The income gap is *decreasing!*

No this is not a Cracked.com article. I picked this nugget of wisdom from a one of my Libertarian (big L) friends. It's actually an excerpt from Thomas Sowell's book, Intellectuals and Society.

I should point out: Sowell's view is very intrigueing to me. I wanted the minds of Those Smarter Than Me to comment on / agree with / tear apart the general idea presented here, which is that while the gap between the absolute lowest and absolute highest categories of income is growing, it's because the incomes of thepeople within those groups is changing, and poor people are actually seeing a huge, huge income increase.

Thomas Sowell wrote:

Many statements have been made in the media and in academia, claiming that the rich are gaining not only larger incomes but a growing share of all incomes, widening the income gap between people at the top and those at the bottom. Almost invariably these statements are based on confusing what has been happening over time in statistical categories with what has been happening over time with actual flesh-and-blood people...

Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories --- and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one category to another over time. In terms of statistical categories, it is indeed true that both the amount of income and the proportion of all income received by those in the top 20 percent bracket have risen over the years, widening the gap between top and bottom quintiles. But U.S. Treasury Department data, following specific individuals over time from their tax returns to the Internal Revenue Service, show that in terms of people, the incomes of those particular taxpayers who were in the bottom 20 percent in income in 1996 rose by 91 percent by 2005, while the incomes of those particular taxpayers who were in the top 20 percent in 1996 rose by only 10 percent in 2005 --- and those in the top 5 percent and one percent actually declined.

When those taxpayers who were initially in the lowest income bracket had their incomes nearly double in a decade, that moved many of them up and out of the bottom quintile --- and when those in the top one percent had their incomes cut by about one-fourth, that may well have dropped them out of the top one percent. Internal Revenue Service data can follow particular individuals over time from their tax returns, which have individual Social Security numbers as identification, while data from the Census Bureau and most other sources follow what happens to statistical categories over time, even though it is not the same individuals in the same categories over the years.

Many of the same kinds of data used to claim a widening income gap between "the rich" and "the poor" --- names usually given to people with different incomes, rather than different wealth, as the term rich and poor might seem to imply --- have led many in the media to likewise claim a growing income gap between the "super-rich" and the "merely rich." ... Once again, the confusion is between what is happening to statistical categories over time and what is happening to flesh-and-blood individuals over time, as they move from one statistical category to another.

Despite the rise in the income of the top 0.1 percent of the taxpayers as a statistical category, both absolutely and relative to the incomes in the other categories, as flesh-and-blood human beings those individuals who were in that category initially had their incomes fall by a whopping 50 percent between 1996 and 2005...

[M]any among the intelligentsia are ready to seize upon any numbers that seem to fit their vision. Behind many of those numbers and the accompanying alarmist rhetoric is a very mundane fact: Most people begin their working careers at the bottom, earning entry-level salaries. Over time [they enter] successively higher income brackets... More than three-quarters of working Americans whose incomes were in the bottom 20 percent in 1975 were also in the top 40 percent of income earners at some point by 1991. Only 5 percent of those who were initially in the bottom quintile were still there in 1991, while 29 percent of those who were initially at the bottom quintile had risen to the top quintile. Yet verbal virtuosity has transformed a transient cohort in a given statistical category into an enduring class called "the poor."

Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a "problem" for which a "solution" is necessary. They have created the powerful vision of "classes" with "disparities" and "inequities" in income, caused by "barriers" created by "society." But the routine rise of of millions of people out of the lowest quintile over time makes a mockery of the "barriers" assumed by many, if not most, of the intelligentsia.

The confusion between statistical categories and flesh-and-blood human beings is compounded when there is confusion between income and wealth. People called "rich" or "super-rich" have been given those titles by the media based on the basis of income, not wealth, even though being rich means having more wealth. According to the Treasury Department: "Among those with the very highest incomes in 1996 --- the top 1/100 of 1 percent --- only 25 percent remained in this group in 2005." If these were genuinely super-rich people, it is hard to explain why three-quarters of them are no longer in that category a decade later.

Thoughts? I don't *want* to agree with it, but I need some help understanding what's the matter with his thinking.

I'd say on the surface it seems like just playing around with perspective and arrangement to come to a predetermined conclusion (the very thing he admonishes others for). But I don't think I'm really actually grasping this after the day I've had, so I'll have to come back to it.

on second thought, I'm actually in the same boat as Bloo: today's just not the day for me to grapple with this.

It looks as if it's a Hoover Institution rewrite of this Treasury Department report: Income Mobility in the U.S. from 1996 to 2005.

