The Myth That the Poor are Getting Poorer
One of the pervasive economic myths of our time is that the rich are getting richer and the poor are getting poorer, especially the second half. Like all myths, it has a kernel of truth to it - if you do a comparative statics of the percentage of income going to each of the income quintiles, most data do suggest that the rich have a higher percentage than they used to, and the poor a lesser percentage. However, the comparative statics ignores the issue of mobility: the people who comprise the quintiles change from year to year. If we really wanted to know if the rich were getting richer and the poor poorer, we should ask two different questions:
1. What are the odds that a poor household in year X is no longer poor in year X+Y? That is, how likely is it that people can move up (or down!) the income ladder? It could turn out that the gains of the top 20% reflect more poor folks moving up the ladder and that the losses of the bottom 20% reflect an influx of lower-skilled immigrants during the time period being analyzed.
2. What do poor people have in their houses? If those who are poor in year X+Y are far more likely to have, for example, basic consumer goods, than were the poor in years before, we can probably dismiss the claim that the poor are getting poorer.
Well the data support answers to both questions that would suggest that the poor are indeed not getting poorer.
For the first question, a variety of data sets support the conclusion that the poor are likely to move up income quintiles over time. Data from the Panel Study of Income Dynamics at the University of Michigan confirm that result from 1976 to 1991 and a study to be released today by the Treasury Department provides evidence for 1996 to 2005. The chart below shows the absolute income gains/losses of each quintile. In fact, the poor got richer faster than the rich did and the very rich got poorer! Note too that the average gain in median real income was 24% over the period, with the average among the lower to middle quintiles being well above that. So much for the "stagnant wages" hypothesis. In addition, as the WSJ's summary notes, "One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile." It will be interesting to read the full report and see all of the results with more nuance. Still, the basic conclusions run in the face of the "rich are getting richer and poor are getting poorer" myth that is out there.
As for the second question, I reprint a table that I've used in a variety of lectures the last few years. This data compares the percentage of households with various consumer goods in them. Note that the first three columns show the lowest income quintile over an 18 year period, while the last column shows ALL US households in 1971. Two things are clear: the poor have continued to live better and better over that 18 year span and poor Americans in 2002 lived better, by this measure, than the average American did 30 years earlier. So much for the idea that this generation is not doing better than its parents. And, of course, this table does not account for all of the new products that even the poorest Americans have today that no one had 30 years ago, e.g. cell phones.
|% Households with:||Poor 1984||Poor 1994||Poor 2002||All 1971|
|One or more cars||64.1||71.8||85.7||79.5|
Lest you think these are frivolous consumer trinkets, consider the health benefits of air-conditioning, the way in which having one or more car makes employment easier, or the ways in which washers and dryers promote cleanliness and good health, or the ways in which cell phones can safe a life and, along with computers, enable us to have access to information and contact with friends around the world.
I know that there are libertarians out there who will criticize this argument on the grounds that I'm making it seem like life is pretty good under the status quo, which runs in the face of the view among some libertarians that the US is on the precipice of a moral and/or economic collapse. I certainly agree that in a more libertarian world, these trends would be even more dramatic (think of the impact on the incomes of the poor if we could reform the educational system along market lines, get rid of minimum wage and licensing laws that restrict employment opportunities, and end the economic and human destruction the War on Some Drugs has caused to poor neighborhoods). But that doesn't mean that the powerful forces of the market don't operate, if only in the form of a somewhat palsied invisible hand, in our own mixed economy. If even a hampered market economy can produce opportunity and rising real incomes for the poor, imagine what an unhampered one could do!