Monday, December 21, 2015

Income inequality: Households are not people

Distinguished Harvard economist Martin Feldstein penned a recent column in the Wall Street Journal making the point that economic differences are less drastic than advertised.

He writes:
The Federal Reserve recently estimated total household net worth in the U.S. to be about $80 trillion, including real estate and financial assets. And data from the Fed’s Survey of Consumer Finances imply that the top 10% of households by net worth hold about 75%—or $60 trillion—of this total. The bottom 90% of households therefore have a net worth of about $20 trillion.
But, as he notes, this picture “leaves out the large amount of wealth held in the form of future retirement benefits from Social Security and Medicare”:

Add the $50 trillion for Medicare and Medicaid wealth to the $25 trillion for net Social Security wealth and the $20 trillion in conventionally measured net worth, and the lower 90% of households have more than $95 trillion that should be reckoned as wealth. This is substantially more than the $60 trillion in conventional net worth of the top 10%. And this $95 trillion doesn’t count the value of unemployment benefits, veterans’ benefits, and other government programs that substitute for conventional financial wealth.

This is a valid point, but it’s important to realize what is and isn’t being said. Feldstein is analyzing a statistical category (“households”), not individual human beings. While he rightly points out that the income gap between households is smaller than the media and the inequality warriors hype, more relevant is how individuals fare over time.

Household sizes have changed over the years and have thus masked individual income growth.  For instance, the average household today consists of fewer working people than the average household a few decades ago. If average household income today is the same as average household income from 1980, that cannot be assumed to represent income stagnation. For example, $50,000 in household income in 1980 may have consisted of three income earners, whereas $50,000 in household income today may consist of two earners—which represents a 50 percent increase in income per person over that period.  As it turns out, that is exactly what has happened:

It is an undisputed fact that the average real income–that is, money income adjusted for inflation–of American households rose by only 6 percent over the entire period from 1969 to 1996. That might well be considered to qualify as stagnation. But it is an equally undisputed fact that the average real income per person in the United States rose by 51 percent over that very same period.

So, not only are household data underinflated by leaving out entitlements and other government benefits (Feldstein’s point), but individuals themselves have risen economically over time. That is why studies that follow human beings consistently contradict the alarmist studies which portray economic stagnation or worse for the middle-class. The latter studies look at categories of a snapshot in time, which disguise the underlying reality of living and breathing human beings.

While Feldstein reminds us that the gap between rich and non-rich households isn’t as wide as we’re frequently told, we must not fall into the trap of confusing categories with people. Only by observing the latter can we seriously measure economic differences.

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