If you don’t yet believe that we live in a de facto caste system, just wait until the new Democratic economic populists take over Congress. They will rely on the usual myths to portray the American economy as an engine of inequity and dispossession, benefiting only the very rich.
In advance of this onslaught, Cato Institute scholar Alan Reynolds has written a new book, Income and Wealth, that explodes much of the downbeat conventional economic wisdom.
The key difference between the richest and poorest households, Reynolds finds, is simply work: “Most income in the top fifth of households is from two or more people working full time. Most income in the bottom fifth is from government transfer payments.” According to the Census Bureau, there are almost six times as many full-time workers in the top households as in the bottom, and 56.4 percent of the bottom households didn’t have anyone working at all in 2004.
For Reynolds, the small number of workers in poor households casts doubt on the category of the “working poor.” A member of the working poor is commonly defined as someone earning an hourly wage too small to support a family of four. But Reynolds points out that most of these low-wage workers “are not supporting more than one person.” He notes that the poverty rate among married couples was just 5.4 percent in 2003, and a mere 2.6 percent among full-time, year-round workers more than 16 years of age.
“The vanishing middle class” is another claim Reynolds doesn’t buy. If the middle class is perpetually defined as those earning between $35,000 and $50,000, it will constantly be vanishing as people get richer. In this vein, one liberal study complained that 31.3 percent of families earned more than $75,000 in 2002, whereas only 11.1 percent earned that much in 1969. “By this measure,” it concluded, “America’s broad middle class has been shrinking.” No, members of the middle class were getting richer.
This isn’t supposed to happen, according to the oft-cited datum that the wages of American workers have been stagnant since 1973. This isn’t true either. “Average real wages and benefits have risen by nearly 40 percent since 1973, after adjusting for inflation,” Reynolds writes. U.S. consumers spent $25,816 per person in 2004, almost double the amount spent in 1973. Who is doing all the consuming if the wages of American workers are exactly where they were 30 years ago?
Someone is always straining to find the bad news about America’s greater wealth. The New York Times reported in 2005 that the number of households with assets worth more than $10 million grew 400 percent since 1980. The Times called this a sign of increasing concentration of wealth. Reynolds counters, “Having four times as many wealthy households in 2001 as in 1980 suggests wider ownership of stocks, bonds and larger homes — less concentration of wealth, rather than more.”
The economy is not a zero-sum game, frozen in place. A Business Week article in 2004 reported that the top 50 percent of families own 95 percent of the country’s assets, meaning “the gains from rising wealth have effectively left out half the population.” Reynolds explains that the wealthy tend to be older and more established. They will be replaced by younger workers as they age in turn: “The top 10-50 percent as measured by net worth will typically spend most of their wealth on retirement, then die and be replaced by an entirely different group of top wealth holders.”
What’s most important to wealth creation in the long run is human capital, and that has become more widely dispersed. According to Reynolds, “[F]ewer than 8 percent of those above the age of 25 had a college degree in 1960, but that fraction doubled to more than 16 percent in 1980, and nearly doubled again to almost 28 percent in 2004.”
It is America — not just the rich — that is getting richer, even if Washington’s newly empowered populists don’t want to hear it.
© 2006 by King Features Syndicate
<title>Income and Wealth, by Alan Reynolds</title>