Better Than Ever

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Democratic presidential candidates are crisscrossing Iowa, citing growing inequality as a reason for raising taxes and expanding government social programs.

Campaigning in Cedar Rapids in mid-October, Senator Clinton declared, “It’s an economy where the gap between the few at the top and everybody else just keeps getting wider … This is the highest level of income inequality since 1929.” Mrs. Clinton might feel guilty for having accepted multi-million dollar advances for her books, but she needn’t worry. The 2006 Consumer Expenditure Survey, just out from the Labor Department, shows that inequality is not getting worse.

On Wednesday, in a speech in Bettendorf, Senator Obama said, “While some have prospered beyond imagination in this global economy, middle-class Americans — as well as those working hard to become middle class — are seeing the American dream slip further and further away.”

Mr. Obama might be surprised to learn that the Labor Department data prove the opposite: the American middle class spends more today than it did last year, five years, even 20 years ago, or ever.

And in Des Moines on October 26, John Edwards stated, “But our social compact is falling apart. The statistics say our economy is growing, but the truth is, it’s only growing at the top.”

Mr. Edwards should not confuse the truth with his “Two Americas” campaign slogan. He does not want to recognize an inconvenient truth: America is growing from top to bottom. Even those in the bottom fifth have more spending power than last year.

One reason that cash measures of inequality, such as the ones used by Mrs. Clinton, and Messrs. Obama and Edwards, break down is that they look at income before taxes are paid and transfers are received.

Examining only cash income invites misleading inferences about what’s going on at the top, middle, and bottom groups. As income rises, a larger share is taken by income taxes. The top half of earners pay 97% of federal income taxes. And people in lower income groups spend more than they earn, because of transfer programs such as food stamps, housing allowances, Medicare, Medicaid, and the earned income tax credit. Further, income quintiles have different demographic characteristics, so comparisons are misleading. In 2006 households in the lowest fifth had an average of 1.7 people, with one earner for every two households. The highest fifth, however, had 3.1 persons per household, with 2.1 earners.

Household size at the bottom has been shrinking faster than at the top, adding to the perception of inequality. Over the past 20 years the size of the bottom household has declined by 12%, whereas the size of the top household has shrunk by only 3%. This is due not only to the increased longevity of today’s seniors, but also to the higher prevalence of divorced couples and single-parent households.

Calculating spending on a per-person basis produces comparable measures. The average annual spending for a household in the lowest quintile was $20,000, which is $12,000 per person. In contrast, the average spending for a household in the top quintile was $94,000, which, on a per person basis, is $30,000.

Democratic candidates may be surprised to hear that 30% of households in the lowest income group and 32% in the next-to-lowest group owned their homes free of mortgage in 2006, compared to 25% in the middle quintile and 17% in the top quintile. This is because there are more seniors in the lower two quintiles, and many have paid off their homes. Higher levels of wealth do not have to be accompanied by high incomes for seniors to be well-off.

The new Labor Department numbers show that in 2006 households in the top fifth, or quintile, of the income distribution spent only 2.5 times the amount per person spent by the bottom quintile, about the same as 20 years ago. The top quintile spent 1.8 times what the middle quintile spent per person. And that ratio has not been increasing — even despite higher savings rates of top groups.

On average, people in all groups were better off, spending more in real terms than in 2005. In 2006 those in the top quintile spent 4% more, adjusted for inflation, than in 2005, whereas the bottom quintile and the “disappearing” middle class spent 3% more.

People in all groups progressed compared with 1986. The highest group spent 20% more in constant dollars, and the lowest group spent 13% more. Over a 20 year period the middle group increased spending by 16%.

All groups are spending more on personal care products and services compared to 20 years ago, more on entertainment, especially audio and visual equipment and services; more on pets, toys, and hobbies; and more on education.

In contrast, people spend far less in absolute numbers on reading, and on fees and admissions to movies, stage plays, sports events, and concerts. They also spend less on clothing, as more imports have lowered textile and apparel prices. The top group spends 22% less on clothing compared to two decades earlier, and the bottom group spends 17% less.

Those Americans who want to believe that the economy is poor and that income inequality is a growing problem will flock to hear the Democratic presidential candidates. But this is a mirage, and should not be used as an excuse to give America a European-style social contract of higher government spending and taxes.

Ms. Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. She can be reached at dfr@hudson.org.


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