Thomas Sowell On Income Stagnation

From Economic Facts and Fallacies (Second Edition paperback, 2011, originally published 2007), Chapter Five: “Income Facts and Fallacies”:

INCOME STAGNATION

What might seem to be one of the easiest questions to answer–whether most American’s incomes have been growing or not–is in fact one of the most hotly disputed.

Household Income

It has often been claimed that there has been very little change in the average real income of American households over a period of decades. It is an undisputed fact that the average real income–that is, money income adjusted for inflation–of American households rose by only 6 percent over the entire period form 1969 to 1996. That might well be considered to qualify as stagnation. But it is an equally undisputed fact that the average real income per person in the United States rose by 51 percent over that very same period.

How can both these statistics be true? Because the average number of individuals per household has been declining over the years. Half the households in the United States contained six or more people in 1900, as did 21 percent in 1950. But, by 1998, only ten percent of American households had that many people.

The average number of persons per household not only varies over time, it also varies from one racial or ethic group to another at a given time, and varies from one income bracket to another. As of 2007, for example, black household income was lower than Hispanic households. Similarly, Asian American household income was higher than white household income, even though white per capita income was higher than Asian American per capita income, because Asian American households average more people.

Income comparisons using household statistics are far less reliable indicators of standards of living than are individual income data because households vary in size while an individual always means one person. Studies of what people actually consume–that is, their standard of living–show substantial increases over the years, even among the poor, which is more in keeping with a 51 percent increase in real per capita income than with a 6 percent increase in real household income. But household income statistics present golden opportunities for fallacies to flourish, and those opportunities have been seized by many in the media, in politics, and in academia.

A Washington Post writer, for example, said, “the incomes of most American households have remained stubbornly flat over the past three decades,” suggesting that there had been little change in the standard of living. A New York Times writer likewise declared: “The incomes of most American households have failed to gain ground on inflation since 1973.” The head of a Washington think tank was quoted in the Christian Science Monitor as declaring: “The economy is growing without raising average living standards.” Harvard economist Benjamin M. Friedman said, “the median family’s income is falling after allowing for rising prices; only a relatively few at the top of the income scale have been enjoying any increase.”

Sometimes such conclusions arise from statistical naivete but sometimes the inconsistency with which the data are cited suggests a bias. Long-time New York Times columnist Tom Wicker, for example, used per capita income statistics when he depicted success for the Lyndon Johnson administration’s economic policies and family income statistics when he depicted failure for the policies of Ronald Reagan and George H. W. Bush. Families, like households, vary in size over time, from one group to another, and from one income bracket to another.

A rising standard of living is itself one of the factors behind reduced household size over time. As far back as 1960, a Census Bureau study noted “the increased tendency, particularly among unrelated individuals, to maintain their own homes or apartments rather than live with relatives or move into existing households as roomers, lodgers, and so forth.” Increased real income per person enables more people to live in their own separate dwelling units, instead of with parents, roommates, or strangers in a rooming house. Yet a reduction in the number of people living under the same roof as a result of increased prosperity can lead to statistics that are often cited as proof of economic stagnation. In a low-income household, increased income may either cause that household’s income to rise above the poverty level or cause overcrowding to be relieved by having some members go form their own separate households–which in turn can lead to statistics showing two households living below the poverty level, where there was only one before. Such statistics are not inaccurate but the conclusion drawn can be fallacious.

Differences in household size are very substantial from one income level to another. U.S. Census data show 39 million people living in households whose incomes are in the bottom 20 percent of household incomes and 64 million people living in households in the top 20 percent. Under these circumstances, measuring income inequality or income rises and falls households can lead to completely different results from measuring the same things with data on individuals. Comparing households of highly varying sizes can mean comparing apples to oranges. Not only do households differ greatly in the number of people per household and different income levels, the number of working people varies even more widely.

In the year 2000, the top 20 percent of households by income contained 19 million heads of households who worked, compared with fewer than 8 million heads of households who worked in the bottom 20 percent of households. These differences are even more extreme when comparing people who work full-time and year-round. There are nearly six times as many such people in the top 20 percent of households as in the bottom 20 percent. Even the top five percent by income had more heads of household who worked full-time for 50 or more weeks in a year than did the bottom twenty percent. In absolute numbers, there were 3.9 million heads of household working full-time and year-round in the top 5 percent of households and only 3.3 million working full-time and year-round in the bottom 20 percent.

