Income Gap: Are The Poor Getting Poorer?

Last night while watching Bill O'Reilly I listened to an interesting discussion regarding the mantra of the poor are getting poorer and the rich are getting richer -- the divide continues to grow.  O'Reilly, in his interview with Steven Horwitz, professor of economics at St. Lawrence University, referenced a recent article in The Economist: "Inequality: The rise and the rest; What to do (and not do) about inequality."  Here are few excerpts (emphasis added):

The debate about inequality is an old one. But in the wake of a financial crisis that is widely blamed on Wall Street fat cats, from which the richest have rebounded fastest, and ahead of public-spending cuts that will hit the poor hardest, its tone has changed. For much of the past two decades the prevailing view among the world’s policy elite—call it the Davos consensus—was that inequality itself was less important than ensuring that those at the bottom were becoming better-off.
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Now the focus is on inequality itself, and its supposedly pernicious consequences. One strand of argument, epitomised by “The Spirit Level”, a book that caused a stir in Britain, suggests that countries with greater disparities of income fare worse on all manner of social indicators, from higher murder rates to lower life expectancy. A second thread revisits the macroeconomic consequences of income disparities. Several prominent economists now reckon that inequality was a root cause of the financial crisis: politicians tried to counter the growing gap between rich and poor by encouraging poorer folk to take on more credit (see article). A third argument is that inequality perverts politics, with Wall Street’s influence in Washington often cited as exhibit A of the unhealthy clout of a plutocratic elite.

But, The Economist counters:

Begin with the facts about inequality. Globally, the gap between the rich and the poor has actually been narrowing, as poorer countries are growing faster. Nor is there a monolithic trend within countries (see article). In Latin America, long home to the world’s most unequal societies, many countries—including the biggest, Brazil—have become a bit more equal, as governments have boosted the incomes of the poor with fast growth and an overhaul of public spending to improve the social safety-net (but not by raising tax rates for the rich). 

The gap between rich and poor has risen in other emerging economies (notably China and India) as well as in many rich countries (especially America, but also in places with a reputation for being more egalitarian, such as Germany). But the reasons for this differ. In China inequality has a lot to do with the hukou system of residency permits, which limits internal migration to the towns; by some measures inequality has peaked as rural labour becomes more scarce. In America income inequality began to widen in the 1980s largely because the poor fell behind those in the middle. More recently, the shift has been overwhelmingly due to a rise in the share of income going to the very top—the highest 1% of earners and above—particularly those working in the financial sector. Many Americans are seeing their living standards stagnate, but the gap between most of them has not changed all that much. 

But, Steve Horwitz a week later wrote a response to economists' assertions that the poor are worse off in the U.S. than they were 30 years ago (emphasis added):

The poor are not getting poorer

By Steven G. Horwitz


In the latest version of its annual report "The State of Working America," the Economic Policy Institute once again argues that the gap between America's rich and poor is widening. Using a variety of data, the institute argues that a few are profiting at the expense of many.

Does this narrative actually reflect the state of America's workers? My research suggests it doesn't. While there's no doubt that some Americans remain far wealthier than others, a closer look at the data shows that the prosperity gains of the last few decades have been shared by workers of all income levels.

Much of the Economic Policy Institute's argument involves comparing the income or wealth gains of various groups across the years. For example, it reports that in real dollars, the bottom fifth of households earned an average of only $200 a year more in 2005 than they did in 1979.

At first glance, that seems awful. However, the comparison tells us nothing about how individual households fared over time. That's because the households that occupied the bottom fifth in 2005 are not the same as those that occupied it in 1979.

If we really want to know what happened to the poor of 1979, we need to be able to track specific households through time. Fortunately, we can. According to researchers at the University of Michigan, households in the bottom fifth in 1975 earned an average of almost $28,000 more per year by 1991, adjusted for inflation. According to U.S. Treasury data, a whopping 86 percent of households in the bottom fifth in 1979 had climbed out of poverty by 1988.

The problem with the data in "The State of Working America" is that it does not account for the fact that individual households move up and out of poverty and are then "replaced" by different households. Most of the households in the bottom fifth are made up of people who have recently entered the labor market and are on the first rung of the income ladder, such as recent high school graduates and new immigrants. The vast majority of American households do move up, and over the last 30 years most Americans have gotten significantly richer in absolute terms.

Granted, even if everyone is better off, it's still possible that the rich-poor income gap has widened. But simply measuring income and wealth tells us very little about the lifestyle of typical Americans. For example, poor Americans today are more likely to own basic household goods - such as washing machines, dishwashers, televisions, refrigerators, and toasters - than average Americans were in 1973.

The gap in personal conveniences has clearly narrowed over time. Consider that both Bill Gates and more than 80 percent of poor American households own cars - though likely differing in quality. Fifty or 100 years ago, the difference would not have been in the quality of car, but in owning a car at all.

Yes, there are more Americans in poverty during a recession - some in deep poverty - as the institute's data shows. But it also shows that since about 1980, the share of the population in extreme poverty has hovered between 5 and 6 percent. In other words, there's no long-term upward trend in the percentage of households living in extreme poverty.

The reality of the modern U.S. economy is that upward mobility is alive and well. One look around at even the bottom fifth of American households today - where children are watching cable TV, surfing the Web, or chatting on cell phones while Dad takes free generic medicine and Mom heats something up in a microwave - shows the poor are hardly getting poorer.

Interesting debate!  (By the way, the Economic Policy Institute is a progressive think tank that focuses on the income of low- and middle-income workers.)