To answer some of the questions Cheeze rightly raised, the Treasury Department report classifies cash income as "wages and salaries, tip income, taxable and tax-exempt interest, dividend income, alimony, net income from business (sole proprietorships, partnerships, and S corporations), farm income, net rental income, royalty income, net capital gain or loss in adjusted gross income (AGI), other gain or loss, unemployment compensation, taxable and non-taxable pension and annuity income, Social Security benefits (including the non-taxable portion), and other income included in AGI." For those running a sole propietorship, partnership, or S corporation, net operating losses are carried over from prior years are added back. For those that got divorced, alimony payments are subtracted to reflect cash income.

The report also noted that there were changes in financial and compensation arrangements that affected the reporting of cash income 2005. Mutual funds actively worked to minimize the taxable capital gains of its investors even though the market value of the mutual fund shares had increased. The report noted that this change reduced the incomes of households that owned mutual funds compared to the income that would have been reported if the change hadn't happened. So basically your income might have dropped through creative accounting, but you definitely got wealthier.

My biggest beef, I suppose, is that Sowell is trying to make the point that the rich are actually suffering because he can show one statistic: 0.1 percenters had their incomes fall by 50%. I looked it up in the Treasury Department report. The little weasel forgot to mention one thing: that 50% decline is median income. The mean income of the 0.1 percenters actually went up 10.4% to $3.15 million from 1996 to 2005.

As for explaining why only 25% of the top income earners that were there in 1996 aren't there in 2005, the Treasury Department notes that the incomes at the highest levels are "very volatile" and "highly transient." The report doesn't give any reasons, but I would have to imagine that because the reported income includes income from sole proprietorships, partnerships, and S corporations there'd simply be a chunk of those rich that had a couple of very good years for their business and it crashed or it continued to do well and they incorporated and all that business income came off their income tax forms, making it look like their incomes took a dump.

What Sowell conveniently forgot to mention from his quote about only 25% of the top income earners sticking around for the decade was that those that didn't make it weren't left destitute. 32.9% only fell down to the next highest level (0.01 to 0.1% or $3.15 million a year), another 24.2% only dropped down to the entry level of the super rich (0.1 to 1.0% or $800,000 a year), and a tiny 6.0% of those super rich 1996ers fell all the way down out of the top quintile.

When mentioning the poor, Sowell again conveniently left out vital information:

Bradbury and Katz (2002a, 2002b) used PSID data to examine relative income mobility in the 1970s, 1980s and 1990s. Their results also show that about half of households in the bottom quintile moved out after 10 years (51 percent for 1969-1979, 50 percent for 1979-1989, 47 percent for 1988-1998). They argue that relative mobility declined slightly in the 1990s as 40 percent of households remained in the same income quintile as compared to 36 percent in the 1970s and 37 percent in the 1980s. They also show that the income gaps widened over this period, which would make mobility across quintiles more difficult, and may account for the small decline in relative mobility.

See that 36 to 40% of households that didn't move out of the same income quintile over three decades? That an "enduring class." See those widening income gaps? Those are "disparities" and "barriers."

Again, Sowell seems hell bent to make it seem like all is well in America by distorting information and completely ignoring the massive concentration of wealth and rapidly growing income inequality that has happened over the same period of time.

OG_slinger wrote:

that 50% decline is median income. The mean income of the 0.1 percenters actually went up 10.4% to $3.15 million from 1996 to 2005.

Or in other words: Income disparity increased even within the top 0.1% of the population.

Sowell does this all the time. By statistical standards, he's a master chef.

Robear wrote:

Sowell does this all the time. By statistical standards, he's a master chef.

So would that classify him as one of "the intelligentsia (who is) ready to seize upon any numbers that seem to fit (his) vision"?

Looking back, between 1996 and 2012 my income has risen by about 2,000%. Obviously I'm doing fine. Of course I was an 18 year old college student in 1996 with a part-time job but that's neither here nor there. Extraneous fact, right? The numbers themselves show that I'm highly mobile and on my way to being one of the super-wealthy. In the last 3 years alone my household income has risen almost 120%. Of course 3 years ago my wife was in nursing school and didn't have a job and now she's working and I got a promotion. But of course that doesn't have anything to do with it. The numbers alone show we're doing great.

Robear wrote:

Sowell does this all the time. By statistical standards, he's a master chef.

Amen. Sowell is one seriously disingenuous scumbag.

I haven't had time to read this, but I will make this observation: he appears to be deliberately conflating income with assets, and they are very, very different things. Poor people typically have only income to generate wealth, but rich people can be gaining assets at terrific speeds, even in years where they have no "income" whatsoever.