There was a time when it was meaningful to speak of “the idle rich” and the “toiling poor” but that time is long past. Most households in the bottom 20 percent by income do not have any full-time, year-round worker and 56 percent of these households do not have anyone working even part-time. Some of these low-income households contain single mothers on welfare and their children. Some such households consist of retirees living on Social Security or others who are not working, or who are working sporadically or part-time, because of disabilities or for other reasons.

Household income data can therefore be very misleading, whether comparing income differences as of a given time or following changes in income over the years. For example, one study dividing the country into “five equal layers” by income reached dire conclusions about the degree of inequality between the top and bottom 20 percent of households. These equal percentages of households, however, were by no means equal percentages of people, since the poorest fifth of households contain 25 million fewer people than the fifth of households with the highest incomes. Increasing income inequality over time also becomes much less mysterious in an era when people are paid more for their work, because this means that people who don’t work as much, or at all, lose opportunities to share in this income rise. In addition to differences among income brackets in how many heads of households work. The top 20 percent of households have four times as many workers as in the bottom 20 percent, and more than five times as many full-time, year-round workers.

No doubt these differences in the number of paychecks per household have something to do with the differences in income, though such facts often get omitted from discussions of income “disparities” and “inequalities” caused by “society.” The very possibility that inequality is not caused by society but by people who contribute less than others to the economy, and are correspondingly less rewarded, is seldom mentioned, much less examined. But not only do households in the bottom 20 percent contribute less work, they contribute far less skills, based on education. While nearly 60 percent of Americans in the top 20 percent graduated from college, only 6 percent of those in the bottom 20 percent did so. Such glaring facts are often omitted from discussions which center on the presumed failings of “society” and resolutely ignore facts counter to that vision.

Most statistics on income inequality are very misleading in yet another way. These statistics almost invariably leave out money received as transfers from the government in various programs for low-income people which provide benefits of substantial value for which the recipients pay nothing. Since people in the bottom 20 percent of income recipients receive more than two-thirds of their income from transfer payments, leaving those cash payments out of the statistics greatly exaggerates their poverty–and leaving out in-kind transfers as well, such as subsidized housing, distorts their economic situation even more. In 2001, for example, cash and in-kind payments together accounted for 77.8 percent of the economic resources of people in the bottom 20 percent. In other words, the alarming statistics on their incomes so often cited in the media and by politicians count only 22 percent of the actual economic resources at their disposal.

Given such disparities between the economic reality and the alarming statistics, it is much easier to understand such apparent anomalies as the fact that Americans living below the official poverty level spend far more money than their incomes–as their income is defined in statistical studies. As for stagnation, by 2001 most people defined as poor had possessions once considered part of a middle class lifestyle. Three-quarters of them had air conditioning, which only a third of all Americans had in 1971. Ninety-seven percent had color television, which less than half of all Americans had in 1971. Seventy-three percent owned a microwave, which less than one percent of Americans owned in 1971, and 98 percent of “the poor” had either a videocassette recorder or a DVD player, which no one had in 1971. In addition, 72 percent of “the poor” owned a car or truck. Yet the rhetoric of the “haves” and the “have nots” continues, even in a society where it might be more accurate to refer to the “haves” and the “have lots.”

No doubt there are still some genuinely poor people who are genuinely hurting. But they bear little resemblance to most of the millions of people in the often-cited statistics on households in the bottom 20 percent. Much poverty is imported across the southern border of the United States that immigrants cross, legally or illegally, from Mexico. The poverty rate among foreign nationals in the United States is nearly double the national average. Homeless people, some disabled by drugs or mental problems, are another source of many people living in poverty. However, the image of “the working poor” who are “falling behind” as a result of society’s “inequities” bears little resemblance to the situation of most of the people earning the lowest 20 percent of income in the United States. Despite a New York Times columnist’s depiction of people who are “working hard and staying poor” in 2007, Census data from the same year showed the poverty rate among full-time, year-round workers to be 2.5 percent.

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