Joseph Stiglitz, a winner of the Nobel Prize in economics and a professor at Columbia University, writes in Vanity Fair that income inequality in the United States has become so extreme that the people may soon rise in the streets the way they have in Tunisia and Egypt. That’s rather hysterical, of course, and most of Stiglitz’s column is simple assertion unsupported by the kind of argument that characterizes his scholarly publications (to be fair, he is writing in Vanity Fair, after all). In the key paragraph, however, Stiglitz does make a serious argument, and since it’s important, often-repeated, and wrong, I call it to your attention:
The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year…. Twenty-five years ago, the corresponding figure[] [was] 12 percent…. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.
This argument is in one respect misleading and in another respect simply wrong. It’s misleading because it suggests that the top 1 percent are not paying their fair share of taxes (Stiglitz says as much elsewhere in the article), but this is demonstrably false. According to IRS data for 2008 (the latest year for which such data are available), although the top 1 percent of income earners enjoyed about 20 percent of the income (not quite the “nearly a quarter” Stiglitz mentions), they also paid 38 percent of the income taxes. In other words, their share of the taxes is almost twice their share of the income. Incidentally, the bottom 50 percent of income-tax payers paid less than 3 percent of the income taxes, and since about 10 percent of the population does not file income tax returns at all, it is probably the case that the bottom 50 percent of Americans (including non-filers) paid close to zero percent of the income taxes (although they do pay other taxes, such as payroll taxes).
More important, however, is Stiglitz’s claim that “those in the middle have actually seen their incomes fall,” for without this claim, there is indeed a rising tide lifting all or most boats, and Stiglitz’s argument loses virtually all its force. Stiglitz cites no sources in his Vanity Fair column, but he is likely referring to statistics reported in the U.S. Census Bureau’s March Current Population Survey (CPS), which show that, although median household income rose over the 1979-1989 and 1989-2000 business cycles, such income declined about 1.2 percent over the most recent 2000-2007 cycle.
But consider this new paper by Richard Burkhauser (Cornell University), Jeff Larrimore (Joint Committee on Taxation), and Kosali Simon (Indiana University) and published by the National Bureau of Economic Research. Entitled A “Second Opinion” on the Economic Health of the American Middle Class, it shows that, as a measure of the overall economic resources available to middle-class Americans, the CPS data have at least two serious flaws. First, although the data include as income various forms of market income (such as wages, salaries, interest, dividends, and retirement pensions) as well as welfare and Social Security payments, they do not include Medicare and Medicaid benefits or employer-provided health insurance benefits. Since health insurance benefits, whether from the government or an employer, are clearly very valuable, the CPS data systematically understate the resources available to individuals.
Second, the CPS data do not account for the number of persons in a household. Thus, under the CPS approach, a single individual living alone with a $50,000 income and an individual in a family of four that collectively has a $50,000 income are treated as having the same economic resources, which is obviously not the case. If we are going to use household data, we should control for the number of individuals in the household as well as the efficiencies generated when people live together in a single household.
Using some sophisticated statistical techniques, Burkhauser, Larrimore, and Simon then correct for these factors, and find that, using this more accurate measure of economic resources, the American middle class has done quite well over time, including during the last business cycle of 2000-2007. They write, “When using our broadest measure of available resources—post-tax, post-transfer size-adjusted household income including the ex-ante value of in-kind health insurance benefits—median income growth of individual Americans improves to 36.7 percent over the period from 1979 to 2007, and by 4.8 percent between 2000 and 2007.” In other words, contra Stiglitz, middle class Americans have made substantial gains over the relevant periods. They have gotten richer—in fact, quite a bit richer—and not poorer.
This is just the headline result. There is much more in this fascinating paper, and I urge you to download it and read it in its entirety. As with many publications of the National Bureau of Economic Research, the paper is available for free to institutional subscribers (which includes many colleges and universities, meaning you can probably get it for free if you have a .edu email address), journalists, government employees, and residents of developing countries. All others can download a copy for five dollars, from either the National Bureau of Economic Research or the Social Science Research Network.
