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Tuesday, February 22, 2005


This, the 6th article in a lengthy mini-series on the American ideological spectrum --- its unique nature on both the left and right, and how, in turn, that uniqueness has helped shaped the US economy's institutional structures and government policies --- is a direct follow-up of the previous article. That article looked at economic equality and inequality. So too does the current article.

Up to now, the mini-series has dealt with the left-side of the American spectrum: in particular the reasons why it alone, in all the industrial countries, has never been attracted to Marxism or any other socialist variants. So far, come to that, we've looked only at economic explanations --- such as the extraordinarily high wages of American labor in the 19th and 20th centuries (always comparative viewed), our unusually high standard of living, and the uncommonly wide diffusion of property ownership. The previous article moved on to probe the distribution of income in American life since the early 19th century. It showed that right down to 1970, Americans also enjoyed the most equitable distribution among industrial countries. It also showed, in a fast, top-skimming way, nothing more, how this has markedly changed since then.

The Big Change

Specifically, the US now ranks at the bottom in income equality among industrial countries. Interestingly, too, Britain --- which was 2nd to the US in limiting income inequality in 1970 --- now ranks 2nd from the bottom, slightly ahead of the US. Is this just a coincidence? No, not really. As you'll eventually see, Britain is the most dynamic of the big countries in the EU, just as the US is by far among all industrial countries.

Hence, in brief, the need for this follow-up argument, which will strive to deepen the analysis of the previous article and make more sense of the big turnabout in the US's income-distribution over the last three decades.

More Specifically, A Trio of Aims Here

The argument that unfolds in this article has three specific aims, each delved into carefully. Specifically, we want to know . . .

1. How serious the big changes in the distribution of income have been, and whether they're worth worrying about much . . . at any rate, as much as numerous left-leaning sociologists and economists happen to, not to forget the dominant thrust in media reports. As we'll see, the impact of those changes on the well-being of low-income American people turns out to be noticeably exaggerated, and for several reasons --- all carefully spelled out.

2. What the various causes of the turnabout in the income-distribution actually are. It turns out that most scholars who specialize in analyzing the distribution of income, never mind the media journalists who report on its changes, either skirt or outrightly fail to delve into some of the most significant causes at work here . . . mainly, it seems, because these causes conflict with their ideological or moral propensities.

The outcome is largely a flight from reality. As you'll see, these skirted causes include striking demographic shifts, a startling decline in two-parent families among poorer Americans, and finally the impact of high-voltage immigration flows into this country since 1965. . . . roughly 35-40 million, depending on the actual number of illegal ones . . . and possibly even 45 million or more according to the latest survey of illegals that will be looked at later on here. When economists --- usually others not specializing in distributional matters --- do discuss the recent changes in income-distribution, they too tend to skirt these latter, non-economic causes and instead focus mainly on shifts in technology that favor educated workers and the growing globalization of the US economy . . . influential in both cases, to be sure, but far from an adequate explanation.

3. What the trade-offs have been for Japan and EU Continental countries whose governments have striven, by a variety of policies, to offset the other, more universal causes of growing income inequality in their countries: by ever high minimum wages; by growing regulations of their labor markets that have made them increasingly rigid; by a huge leap in government spending since 1970 and very high taxes; and until recently, by ever higher levels of welfare transfers.

The wider outcome? With two or three exceptions --- Sweden and Denmark and Finland, all tiny, fairly homogenous countries --- the rest of the Continent EU members and Japan have experienced slow or stagnant growth and increasingly high levels of long-term unemployment.



(i). The Changes In The Distribution of Income Are Complex,
And The Conventional View of Growing Inequality Is Misleading

First off, as you'll see when you read through the argument, things aren't as simple as the latest Lou Dobbs CNN report or New York Times article --- or even the more sophisticated works of American or European scholars specializing in the topic of income-distribution that now number several hundred and end up being posted at the Luxembourg Income Study site . . . a whole cottage industry, it seems, of excessively narrow mental work compiled in just a few years. Few --- hardly any, to be more exact --- seem to grapple with the more controversial causes just mentioned, or the tradeoffs in economic growth and job-creation that have entangled those countries whose economies in West Europe or Japan seek to block what Joseph Schumpeter, the great Harvard the great Harvard economist of the 1930s and 1940s, called the recurring forces of creative destruction.


Well, that brings us to a second point that allows us to dig deeper than the usual stick-to-the-surface analyses found nearly everywhere else . . . .


(ii.) Creative Destruction Clarified

For Schumpeter and his followers, capitalism is never incremental in its changes, never inclined to equilibrium as in neo-classical economics. Instead, at its core, it's always inherently dynamic and prone to change suddenly in abrupt, tumultuous ways, thanks to the interaction of two kinetic forces: 1) recurring breakthroughs in revolutionary technologies and 2) driven men and women, consumed by dreams of wealth and glory, as the bold entrepreneurs who bring them successfully to the market-place.

