Economic Gain Not Zero-Sum Game

January 20, 2012

In making the argument that the income gap is an ever-widening disparity, many economists point to studies of the progress of the rich and the poor over the previous decade.  The narrative portrayed by these studies paints the picture of an economic pie that is increasingly dominated by a small few at the expense of the public at large, says Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University.

However, this perspective precludes the fact that economic gain is not a zero-sum game, and that greater wealth for the wealthiest does not eliminate the possibility of higher incomes for the poor.

  • Even though lower earners have a smaller share of income today than they did in 1990, their absolute income is higher.
  • According to IRS statistics the bottom 50 percent of income earners reported 15 percent of real adjust gross income (AGI) in 1990 ($517 billion), while they reported only 12 percent of AGI in 2007, but this percentage amounted to more absolute dollars -- $1.1 trillion.
  • This speaks to the logical argument that a smaller slice of a larger economic pie can still yield significantly more income for lower earners.

Furthermore, traditional statistics about the income gap ignore the dynamic nature of income mobility in the U.S. economy.  While studies point to the increased income share of top earners between two time periods, they ignore the fact that it is often not the same people earning large incomes over time -- the top 1 percent in 1990 are not necessarily the same people as the top 1 percent in 2012.

  • Using IRS data, the Tax Foundation has shown that of the 675,000 taxpayers who reported $1 million in income at some point between 1999 and 2007, only about half remained millionaires just one year later.
  • A tiny 6 percent, or 38,000 people, retained their millionaire status for all nine years.
  • Meanwhile, 60 percent of households that were in the lowest income quintile in 1999 had moved to a higher quintile by 2007.
  • Furthermore, about one-third of those in the lowest quintile moved to the middle quintile or higher.

Source: Veronique de Rugy, "For Richer and For Poorer," Reason Magazine, February 2012.

For text:

http://reason.com/archives/2012/01/12/for-richer-and-for-poorer

 

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