July 15th, 2011 | 12:46 pm
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July 15th, 2011 | 3:57 pm
Your critique of Stiglitz does not hold water. First the U.S. tax program is supposed to be progressive and so we would expect the very wealthy to pay at a higher rate. Today the highest is rate catergory is only 35%. Second, the benefits the middle and working class receive are also received by the wealthy, and often they receive a much higher level of benefit as well as company paid “working” vacations. Third, the wealthy benefit from the ability to deduct the interest on multi-million dollar mortgages as opposed to the middle class deducting the interest on hundred thousand dollar mortgages. Fourth, much of the income of the very wealthy comes from dividends and stock sales for which they pay only 15% on ‘long term” investments. They also benefit from income received from state, local and other tax exempt bonds, not to mention unreported offshore investments.
If the very wealthy pay a greater percentage of the income tax than their percentage of the population it is only a function of their extraordinary wealth and that is what we should be concerned with.
July 15th, 2011 | 4:23 pm
Mr. Fidel:
You misread the post. It is not that “the wealthy pay a greater percentage of the income tax than their percentage of the population”; it is that they pay a greater percentage of the income tax than their percentage of *the total income.* So 1 percent of the population has 20 percent of the income but pays 38 percent of the income taxes.
Thus, if we had a flat tax, this top 1 percent would presumably still have 20 percent of the income but would pay only 20 percent of the taxes. Because of the progressivity of the current system, they pay almost twice that amount, i.e., 38 percent of the taxes.
I note that most of the rest of your post is simply unrelated to the question of whether the middle class has been doing well or ill recently, and so I pass it over in silence, despite its various mistatements.
July 16th, 2011 | 5:25 am
If Ken’s comments were too cryptic for you, let me try to explain. Imagine an economy with two income groups: those with nill annual income, and those earning 1 billion.
What is, say 20 %, out of zero?
The answer: nill.
What is 20 % out of 1 billion?
The answer: 200 million
How much, as a share of federal tax revenue, would the rich be paying in this example? the answer: 100 %
The fact that rich people pay a much higher percentage of the tax revenue even under a relatively low progressive tax system only proves Prof. Stiglitz’s point: there is gross inequality in the US.
July 16th, 2011 | 6:41 am
The “disappearing middle class” meme is popular among lefties (and, I fear, much of the “social justice” crowd in my own religious group–Catholic), and a very persistent myth. I’ve heard it from friends, enemies, and strangers for years. But it is absolutely without basis when one looks at real data.
There are sources galore, but for simplicity I offer a Wikipedia article titled “Household Income in the US”. Almost halfway down, there are graphs under the title “Family Income.” One shows income percentiles from 1947 to 2007, another 1967 to 2003, in constant dollars (ie, best approximation of real purchasing power, adjusted for inflation).
The graphs show: all categories of household incomes increased in each 10-year period, and of course over the whole time; the “middle class” (broadly defined as 20th to 80th percentile) steadily improved in purchasing power over the time period. As a particular example, from 1967 to 2003, the average “middle class” real household income increased about 45%. All this before correcting for the decrease in household size over this time–meaning, as one commenter stated already, that the actual income position for individuals has improved even more.
Take-away fact: the average middle-class person is about half-again better off financially than his counterpart of a generation and a half ago. So much for “disappearing” or getting poorer.
I grant that the rich got richer faster, and the poor stayed poorer (although all categories improved). However, the point is whether the middle class is getting poorer or shriveling up, not whether they are falling behind the very rich.
For some people, I know the point IS income disparity. They are offended that the rich get richer faster–even if all categories improve at the same time. But we all need to consider the choices, which in the end boil down to about these two: we either get greater income disparity, but everyone better off, or we get less disparity and everyone poorer than they would be under a freer market. That’s about what we have in the choice between a free-market economy and socialism or a socialized economy.
I say this: before we “save the middle class” by insisting that the rich don’t get richer faster, I think we should pose this choice to the real middle classers. As one of those, my answer is let the rich get as richer as they wish, if it means that my colleagues in the middle class are better off than they would otherwise be. Give me the free market, hands down.
