The American Spectator

Whereas the income of the top fifth of U.S. households is mostly from two or more people working full time, Reynolds shows that most of the income (77 percent) of the lower 20 percent comes from government transfer payments including supplemental Social Security Income, the Earned Income Tax Credit, disability, unemployment, Medicaid, food stamps, and the like.

But Reynolds also points out that most economists do not count such transfer payments as income because, presumably, they are not earned. This artificially deflates the income levels they cite for the poor since the omission leaves average money income for work and savings for these people at an astonishing and seemingly unsupportable level.

Reynolds notes, “If salaries and employee benefits generally rise faster than inflation, while government transfer payments do not, then the gap between two-earner families at the top and no-earner households at the bottom must necessarily widen over time.”

Then there is the nature of the people themselves, for the lower fifth is heavily weighted to single young people just starting out, older seniors easing into retirement, newly arrived immigrants, in addition to the disabled, the addicted, the unemployed, and those who choose to live on the fringes of our society in one fashion or another. The mobility of these younger and upwardly mobile people also usually means they move into the upper quintiles rather quickly so from one election cycle to the next we are not always talking about exactly the same people.

Then there are the ones called the wealthy. Reynolds demonstrates the important distinctions among households played by job experience, educational attainment, marital status, race, and gender and how many of those ratios have changed. The obvious is still true: the more education one has, the more one earns. The median income of a household headed by someone with a doctorate degree was more than $96,000 while that of a high school graduate was $36,000. Women had median earnings of only 56.6 percent of men in 1973 but that gap closed to 76.5 percent by 2004. So there is change and much of it is for the better.

But the big change in the status of the wealthy 1 percent (1.3 million people, by the way) turns out to have more to do with changes in the tax laws and securities regulations than in any suddenly unfair advantage in grinding the poor. In 1986, a massive overhaul of the federal tax laws altered the way many high-income earners estimated and reported on their returns. Tax-exempt municipal bond income had to be disclosed for the first time in 1987. Other changes caused share owners in Subchapter-S corporations, partnerships, or limited liability companies to shift income that had been reported on corporate returns to their individual tax liabilities-thereby significantly inflating the individual reports without significantly changing the actual amount of income being taken in.

SO THE APPEARANCE OF THE POOR getting poorer while the rich leaped ahead turns out to be something of a canard, but it is a duck that will not be easily killed. The danger is that the myth will lead us into tinkering with wrongs that don’t exist and thereby causing enormous damage while not solving very real problems of those among us who are disadvantaged and in need of help.

Witness Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco. No Krugmanite, Yellen earned her spurs at the Fed in Washington and on President Clinton’s oft-ignored Council of Economic Advisers. Recently in her bank’s economic newsletter she tackled the question of economic inequality, making the correct connection between the broad gains in productivity in the U.S. economy and the current run of prosperity we have enjoyed over the last 25 years.

Like Reynolds, she distinguishes between citizens who have advanced educational attainment and higher incomes and those who do not. She also points to the more recent conundrum of the lowest-income earners (the tenth decile) who have tended to out-earn middle-class management types whose jobs have been outsourced. She even pooh-poohs the European social safety nets that have sacrificed general prosperity and economic growth for rigid employment and welfare systems.

Still, at the end, she can’t help it. Some sort of income intervention to help the poor deserves “high policy priority.” She explains, “Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people.”

You see what Reynolds is up against?