e21 Asks: Is Inequality Rising?

Last week we asked readers if they thought economic inequality was rising and if an increase is problematic. The most popular response was “yes, and it is a problem,” which received 39 percent of votes. “No, even if it were it would not be a problem” and “Yes, but it is not a problem

” received 31 percent and 23 percent of readers’ votes respectively. “No, but if it were it would be a problem” had only 7 percent.

Whether or not increased economic inequality is problematic is more of a philosophical question, but the question of whether inequality is rising and how fast is an economic one.

It is not surprising that 62 percent of respondents think income inequality is increasing. The conventional wisdom from pundits and scholars is that inequality has worsened dramatically over the past generation and over the past decade in particular.

The editors at e21 disagree with the conventional wisdom in this area, as in many other areas. 

One measure of well-being is inflation-adjusted per-person spending power. Consumer expenditure data published by the Bureau of Labor Statistics show that the ratio of spending between those in the top and bottom 20 percent is at the same level as 1987 (2.5 times as much).

An issue with many other types of analyses is that they do not take into account changes in the composition of households over the past 25 years. In 2012, households in the lowest fifth of incomes had an average of 1.7 people, and in half these households there were no earners. The highest fifth had 3.1 persons per household, with two earners.

Much of the apparent increase in income inequality has been caused by problems of measurement and changes in demographic patterns over the past quarter-century. In 1960, only 13 percent of households had one person. Now this number is 27 percent. Without the benefit of two incomes, one-person households usually earn less. Taking all of these factors into account, per person spending shows remarkable stability over the past 25 years.

Many studies of income trends rely on an inferior way of accounting for changes in the cost of living. Income is narrowly defined to exclude both taxes paid by upper-income earners and transfers paid to those with low incomes.  Transfers include food stamps, Medicaid, Medicare, and employer-provided health insurance. These transfers have large value to families trying to pay their bills and live more comfortably. 

Spending on these programs has increased over the past decades. For example, adjusting for inflation, yearly SNAP (food stamp) benefit expenses have increased 240 percent (to $75 billion) over the last 15 years and 145 percent over the last 5 years. Fifteen percent of Americans (48 million) participated in SNAP in 2013. Five years ago that number was less than 9 percent. Ignoring these real benefits while evaluating income inequality leads to an incomplete view of the situation. 

If inequality has not risen, policymakers should reassess the nature of various problems that are thought to be connected to it. Findings would affect debates over taxation, spending, deficits—even macroeconomic policy. 

While that debate moves beyond the scope of this article, without correct information policymakers cannot come to an informed decision. The conventional wisdom on income inequality should be questioned and this is an area in need of further research. Recent publications by Economics21 senior fellows Diana Furchtgott-Roth and Scott Winship include The Income Inequality Problem is Overblown and Has Income Inequality Really Risen?