July 16th, 2011 | 8:27 am
The thing that usually bothers me about the left is that they forget that the society that cares for and nurtures them also requires care and nurture – that is, people want to take without worrying about giving anything back.
The thing that usually bothers me about the right is that they make the opposite mistake: they forget that society claims a lot of people, and people have a right to expect to be cared for and nurtured in return.
Right now are really tough times for the working class. A few years ago, people saw their life savings lose all value. Around here, the local employer just found a way to get out of paying for health benefits for all its retirees. People who worked for decades now find that everything they worked for is gone – while the rich are not only prospering, but doing so with taxpayer bailouts and subsidies.
I don’t know where it would show up in your economic figures, but it seems like everything is costing more or paying less. But even people who’ve got the same job they had this time last year are finding that the income that once seemed generous is now insufficient to cover the basic bills – even without factoring in the cost of helping Mom pay for pills or helping the grown-up children who can’t find decent jobs.
We are good at finding ways to pay off those who choose not to work. When is someone going to care about the people who do work, who play by the rules and obey all the laws, and yet end up with a less comfortable standard of living than welfare recipients?
July 16th, 2011 | 8:30 am
Since Mr. Miller declines to do so I’ll make some comments on Mr. Fidel’s other errors.
First I would like to say, what is he talking about when he talks about “working vacations”? He makes that sound like a gov’t provided benefit, so maybe he is talking about congressmen who go overseas on “fact finding missions” and the like.
If he is just being unclear, and is talking about professional conventions and the like, I’d urge him to remember how much work and how many jobs are supported by such activity.
Secondly, and this is much more important, the wealthy are NOT able to deduct the interest on multimillion dollar mortgages. I believe the top mortgage amount for which you can deduct the interest is a million dollars.
In addition, at certain high income levels, Schedule A deductions are reduced and finally eliminated. And let’s not forget the Alternative Minimum Tax.
As for his other comments about municipal bonds and offshore investments, yes if anyone does invest in those they will get the tax advantages, but Mr. Fidel makes it sound like the wealthy are dragooned into these investments. There are a lot of wealthy people in this country who derive their income in different ways and who have various tax burdens as a result.
For example, athletes must file tax returns in whichever states they compete in, how’d you like to be filing all those returns, esp. if you are some third stringer?
We are all Taxed Enough Already and we need to find a way to reduce the size, scope and cost of the Federal Government. It is THAT burden that is starving the middle class.
July 16th, 2011 | 8:58 am
@Kenneth Fidel: Given Robert T. Miller’s correction, do you think the rich are paying enough? If not, how much should they pay? More importantly, why?
My own take is that there is currently no rationality in the taxes debate. The points are all made for emotional effect. Take Obama’s call for a “balanced” approach. The only balance there is perceived relative political pain, not exactly the problem at hand. Or rather, that is the problem our politicians substitute for the real one.
July 16th, 2011 | 10:23 am
To AV Suni:
No one denies that there is income inequality in the US, and, in fact, in every other human society that exists or has ever existed. Moreover, no one who understands what the words mean denies that, under a progressive tax system or even a flat tax system, those with higher incomes pay higher taxes. Leaving aside Mr. Fidel’s flat-out misreading of the post, the question is not whether there is inequality of income in the US, but whether it is, as you put it, “gross.”
More generally, no one seriously objects to inequality of income. It is only when the inequality of income becomes “too great” that a moral or political problem may arise.
In my view, inequality *as such* is a non-issue. That is, assuming income was otherwise acquired honestly, I don’t see any moral or political problem arising *simply because* one person has much more than another. In my view, the problem arises when some people have *not enough*–that is, they have so few economic resources that their ability to lead otherwise good, decent, productive, fulfilled human lives is impaired; put another way, they are so lacking in economic resources that their ability to carry on the important non-economic aspects of human life are materially impaired. In such cases, those with more than enough have a moral obligation to help those with less than enough. See, e.g., 2 Cor. 8:10-15.