IMAGE(http://charactergrades.com/wp-content/uploads/2012/07/Homer_Simpson_214425m.jpg)
"Aw, people can come up with statistics to prove anything, Kent. Forfty percent of all people know that."

cool, thanks everyone. Especially OG, that was some great analysis. I admit it, I use P&C as my own thinktank sometimes. It's pretty awesome.

FYI when I read something and see 'intelligentsia' my bullsh*t radar warms up.

When you read something and you see "Thomas Sowell", your bullsh*t meter should go off. He's a part of the "Apologentsia", if I may coin a word. Anything to support the Party line.

I don't know anything, but this strikes me as pretty obviously bad logic:

Most people begin their working careers at the bottom, earning entry-level salaries. Over time [they enter] successively higher income brackets.... More than three-quarters of working Americans whose incomes were in the bottom 20 percent in 1975 were also in the top 40 percent of income earners at some point by 1991. Only 5 percent of those who were initially in the bottom quintile were still there in 1991, while 29 percent of those who were initially at the bottom quintile had risen to the top quintile. Yet verbal virtuosity has transformed a transient cohort in a given statistical category into an enduring class called "the poor."

I read this as "A statistically significant proportion of the people in the lower income bracket are in entry-level positions and heavily skew the distribution. As they develop within the workforce they will earn incrementally higher wages and will move into and through higher income brackets. To lament the nature of the low-income bracket is to ignore the class's eventual income growth."

If that's even reasonably close to what he meant, then Sowell is dramatically conflating flesh-n-blood with statistical category. This particular reading holds water only longitudinally, if we're describing a particular working population from 1975 to 1991. It says very little about the general population.

Robear wrote:

When you read something and you see "Thomas Sowell", your bullsh*t meter should go off. He's a part of the "Apologentsia", if I may coin a word. Anything to support the Party line. :-)

I will give you credit where credit is due as I'm totally stealing this .

Seth wrote:

cool, thanks everyone. Especially OG, that was some great analysis. I admit it, I use P&C as my own thinktank sometimes. It's pretty awesome.

It's why I love this place. Most of the time, we're willing to analyze the crap out of something before tearing into it.

Robear wrote:

When you read something and you see "Thomas Sowell", your bullsh*t meter should go off. He's a part of the "Apologentsia", if I may coin a word. Anything to support the Party line. :-)

That... is a great word.

Someone must have thought of it before. Just popped into my head.

Robear wrote:

Someone must have thought of it before. Just popped into my head.

Possibly coined by Manfred Eimer, date unknown. According to Google this page was updated on Jan 31, 2001, however.

Choosing 1996-2005 was interesting. Basically he is telling the people of 1930 that everything is great and the papers are lying by showing them figures from 1920-1928. You ignore much of the bubble bursting. It is very true that people in that span did indeed have a lot more money on paper. Then we had the Dot Com Bust, the Housing Bust, the steady decline in interest rates, rising personal debt in the lower income brackets-mortgages, student loans, personal loans, auto loans, credit cards. I must resist the urge to bring up the estate tax, but more and more family wealth is being retained and not taxed. We also have unemployment hovering around 10 percent(give or take). That rate disproportionately hurts the lower income brackets.

What I read into the snippets is much the same logic that goes into flat tax thinking. 50 percent is the same for everybody.

KingGorilla wrote:

What I read into the snippets is much the same logic that goes into flat tax thinking. 50 percent is the same for everybody.

No it isn't.

boogle wrote:
KingGorilla wrote:

What I read into the snippets is much the same logic that goes into flat tax thinking. 50 percent is the same for everybody.

No it isn't.

What is the "it?"

I think that was KG's point... The flat taxers use the same sleight of hand.

KingGorilla wrote:

Choosing 1996-2005 was interesting. Basically he is telling the people of 1930 that everything is great and the papers are lying by showing them figures from 1920-1928. You ignore much of the bubble bursting. It is very true that people in that span did indeed have a lot more money on paper. Then we had the Dot Com Bust, the Housing Bust, the steady decline in interest rates, rising personal debt in the lower income brackets-mortgages, student loans, personal loans, auto loans, credit cards.

Well, to be honest, the housing collapse didn't kick in until 2007.

But you are very correct in pointing out that no mention was made about the dot com bust, which had a huge impact on the both the incomes of a lot of people as well as the value of their investments. Speaking from experience, a lot of people didn't see their incomes get back to their dot com era levels for years such was the extent of the bubble.