Steven Cunningham: The rich are getting richer -- right?

  • Article by: STEVEN R. CUNNINGHAM
  • Updated: March 24, 2011 - 6:42 PM

Not necessarily. Here's how the data, if misused, can confuse the matter.

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One of the most enduring economic myths in our society is that the rich keep getting richer while the poor keep getting poorer. It isn't true.

When most people think of the rich, they probably are thinking of people with great wealth. When they think of the poor, they probably are thinking of people with low incomes.

While there's obviously a correlation between wealth and income, they're not the same. And we shouldn't confuse them.

A retiree who has $1 million invested in CDs is a millionaire; most people would consider this person wealthy. But at a 2.5 percent rate of return on the CDs -- about twice what the typical bank is paying today -- this person could have an annual income of just $25,000.

We don't have to rely on hypotheticals to illustrate this. The households of people ages 70 to 74 have the highest average wealth of any age group in America, but less than half the income of those in the 35 to 44 age bracket.

Government data, if misunderstood or improperly used, can lead to many false conclusions. For example, from 2000 to 2009, inflation-adjusted household income fell 4.5 percent, but consumer spending increased 22.4 percent.

This raises an obvious question: How did people dramatically increase spending on shrinking paychecks?

The answer is: They didn't.

They did increase spending. But paychecks weren't shrinking. Instead, the number of individuals per U.S. household was shrinking, which lowered the average.

Real disposable income, which is essentially total after-tax income, rose 25.2 percent from 2000 to 2009.

At the same time, however, households got smaller, as more people divorced, or rejected or delayed marriage. So total spending went up, while average household income -- due to the larger number of households -- went down.

Like household income data, income distribution data often are misunderstood.

For purposes of analysis, the Census Bureau divides households into fifths -- or quintiles -- yielding the bottom 20 percent of income earners, the next 20 percent, and so on, up to the highest 20 percent.

While this is a reasonable approach, it can be extremely misleading.

We often hear, for example, that the top 20 percent of U.S. households receive roughly 50 percent of total income, while the bottom 20 percent receives less than 4 percent.

According to the Census Bureau's household data and quintile distribution, this is correct.

The problem is that we are not told that the top 20 percent of households includes four times as many workers as the bottom 20 percent, and nearly six times as many full-time, year-round workers.

Knowing this makes a lot of difference in interpreting the original statement.

Income distribution data provide, at best, a snapshot, but this snapshot tells us little about movement within the economy.

Yet, economic mobility is a characteristic that helps differentiate the United States from many other countries.

Between 2004 and 2007, for example, roughly a third of the households in the lowest income group moved up to a higher income group, according to the Census Bureau, while roughly a third of the households in the highest income group moved down.

Another study, conducted in 2007 by the U.S. Treasury, examined income tax returns from 1996 and 2005. Over the period, the median income of the study group rose by 24 percent.

Almost 58 percent of those in lowest income group in 1996 moved to a higher group by 2005. About a fourth of them rose to middle- or upper-middle class incomes; more than 5 percent made it into the highest income group -- in 10 years. The only group experiencing a decline in income was the richest 1 percent. This is hardly what most people have been led to believe.

While this may seem like an economic version of "musical chairs," it tells us that mobility among economic groups is high and chronic poverty is rare.

Is U.S. income growth stagnant? Are the rich getting richer and the poor getting poorer? Neither is true.

The power of the American economy is that it provides opportunity. The income mobility numbers make this abundantly clear.

Steven R. Cunningham is director of research and education at the American Institute for Economic Research. This article was distributed by McClatchy-Tribune Information Services.

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