This brings us back to Stiglitz. He seems to imply that, if it were the case that, while the rich were getting richer, poorer people were getting richer too, there would no or little problem with income inequality as it exists in the US. He then argues that the middle class is, in fact, getting poorer. This is the lynchpin in his argument. The key point in my post was to call attention to the new paper by Burkhauser et al. that refutes this oft-repeated claim about middle class decline.
So I’ve explained when, in my view, income inequality becomes morally problematic, and Stiglitz’s column contains at least an implicit explanation of when, in his view, such inequaity may be morally problematic. What’s your view? When does inequality become “gross” and how do you know?
July 16th, 2011 | 10:47 am
To Blake:
Your points are well-made. The statistics referred to in my post and Burkhauser’s article all end as of 2007 or 2008, in some cases because these are the last year for which data are available and in other cases because this marks the end of the most recently completed business cycle (i.e., the beginning of the most recent recession). Thus, they do not reflect the particularly hard times the nation has experienced since 2008 and that you in part describe.
The good news is that, historically, the US has always recovered from recessions and, even taking account of recessions, the US middle class has done better (indeed, much better) over time. Even despite our many problems today, there is good reason to hope that the same will be true about our recovery from this recession.
More generally, I think that, especially during hard times, it is important to keep things in perspective. If you measure the quality of life in real terms–i.e., the amount and quality of goods and services people actually enjoy–then Americans, even today, enjoy a standard of living superabundantly better than that of the vast majority of human beings who ever lived and superabundantly better than that of most people around the world today. We may complain about US jobs going overseas, but none of us are moving overseas to enjoy a better life. I was in South Africa last summer; if you want to see what hard times really are, go to Soweto.
This is not to make light of real economic hardship in the US, but it is to suggest that such hardships, through real, pale in comparison to the material conditions of the better part of the human race. Morally, that’s very important.
July 16th, 2011 | 11:15 am
Robert T Miller wrote
“More generally, no one seriously objects to inequality of income”
Except admirers of Thrasybulus of Miletus.
July 16th, 2011 | 12:34 pm
To Michael PS:
Gosh darn it, I always forget Thrasybulus of Miletus!
Nihil tam absurdum, quod non dictum sit ab aliquo philosophorum.
July 16th, 2011 | 3:12 pm
I’m not sure about using health benefits as a way of showing the middle class is doing better. That smells like an accounting trick. Also, I don’t see how tax units to household helps. Could you please amplify on this?
July 16th, 2011 | 5:04 pm
For example, athletes must file tax returns in whichever states they compete in, how’d you like to be filing all those returns, esp. if you are some third stringer? —jocon307
Personally, I’d love to have that problem. A third-stringer that’s been in the NBA for six years makes well over $1 million per. I’d let my accountant deal with all those pesky tax forms, while I spent the off-season in Hawaii.
That is, assuming income was otherwise acquired honestly, I don’t see any moral or political problem arising *simply because* one person has much more than another. —Robert T. Miller
Really? You don’t see that the super rich have political advantages over the rest of us simply because they have a vast amount of wealth at their disposal? Are you unaware that when the super rich call their local, state, and national representatives to make “a suggestion”, their calls actually get returned, whereas ours do not? (I assume you’re not super rich. Maybe I shouldn’t.) Or that they routinely hire armies of lobbyists to influence governmental decision-making in a way that we cannot? Or that they have been known to hold entire cities hostage by threatening to take their resources elsewhere, unless they’re given favors unavailable to the average citizen? Or that they spend billions of dollars annually to have PR firms manipulate public opinion—and, hence, legal decision-making—in their favor, something far beyond the resources of the common wage-earner? Or that they use their wealth to shield themselves from the social fallout of their political influence, leaving the rest of us to deal with the mess? In every case, the democratic process is being distorted and that distortion can be traced back directly to a huge imbalance in wealth between the super rich and the rest of society.
Of course, you could respond that none of the political distortions I mentioned is an inevitable consequence of a growing gap between the super rich and all the rest. That is to say, you could insist that we interpret your words “simply because” in a strictly causal or logical sense. You could, for instance, point out that (strictly speaking) money alone is not to blame, for if the super rich behaved themselves, then their vast fortunes would have no ill effects on our political landscape. My point, however, is that they never seem to be able to do so. The temptation to use their financial resources to give themselves a political advantage is too great. That would be no big deal, of course, if their financial resources were scant. But they’re not, so it is. And because it is, we should take it seriously.
