Politics & Policy

Income Relativism

When people care more about politics than helping the poor.

Abortion isn’t the only litmus test in modern liberalism. There’s poverty, too.

This was demonstrated anew last week, when the Economic Policy Institute (the innocuously named intellectual arm of organized labor) released “Pulling Apart.” The 66-page study sings the same song of rising inequality that America’s Left has wailed for four decades. Predictably, it warns us once again of potential dangers (which somehow never materialize) of genuine class warfare.

Yes, American poverty is tangibly real, and tragic, for anyone with eyes to see. Homeless people litter the cold corners of our streets, and ragged poor scrape by even more invisibly in rural areas. But the liberal interpretation of how the poor become and remain poor is the larger tragedy, because it has become a barrier to progress. Senator Ted Kennedy embodied the Left’s position when hurricane Katrina gave him a fresh opportunity to rail against President Bush (and his “tax cuts for the rich”) in a Senate floor speech:

And the disparity in incomes has never been greater, with the rich getting richer, and the rest of America–the poor and the middle class–falling behind.

This incessant glibness of liberal politicians and activists who imagine themselves the only champions of the poor is what blinds them to new ideas. Their worldview supposes that poverty is (1) an intractable flaw in free-market capitalism, (2) deep and persistent, and (3) made worse by globalization cum neo-imperialism. Amazingly, none of the charges holds water when tested against real-world data.

The willingness to conflate real poverty with income inequality is what I call income relativism. If you’re concern is fighting poverty, then you’re an income absolutist. If your concern is politics and class warfare, then you are an income relativist.

An absolutist understands that economic growth is the first concern, because rising productivity is the only long-term source of higher incomes. Liberal icon Paul Krugman said precisely that in 1992 with the first two sentences of The Age of Diminished Expectations, his first pop economics book. An absolutist is obsessed with better education, because enhancing skills among the less skilled is the only way to give them dignity. It’s the old “teach a man to fish” approach. But that requires shining the spotlight of widespread illiteracy on the teachers unions. Which leads us back to EPI…

The Flaws of Income Relativism

Measuring the changes in income inequality is a statistical exercise, a sure-fire way to bore most everyone, including policymakers. But the process suffers from numerous flaws by its very nature. The EPI study is actually an admirable and careful piece of scholarship in many ways, but contains every one of the endemic flaws of income relativism.

The process begins by breaking the population quintiles, modified to account for family size and adjusting for inflation and that sort of thing. Then one makes a ratio of the top income quintile relative to the bottom. If this income ratio is greater than one, it is evidence of income inequality. According to EPI, the U.S. top-to-bottom ratio was 5.5 in 1980-82, and has risen to 7.3 in 2001-03. In Arkansas, the poorest state in 1980 by this measure, the ratio grew from 5.4 to 6.9. That’s interesting, all right, but mainly because of what’s going on beneath the surface that isn’t reported at all:

Inequality Is Not Poverty. Nationally, the average income of families in the poorest quintile is 18.9 percent higher than 20 years ago. In Arkansas, the state with the poorest of the poor in 1980, the number is 26 percent. This tells you all you need to know: the heart of inequality studies is hollow.

Quintile Change & Mobility. The people in the bottom quintile today were largely not in the bottom quintile 20 years ago. Individuals are mobile, both upwardly and downwardly, not to mention geographically. Some are dead, some are newly born, some are immigrants, and almost everyone has a different job and residence than they had two decades ago. A major investigative series in the New York Times last summer reported that only half of the members of the poorest quintile in 1988 were still there a decade later. Critics shout that income mobility itself is slowing down. Barely. Sixty percent of families moved from one relative quintile to another during the 90s, compared to 63 and 65 percent in the two earlier decades.

Quintiles Change – Demographics. Many of America’s “poorest” people in terms of income are simply retired or in college. A 2003 publication by the Federal Reserve bank of Minnesota noted that nearly a quarter of households have no earnings whatsoever, and concluded that exploring inequality without considering demographics “is like driving across country without a map.” A nation with an aging workforce, and declining labor force participation among the young, is likely to experience what looks superficially like rising inequality. Other factors like marriage, family size, and even immigration should be considered, but usually aren’t. The EPI study seems to account for family size, but many studies ignore the trend towards smaller families. Bottom line: income comparisons are highly sensitive to where people are in their life cycle, which makes snapshot relativism a wholly inaccurate way to measure national well-being.

People Feel Richer. Nothing makes the case against income relativism better than the Times own survey of American attitudes about poverty. Only 16 percent of respondents believe that their socioeconomic class is lower than when they grew up. In absolute terms, 45 percent of Americans recognize that they are really wealthier than their parents, and 38 percent say they are the same.

Downward Mobility Is Not Necessarily Economic. One suspects that many instances of downward mobility are driven by non-economic factors. For example, drug addiction destroys many fine careers, but this should be recognized as a social problem, not a systemic flaw in capitalism.

Not All Income Is Counted. Income Inequality studies notoriously count some forms of income, but ignore others. Transfer payments like welfare benefits, food stamps, and the Earned Income Tax Credit are not included in the annual poverty assessment from the Census Bureau, meaning that the poorest Americans have billions of dollars in non-wage income that radically alters the size of relativistic income gap. My colleagues at the Heritage Foundation, Robert Rector and Rea Hederman, have noted this discrepancy for years, showing in one 1999 paper that the top-to-bottom ratio shrinks by more than two thirds if honest income accounting is utilized.

Relativistic Policy Prescriptions

The American economy has been the most productive on earth for many, many decades, and in defiance of the economic theory of convergence, it continues to grow faster still. That is, the American comparative advantage–innovation–is outpacing the mercantilist strategies of Japan and Old Europe. No surprise to economic libertarians, but a permanent riddle to the social planners. The great irony of income relativism is that its policy prescriptions are increasingly recognized as growth retardants.

Relativists instinctively prescribe redistribution as a policy “cure,” yet another logical fallacy on their part. Even if you fix the game somehow, the less skilled players remain less skilled. Perhaps closer games would make some people feel a lot better, but it would be just so much window-dressing. The real solution is to figure out how to help the less skilled players improve.

Consider what EPI recommends at the end of its new paper: a higher minimum wage, more generous unemployment benefits, easing welfare rules, and higher taxes on the rich. EPI does this with a straight face, though certainly their researchers must have noticed that states with higher minimum wages and highly progressive tax codes (see New York) tend to have the highest income gaps.

The drumbeat of inequality studies reinforces the myth that poor Americans are falling behind. Sadly, the studies are then used to fight against the policies that actually work. But this myth is crumbling in light of new research, and more and more academics are skeptical of the relativistic policy model, which has led to labor stagnation in countries with the strongest labor protections. EPI’s new study trumpets the fact that inequality is rising in nearly every state, but the bigger story is in the footnotes where you learn that incomes among the poor are rising in every state as well.

Liberals are running away from the poverty debate, because they can’t win on that battlefield. Instead, they are retreating to statistical arguments about inequality. It’s a cynical ploy. Even better, it’s a loser.

Tim Kane is the Bradley research fellow in labor policy in The Heritage Foundation’s Center for Data Analysis.

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