20,000.  That’s not a huge raise, but remember that in our comparison, the dollar is always the same and that means those 20 people make about $3,000 more than they did before.

These 20 people are getting ahead, and it is about a 17% increase in income.  Not too shabby, really.  If I offered you a 17% raise, I bet you would take it.  So, these numbers prove pretty solidly that the poor are NOT getting poorer.  They got 17% richer, actually.

But what about the rest of the 80 people….how are they doing?

Well, person 21 through person 40 did a little better.  These 20 people went from making between $17,000 and $33,000 to between $20,000 and $38,000.  Not only did their incomes go up between $3,000 and $5,000, the range of incomes for these 20 people got wider.

The next group of people, persons number 41 to 60 did even better though.  (These are who most people would say are “middle class”, since they are literally in the middle of all income groups.)  Their incomes went from between $33,000 and $47,000 in 1967 to between $38,000 and $62,000 in 2010.  These 20 people got increases of between $5,000 and $14,000!

The next 20 people, persons 61 through 80 are really kickin’ butt!  In 1967 they made between $47,000 and $68,000.  In 2010 they make between $62,000 and $100,000!!!  That is an increase of between $14,000 to $32,000.  And just like the previous groups, the spread of incomes widened again showing that there is a lot of overall income growth going on.

Persons number 81 through 94 did even better, and their incomes also grew from between $67,000 and $108,000 in 1967 to $100,000 and $180,000 today.  Again, the spread of incomes in the quintiles continues to grow.

That isn’t even the most stunning thing though.  Person #80 in 2010 makes almost as much as the top 5% did in 1967!!!  That is incredible when you think about it.

Note that every quintile had an increase.  That is unbelievable, really.  Everyone got richer.

Also notice that every quintile had a wider range of incomes.  This spread of incomes inside a quintile means just that the top income in this group is higher now than before in comparison.  This is a really good thing.  It means that incomes are growing pretty fast, and it takes ever higher incomes to make up 20% of the whole group.  Imagine an inflating hot air balloon if it helps.  The balloon has to expand to hold the expanding air inside it, just like the quintiles have to expand to hold the expanding incomes inside it.

Want to test my findings?  Figure out which group of people your income belongs with in the 2010 values.  Now look at which group that income would place you with in 1967.  I don’t want to ruin the surprise, but you will may find that you move up 1 or even 2 groups.

The easiest and quickest way for me to summarize this data for you is with a picture.  The following graph shows the average income for each quintile in 1967 and 2010.  Notice the positive change for all groups.

As the graph above shows, every group of 20% had their incomes increase, and while it is true that the more you make, the more it grew, that fact is neither surprising or an indication of some type of inherent unfairness.  Generally speaking, those who start with more grow what they have faster due to the rules of compound interest, which apply to the world even outside a bank.  Like it or not, it’s a fact of life.

Nerds like me will also notice that income growth of the respective quintiles is a typical exponential curve that we find almost everywhere in nature.

What is most important to note is that the poor did not in fact get poorer.  The only argument you can make supporting the statement that “the poor got poorer” is to say that the poor, relative to others and not themselves, got poorer.  Or more simply stated, they didn’t get richer as fast as some people  around them.

This argument is entirely subjective because you have to pick and choose who you are comparing.  When you do that, you can make data say almost anything.  In fact, the argument of the left in the face of these facts exposes that they are using envy and jealousy to advance their own politics.

The only truly fair and objective comparison that can be made over time is to compare each quartile to itself.  For example, looking at the bottom 20% of all incomes from year to year alone.  Comparing with other quintiles is dishonest because over time, the divisions of those quintiles move relative to one another.

The only other way to fairly compare is to set the dividing lines at what they were in 1967, and then count the number of incomes in those groups with fixed borders.  If you did that with the data above, you would see that the bottom quartile (< $17,000 – the 1967 baseline) is much less than 20% of all incomes, because more people make more money.

Having said that, I wish poverty on no one, and for those in that bottom 20% that are not students or retired, things are certainly difficult.

But….BUT…things were HARDER in 1967, and the numbers prove that out.  Unfortunately (or should I say fortunately?) the bottom 20% has a lot more luxury stuff to buy (cable TV, high speed internet, video games and cell phones to name a few) so they feel like they have gotten poorer.  If they bought the same stuff they did in 1967, they would probably live more comfortably on that income, just without the toys many others have.

It is also really important to remember some other things about the people in the bottom 20% in our examination.

In order to make $20,000 or less working full time, your hourly wage would need to be just under $10/hour.  People making $10/hr or less are generally in a few select groups.  They are (typically) unskilled workers such as people with no HS degree or special training, high school and college students with jobs (who do report their incomes and are part of our mix of incomes), or retirees.

Estimates by the US Census Bureau are that there were roughly 36 million high school and college students in the US as of October 2009.  That accounts for 12.5% of the entire population.  If only half of those students works part time for minimum wage or less, that would account for about 3 quarters of the bottom 20% of incomes alone.

That means that the people in the bottom 20% are likely not what we think of as full time employees.  More accurately they are most likely to be a 16-22 year old student earning pocket money while they are in school.

These understandings go a long way to explaining why the growth in incomes for this group is slower than the rest.  These jobs are mostly part time and low skill meaning the wages should be lower and grow slower.  Also, there is a huge amount of turnover in the bottom 20% as people graduate and move on to new jobs, while new students come in behind them.

So what conclusions can we draw from all this data and analysis?

Well, simply put, there are more people making much more money now than in 1967.  Incomes for everyone are up, and the median income is much higher than it ever has been.

The occupy crowd and the left are, shall we say, not exactly telling the truth about the poor getting poorer.  They are using subjective measures to back that position, and it just isn’t true in an objective sense.  The poor have gotten richer (17% richer to be exact), they just aren’t noticing it much because they are trying to “keep up with the Joneses”.

Also, our poorest citizens still do make quite a bit of money, relative to those anywhere else in the world.  That is an important fact that we need to remind people of whenever possible.  The United States remains the most prosperous nation in human history, and an example to the rest of the world.  Maybe other countries should start doing things our way, instead of trying to make the US more like the EU.

Remember that we as a nation have spent trillions in welfare and other benefits since 1967 in the War on Poverty.  The results are clear.  The War on Poverty has failed to do much but grow government and put us into deep debt.  The money spent to dramatically lift the bottom incomes has not seemed to do much good.  Actually, the biggest income growth was in the areas NOT getting any help from the government.

I also noticed that since I was 18, I have been a member of 4 of the 5 quintiles at one time or another.  I don’t think my experience is all that unique, either.  Most people earn more as they get older and gain experience.  That is also important to remember when we talk about income distribution.  The single biggest thing determining your income is YOU!

Finally, the data points to the truth of the words of Christ in Matt 26:11 “The poor you will always have with you…”.  Indeed the poor will always be among us, and while we can and should do all we can individually to comfort and aid those in poverty, no magic government program will ever eliminate poverty from the Earth.

I rate the myth that “the rich got richer and the poor got poorer” BUSTED!

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  1. […] Economics, Tax Policy, Taxes, Tea Party on December 21, 2011 at 6:00 AM My previous posting (link) discussed the data related to inflation adjusted incomes over the last 43 years (1967 to 2010).  […]

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