July 17th, 2011 | 6:21 am
JB at CA
You call to mind Rousseau
“If the object is to give the State consistency, bring the two extremes as near to each other as possible; allow neither rich men nor beggars. These two estates, which are naturally inseparable, are equally fatal to the common good; from the one come the friends of tyranny, and from the other tyrants. It is always between them that public liberty is put up to auction; the one buys, and the other sells.”
Now, perhaps, you do recall Thrasybulus of Miletus’s little object-lesson on the art of government, when he strolled through a corn-field, snicking off with his cane the heads of any ears of wheat that rose taller than the rest.
July 17th, 2011 | 10:51 am
To Dblade:
Thanks very much for your questions. They go directly to the substance of the paper by Burkhauser , Larrimore, and Simon to which I was calling attention, and although I refer you to that paper for more complete answers, I venture some brief ones here.
As to including health benefits in income, such benefits are clearly valuable. Many people pay a lot of money out-of-pocket for them, and most working people consider them an important component of their compensation. Isn’t a job providing a certain salary and health insurance much better than the same job with the same salary without health insurance? Indeed, it is precisely because health insurance is so important to a person’s material well-being that many people think it’s a serious problem that a significant number of Americans don’t have health insurance.
The value of health benefits is not included in IRS data because Congress has decided that such benefits, even when provided by employers, shouldn’t be taxed. The value of such benefits is not included in CPS data because (I think, though I’m not completely sure here) their ex-ante value is difficult to calculate. But, if we’re interested in how well certain people are doing economically, it seems obviously relevant whether these people have health insurance, and so if we’re going to use their income as a proxy for their economic well-being, it follows that we should include the value of their health insurance in their income. Failing to do so may seriously skew results because the ex-ante cash value of health insurance benefits is often quite large and amounts to a significant fraction of the employee’s cash compensation. For instance, my employer, Villanova University, estimates that the ex-ante cash value of the full-family health insurance plan it provides its employees is about $12,000 per year. Other than the difficulty of quantifying the value of health insurance benefits, I can’t imagine a serious argument against counting them in a person’s income.
As to tax units vs. households, there are both technical issues and more substantial issues. Among the technical issues, tax-unit data comes from the IRS, while CPS household data comes from the Bureau of the Census. One important difference is that about 9 percent of Americans don’t file tax returns and so these people are not captured in IRS data about tax units. Scholars who use tax-unit data may try to correct for this in various ways. Since CPS household data come from a random sample of the population, such data presumably include people not filing tax returns. Another technical difference is that tax-unit data, since they are collected by the IRS, don’t include non-taxable forms of income such as public transfer payments, and if such income is to be counted, once again the tax-unit data have to be corrected.
As to the more substantial issues, among Americans filing income tax returns, tax units and households often overlap. Thus, if mom, dad, and two small children live in one household, and if mom and dad file their taxes jointly, we have one tax unit and one household, and so whether we use households or tax units makes no difference. But sometimes—and increasingly often—tax units and households do not overlap. Thus imagine a cohabiting couple. They are two tax units but one household. Suppose they each have income of $50,000. Then there is one household with income of $100,000, but two tax units, each with income of $50,000. Similar issues arise when adult children continue to live at home with mom and dad or when aged parents move in with adult children. In all these cases, we have households containing multiple tax units, and the income of a household will be higher than the income of any of the tax units.
This is all before we start taking account of the fact that units, whether households or tax units, with the same income but different numbers of individuals provide different standards of living. For example, a single individual with $50,000 in income obviously enjoys a higher standard of living than the members of a family of four that, in total, has $50,000 in income. Accounting for these issues is called “size-adjusting,” and Burkhauser and his co-authors give size-adjusted and non-size-adjusted data, both for tax units and for households. But, as you see, it gets very complicated, and I urge you to consult the paper itself for more details.
