The Inequality Myth

Wall Street Journal: The Inequality Myth

… While there is some substance to these fears of widening inequality and middle-class stagnation, the situation is not nearly as clear-cut. Demographic changes in the size and composition of U.S. households have distorted the statistics in important ways.

First, we can easily dismiss the notion that the poor are getting poorer. All the Census Bureau tells us is that the share of the pie consumed by the poor has been shrinking (to 3.4% in 2006 from 4.1% in 1970). But the "pie" has grown enormously. This year's real GDP of $14 trillion is three times that of 1970. So the absolute size of the slice received by the bottom 20% has increased to $476 billion from $181 billion. Allowing for population growth shows that the average income of people at the bottom of the income distribution has risen 36%.

They're not rich, but they're certainly not poorer. In reality, economic growth has raised incomes across the board….

…Since 1970 there has been a dramatic rise in divorced, never-married and single-person households. Back in 1970, the married Ozzie and Harriet family was the norm: 71% of all U.S. households were two-parent families. Now the ratio is only 51%. In the process of this social revolution, the average household size has shrunk to 2.57 persons from 3.14 — a drop of 18%. The meaning? Even a "stagnant" average household income implies a higher standard of living for the average household member.

Last year, the Census Bureau published a new set of income statistics that adjusted for changing household size and composition. In a single year (2006), this "equivalence-adjusted" computation increased the income share of the poor by 8% and reduced the standard measure of inequality (Gini coefficient) by 4%. Such "equivalency" adjustments would mute unadjusted inequality trends even more.

A closer look at household trends reveals that the percentage of one-person households has jumped to 27% from 17%. That's right: More than one out of four U.S. households now has only one occupant. Who are these people? Overwhelmingly, they are Generation Xers whose good jobs and high pay have permitted them to move out of their parental homes and establish their own residences. The rest are largely seniors who have enough savings and income to escape from their grandchildren and enjoy the serenity of an independent household. Both transitions are evidence of rising affluence, not increasing hardship. Yet this splintering of the extended family exerts strong downward statistical pressure on the average income of U.S. households. Had the Generation Xers and their affluent grandparents all stayed under the same roof the average household income would be higher, but most of us would be worse off.

The supposed decline of the poor and middle class is exaggerated even more by the dynamics of population growth. When people look at the "poor" in any two years, they think they're looking at the same people. That's rarely true, especially over longer periods of time. …