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4 things you didn’t (but should) know about economic inequality

Jun 11, 2015

It's not surprising that the leaders of the Democratic Party have been making a big deal about rising income and wealth inequality in America, but when Republican Party leaders and presidential hopefuls are using it in their speeches and policy proposals, you know it's an issue that's on Americans minds.

Despite the fact that there is a growing consensus that inequality is important, there is little agreement on how it affects average Americans. This is partly because more research needs to be done on the topic. But it's also because the research that has been done has been hijacked by those with political agendas in order to further policy goals that existed long before we ever thought that America was divided between the 99% and the 1%.

Increasingly, economists are publishing work that can help us understand how individual Americans experience the phenomenon of growing income and wealth inequality. Here are four facts about income inequality that you should know:

1. Americans don't like the way wealth is currently distributed in this country. But they dislike wealth redistribution policies even more.

You may have come across a viral video published in 2012 that highlighted large differences between what Americans think income inequality should be, what they think it is, and what the actual distribution of wealth is in America. The video, based on a 2011 study by economists Michael Norton and Dan Ariely, shows that Americans have a very poor understanding of how unevenly wealth is distributed in America and would prefer a system that is much more egalitarian.

The video has been viewed an impressive 16.5 million times and was cheered by progressive websites all over the country because it fits into the notion that if Americans simply understood the extent of wealth and inequality in this country, they'd support wealth redistribution. But study after study show that Americans, even as they recognize income and wealth inequality has grown in America, do not support significant levels of wealth redistribution. Sure, there's evidence, like the last presidential election, that they'll support higher income taxes on the rich, but there is no evidence that they would support the levels of redistribution required to create a country in which wealth is distributed at the level that the Norton and Ariely paper says is ideal.

2. There's no such thing as the 99% and the 1%.

Class divisions, at least when measured by income rather than wealth, are actually quite fluid in the United States. I recently highlighted a study by by sociologists Thomas Hirschl of Cornell University and Mark Rank of Washington University which shows that, on average, Americans reside along many different income brackets throughout their lives. They relied on the government-sponsored Panel Study on Income Dynamics, and found that from 1968 to 2011:

  • 70% of the population will have experienced at least one year within the top 20th percentile of income;
  • 53% of the population will have experienced at least one year within the top 10th percentile of income; and
  • 11.1% of the population will find themselves in the much-maligned 1% of earners for at least one year of their lives.

This fluidity cuts both ways. More than half of Americans will experience a year of poverty by the age of 60, according to PSID data.

3. The American economy has treated older generations much better than the younger ones.

A recent article from Philip Longman at Washington Monthly takes a deep dive into research that will be published by the Federal Reserve Bank of San Francisco in December, and it paints a striking portrait of the different economic fortunes of older and younger Americans. Longman points out that while we often hear that middle incomes have "stagnated" since the 1970s, that's not actually true for older middle class Americans:

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Longmans writes:

These vastly different economic trajectories experienced by today’s living generations are basically unprecedented. Throughout most of our history, inequality between generations was large and usually increasing, to be sure, but for the happy reason that most members of each new generation far surpassed their parents’ material standard of living. Today, inequality between generations is increasing for the opposite reason. Though much more productive and generally better educated, most of today’s workers are falling farther and farther behind their parents’ generation in most measures of economic well-being.

This certainly helps explain why older Americans are more opposed to redistribution than their younger countrymen.

4. It's the older, richer Americans that are increasingly benefitting from the distribution we do have.

Income inequality is softened somewhat by government transfer payments, like need-based welfare programs and Social Security. But since 1979, according to the Congressional Budget Office, these payments are increasingly not going to people who are actually poor. It writes:

The size of transfer payments ... rose by a small amount between 1979 and 2007. The distribution of transfers shifted, however, moving away from households in the lower part of the income scale. In 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers. That shift reflects the growth in spending for programs focused on the elderly population (such as Social Security and Medicare), in which benefits are not limited to low-income households. As a result, government transfers reduced the dispersion of household income by less in 2007 than in 1979.

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