The Misleading Tale of Income Inequality

March 12, 2012

Although cries for redistribution by government echo in the press and among some politicians, by some measures economic inequality is no greater now than it was in the 1980s, says Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute.

To appraise economic inequality, it makes more sense to look at spending, not cash income.  The effective purchasing power of those with the least cash income is augmented by food stamps, rent supplements, Medicaid-funded health care, subsidized school lunches and other social programs.

  • Government data on individual spending patterns show that the ratio of spending between the top and bottom 20 percent of the income distribution, measured on a per person basis, was essentially unchanged between 1985 and 2010.
  • In 1985 people in the top quintile had spending that was 2.5 times that of people in the bottom quintile; by 2010, this ratio was 2.4.
  • This metric suggests that economic inequality has diminished slightly, rather than increased.

Spending per person by income quintile shows how individuals are doing over time both in absolute terms and relative to those in other income groups.  An examination of the government's Consumer Expenditure Survey from 1985 through 2010 shows that inequality has declined rather than increased.

  • The average annual spending for a household in the lowest quintile in 2010 was $12,325 per person.
  • In contrast, the average spending for a household in the top quintile was $29,022 per person.
  • On a per-person basis, Labor Department data show that in 2010, households in the top fifth of the income distribution spent 2.4 times the amount spent by the bottom quintile.
  • That was about the same as 25 years ago.
  • In addition, the overall level of inequality is remarkably small -- a person moving from the bottom quintile to the top quintile can expect to increase spending by only 140 percent.

But compared with 1985, the big winners are the lowest-income group, whose expenditures per capita increased by 6.5 percent in constant dollars.  In contrast, spending per person in the top income quintile increased by 1.5 percent.  This shows that even though the income spread from top to bottom might be larger, those at the bottom are doing better than they did 25 years ago because they have greater spending power, after adjusting for inflation.  This is important for the bottom quintile-economically, socially and psychologically.

Source: Diana Furchtgott-Roth, "The Misleading Tale of Income Inequality," Real Clear Markets, March 8, 2012.

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http://www.realclearmarkets.com/articles/2012/03/08/the_misleading_tale_of_income_inequality_99555.html

 

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