ACRU

The Equality Of Reaganomics

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published August 25, 2011 on Forbes.com.

For over 20 years now, major media institutions have been reporting growing inequality in America, blaming it on Reaganomics. But does what they are reporting reflect actual “inequality,” or does it just reflect changing demographics in our society?

Often the numbers they are reporting for changes over decades can’t logically be compared because the composition of the numbers themselves has changed so much. Because this issue, and the media institutions themselves, are so ideologically contentious, much of what has been reported has been misleading at best, and deceptive at worst.

All of this has been sorted out the best by far by Alan Reynolds in his brilliant 2006 book Income and Wealth. Reynolds digs deep into the underlying data to show that what has been reported as rising inequality involves primarily changing demographics that reflect changing patterns of work and productive output, as well as misunderstood changes in the meaning and composition of the numbers being reported themselves. I discuss all of this in detail in my new book America’s Ticking Bankruptcy Bomb.

As Reynolds reports, the top fifth of households in terms of income includes nearly six times as many full time workers as the bottom fifth. That is because the top fifth is heavily composed of two earner couples and older children or other relatives that work. The bottom fifth, by contrast, includes many aged or young singles who are either retired or still in school.

Of course, a household composed of one single person cannot have multiple workers in any event. Some in the bottom fifth are disabled and can’t work; others are temporarily too sick to work, or work regularly. Some who do work are in the bottom fifth because their work is in the underground economy, or in crime, and so is not reported. Some in the bottom fifth don’t work regularly because they suffer from alcoholism or drug addiction.

The result of all of these factors is that in 2004, 56.4% of households in the bottom fifth featured no work by anyone for the entire year, not even part time work, leaving the average number of workers per household in the bottom fifth rounded down to zero by the Census Bureau. By contrast, the average number of earners in the top fifth of households was 2.0. The total number of full time, year round workers in the entire bottom fifth of households in 2004 was less than 3 million, compared to 16.4 million full time, year round workers in the top fifth of households. Differences in work are reflected throughout the income scale, as the average number of workers in the second lowest fifth and in the middle fifth of households in terms of income was 1.0; in the second highest fifth, 2.0.

Those who don’t work, for whatever reason, don’t themselves expect to make as much income as those who do. That difference in income does not reflect unfair economic “inequality.” It reflects differences in production.

In our generous society, the bottom fifth does receive a lot of transfer income from government programs, such as Social Security retirement and disability payments, federal, state and local welfare programs, education assistance, etc.

This transfer income enables many in the bottom fifth not to work who otherwise could and would do so. In the case of those retired or in school full time, this is not undesirable. In the case of those on welfare, it is undesirable and socially and economically counterproductive. That is not to say there should not be a social safety net. I don’t believe in human suffering. But for the able bodied, that safety net should be provided through work rather than free stuff.

As Reynolds reports, most income received by the bottom fifth of households is from such transfer payments, nearly 80% in 2001, for example. For the top fifth, by contrast, such transfer payments represented less than 2% of household income. But the measures of income usually reported as showing rising inequality do not even include such transfer payments in their definition of income. That grossly exaggerates actual income inequality. Family gifts that finance the living expenses of a college student who otherwise appears in the statistics as a low income household are also not counted, again exaggerating income inequality, or at least differences in standard of living.

In addition, as time goes by income from work naturally increases with rising wages. Transfer payments are not linked to rising wages, however. So the income “gap” between households in the top fifth with multiple workers and households among the bottom fifth relying mostly on transfer payments is naturally going to grow over time, all the more so if the transfer payment income is not even counted.

This will be especially true during economic boom times, when jobs, wages, and household and family incomes are rising even faster. Those households relying more heavily on income from work will prosper faster during such times, leaving those relying primarily on transfer payments falling farther behind. This was reflected during the 25-year Reagan economic boom, which was wrongly castigated by ideological media opponents as increasing economic “inequality,” when what was actually happening was more prosperity for our society, involving more production from those working.