July 17th, 2011 | 4:21 pm
“Personally, I’d love to have that problem. A third-stringer that’s been in the NBA for six years makes well over $1 million per. ”
What about the kid playing AA baseball?
July 17th, 2011 | 4:52 pm
I see, thank you. I think I understand what you mean a little better. Thanks for replying.
July 18th, 2011 | 9:46 am
I await Miller’s response to JB in CA.
July 19th, 2011 | 4:28 am
What about the kid playing AA baseball?
Wasn’t jcon307′s example of pro athletes having to fill out tax forms in multiple states supposed to illustrate one of the burdens that wealthy people have to bear? The kid playing AA ball and having to fill out all those tax forms would be an example of a burden that decidedly unwealthy people have to bear.
July 19th, 2011 | 7:31 am
Your points are well-made. The statistics referred to in my post and Burkhauser’s article all end as of 2007 or 2008, in some cases because these are the last year for which data are available and in other cases because this marks the end of the most recently completed business cycle (i.e., the beginning of the most recent recession). Thus, they do not reflect the particularly hard times the nation has experienced since 2008 and that you in part describe.
I remember a book awhile back called something-Risk Shift that I flipped through but did not read. I saw two arguments that seemed very appropriate to how I feel about what’s going on.
The first is the argument that our data is inadequate to describe the situation because we don’t have all the relevant information. (I gather the premise of the book was about this gap between current number-gathering techniques vs. relevant numbers that need to be gathered).
If 10,000 families are unemployed in June, and 10,000 families are unemployed in July, then whether those are the same 10,000 families or mostly different families makes a huge difference in knowing what poverty looks like, because a family that is doing well falls into crisis when it becomes unemployed, and then when it regains employment the family is in a seriously weakened position, because it has spent its emergency resources and also may have new costs (relocation, health insurance issues, etc.)
The other point I remember from this book was that the reason for the sense of crisis many households are feeling is related to the “risk shift” of the title: the powers-that-be are getting better and better at manipulating the relationship between risk and reward, such that they keep the rewards but without the associated risk – which is transferred onto the citizenry. (I assume his argument goes on to link the transfer of risk to the state of the data not accurately capturing the true economic health of the nation).
I’m no economist but I know things have gotten a lot worse than they were even a few years ago. All around us there are things that have changed – the workers work more hours, and get paid less overtime (or none at all); the working conditions are a little less safe, while what injuries qualify as the worker’s own responsibility vs. the employers’ are a little less generous; everywhere you go things are a little more this and a little less that, and there’s a real feeling that things have gotten harder – but there don’t seem to be any numbers describing the situation.
I do not begrudge the rich their wealth. I do begrudge their “right” to hire illegal immigrants to do their house and lawn work at cut-rate prices.
July 19th, 2011 | 10:03 am
Yes, but the point is that “they shouldn’t care because they have so much money” only applies to those who actually DO — the policies that are supposed to more or less painlessly extract money from the pain-immune wealthy because of how they’re targeted once again, for the nth time, wind up hurting people because one doesn’t have to be “wealthy” to be treated like a wealthy pro athlete — one just has to be lumped in with them.
July 20th, 2011 | 5:15 am
Well, I guess I don’t understand the argument, then. I thought jcon307′s example was supposed to illustrate that certain wealthy people—in particular, wealthy athletes—have a special tax burden, which is especially burdensome on those third-stringers who aren’t quite as wealthy as the first and second-stringers. I agree, of course, that the filing of multiple tax forms is a greater burden on the relatively poor Double-A ball players than it is on the third-string NBA players, but that fact seems to undercut the very point jcon307 was trying to make, namely, that the requirement to file multiple forms is a special burden that the wealthy have to bear.
Also, no doubt you’re right that we all could stand a little tax relief, but I’m not sure it really is the case that the requirement to file multiple tax forms is the result of the government trying to “extract money from the pain-immune wealthy”. Isn’t it, rather, the result of each state taxing those who do business within its borders, regardless of anyone’s net worth? Please understand that I’m not trying to defend this particular form of taxation, only to question whether it really represents an attempt on the part of the government to target the wealthy.
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