Another important difference in incomes can be found due to age and experience of workers. As Reynolds notes, median income of families where the head of household is 45 to 54 is close to 3 times as large as the median income of families where the head of household is younger than 25. That reflects the raises and promotions that workers naturally earn over time. This, again, is not an unfair economic “inequality.” It reflects again increased ability to produce as workers gain experience and skills. The aging of the huge numbers of the baby boom in recent decades naturally exacerbated this social “inequality” during this time, as they grew into their peak earning years. Nothing remotely “unfair” about that.

Another important factor in income differences is education. Reynolds indicates the median income of households where the head holds a doctorate degree is about two and a half times as large on average as the median income of households where the head holds only a high school degree, and 5 times as large on average as for households where the head holds less than a ninth grade education. This, again, is not an unfair economic “inequality.” Rather, it reflects, again, increased ability to produce as workers gain in education and human capital.

The sharp increase in women working over the last 40 years naturally exacerbated these income differences. That increase sharply increased the number of two earner couples, resulting in more social “inequality” as compared to households with only one earner, or no earners. But this increasing “inequality” does not reflect the unfairness of Reaganomics, or our “oppressive” capitalist system. It reflects the increased share of production coming from two earner households.

This increasing “inequality” was further exacerbated by the growing proportion of college educated workers in recent decades, and the tendency of couples to match up with spouses of equivalent educational backgrounds. Households with two college educated spouses working are going to earn a lot more than households with only one worker of lesser education, with an even wider difference with households with no workers. But these differences reflect, again, not unfair economic inequality, but differences in productive output.

At the other end of the spectrum, the rising number of single households is also increasing “inequality.” Young people delaying marriage towards and past 30 are boosting the number of those single households. So is the aging of the population, creating more single widows and widowers, an effect that will grow as the baby boom retires. But married couples earn on average three times the incomes of single people, as Reynolds reports. Comparing household incomes across the decades would consequently appear to show increasing income inequality, again during the Reaganomics years. But this is not a valid comparison because it would not be comparing apples to apples given the changing household composition. The changing income pattern is not reflecting economic effects, but the effect of the demographic change of more lower income earning single households replacing higher income earning married households.

Another demographic change in recent decades is increasing numbers of single mothers with children, often without a high school diploma. Such households tend to suffer among the lowest incomes and the highest poverty rates in the country. That would again appear to increase income inequality. But it would again be the effect of changing social demographics, rather than an economic effect, discrediting simple comparisons of changing household incomes over the years.

Increasing immigration in recent decades of lower income, lesser skilled workers with little education would also appear to increase income inequality. As Reynolds notes, “Countries that import millions of poor people are bound to end up with more poor people than otherwise.” But that again would not be an economic effect, but the effect of an immigration policy of allowing entry of more workers with little in productive skills.

The broadest and most accurate measure of living standards is real per capita consumption. That measure soared by 74% from 1980 to 2004, an unprecedented gain in that short of a period. If we measured it just during the 25-year Reagan boom from 1982 to 2007, the increase would be even more. From 1973 to 2004, about 30 years, such real per capita consumption in America nearly doubled. Over 75 years, 1929 to 2004, real per capita consumption by American workers increased by 5 times, and even faster since 1961 than before. The fastest growth periods were 1983 to 1990, and 1992 to 2004, during the 25-year Reagan boom.

Moreover, as Reynolds notes, both Census and CBO data showed real income gains for every income group over this period, with accelerating, even faster gains for lower income groups as the Reagan boom went on. Reynolds notes as well that by 2001 the Census Bureau was reporting that the poor enjoyed as much or more of the indicia of a comfortable, modern standard of living as the middle class 30 years before. The poor enjoyed as many or more cars, trucks, clothes dryers and refrigerators in 2001 as the middle class in 1971. They enjoyed twice the proportion of air conditioners and color TVs, and much more of the modern advances of microwaves, DVDs, VCRs, personal computers, and cell phones, as the middle class 30 years before. This indicates a broad advance of prosperity during the Reagan boom.

But even this is not the whole story of the equality of Reaganomics. Other class warrior critiques fail to take into account the dramatic changing definitions of income resulting from the 1986 tax reform, or fall to the fallacies of statistical illusion. That will be discussed in upcoming articles.