Ever since the start of the industrial revolution, these radically restructuring technologies have erupted every few decades in clustered waves; and as they break forth over the economic landscape, they challenge the economic status quo within and across countries relentlessly, with jarring shock-force. Dislocations are inevitable. Whole industries and firms using older, standardized technologies --- however revolutionary they once were in earlier decades --- are suddenly threatened with obsolescence, the owners, managers, and work-forces left behind as increasingly outmoded relics of the past. Think of the horse-and-buggy trade and the new internal combustion engine at the start of the 20th century. Or the whaling industry, the lantern and candle industries faced with electrification at roughly the same time. Both revolutionary technologies altered our lives --- the way we work, spend our leisure, move from place to place, communicate with one another --- in core, hyperkinetic ways. More recently, thanks to globalizing forces --- especially the rapid rise of Asian manufacturing --- the challenges to old-line industries and the spin-off dislocations to national economies have accelerated with rippling force.


Note Quickly:

Not all old-line industries will disappear when the dislocations shoot up and multiply within a national economy.

Many of these industries --- think of the automobile, steel, and textile industries in the US during the 1980s --- will survive and remain competitive, but only if they restructure painfully, cut their labor forces, and find ways to improve productivity and maybe even the quality of their products. Again, these three industries are a good example. Generally competitive and with productivity equal to the Japanese and others now, their labor forces have had to be trimmed by a good 50% on the average.

None of these changes were easy to absorb. Overall, to emerge a more updated, far more competitive economy based on the new radically restructuring technologies, the US economy had to shed a good 10 million manufacturing jobs in the 1980s and early 1990s. The shedding, for that matter, is continuing today, with 4 million more jobs lost to overseas competition the last four years; and it will no doubt continue way into the future . . . especially since the combined shocks of breakthrough technologies and fast-paced shifts in manufacturing prowess across countries will not likely ease any time soon, let alone die off.


Old-Guard Backlashes Inevitable

Needless to add, the forces of the status quo --- capital, labor, and management --- will not accept decline gladly.

They will almost always fight back. At first, only a few bold, risk-taking entrepreneurs --- obsessed with dreams of wealth and glory like the Carnegies, Rockefellers, Fords, Bill Gates, the Walmart family, or the giants who created the Hollywood motion picture industry from scratch --- are there to challenge the powerfully entrenched, diehard forces. Enter a key Schumpeterian concept --- creative destruction. Only if the old, increasingly uncompetitive industries --- agrarian, mining, manufacturing, or service, it doesn't matter --- are allowed to run down or disappear will there be enough capital and managerial talents and scientists and engineers freed up in any national economy to let the new, more promising industries that embody these revolutionary technologies come into existence.

That's what creative destruction means. And it never unfolds without creating winners and losers, though eventually the great masses of people living in the advanced countries will all be winners once the initial dislocations and turbulence are absorbed and a more productive, competitive economy is solidified. That's what a newer, more competitive economy with ever higher levels of productivity entails.


(iii.) Enter The Next Point: Countries Vary Markedly Here

Some countries, as it happens, have more flexible economic institutions and policies to deal with the rippling dislocations of radical economic change and creative destruction. Those that do --- the USA pre-eminently, plus a handful of smaller economies --- will generally allow the innovative changes to occur without prolonged resistance by the old order.

In that case, the forces of creative destruction will play out in the market-place fairly quickly, and the shock-power of the initial economic and social dislocations will be more easily absorbed.

As old industries decline and shift their location elsewhere to more dynamic but lower-wage developing countries --- or just disappear in the home-country --- then investment capital, managerial talent, and scientists, engineers, and other skilled workers will be freed to allow the most competitive of the new start-up firms to expand and replace them. Whole new industries will emerge. Big spillover effects of a positive sort will radiate across other industries and sooner or later --- sooner in this instance --- throughout the entire national economy. By the later 1990s, a good 75% of the Fortune 500 Companies didn't even exist three decades earlier: Microsoft, Intel, Cisco, Amazon, Walmart, what have you. In short order, the ways we live, work, and spend our leisure will be altered almost beyond recognition, once and for all.

(Whether the great entrepreneurs were all decent people is another matter. Henry Ford was a notorious racist, who had to apologize publicly for his blatant anti-Semitic views. The Walmart family's giant store-chain, which has revolutionized merchandising in this country --- the retail industry logging the biggest jump in productivity during the 1990s, not least in response to Walmart's challenges --- may be engaged in squeezing some of its workers. And so on. And yet, in time, these innovative giants also built great universities --- Stanford, Chicago (Rockefeller), Vanderbilt --- or created the American public library system (Carnegie) or have spent a billion dollars on trying to improve American public education (the Bill Gates Foundation).
Oppositely, there are countries whose economic institutions aren't as flexible or efficient, and whose governmental policies have the effect --- intended or not --- of solidifying the status quo and strengthening the resistance of old industries and work-forces to the dislocating changes that the forces of creative destruction invariably entail.


What Then?

Simply said, the resistance of the old economic order to painful change will be quickly politicized.

In the upshot, the few inventers --- maybe a handful of imaginative scientists and engineers --- can't find the bold entrepreneurs who will support them. Even if there are risk-taking entrepreneurs --- there might not be many, mind you (70% of French youth recently said in an opinion survey that they'd like to have a career in the state bureaucracy) --- the innovative entrepreneurs will likely have trouble finding financial support to bring the promising but high-risk inventions to the market-place. Suppose, though, they do drum up support: what next? Well, governmental regulations of both product and labor-markets, all intended to protect the economic status-quo, will likely impede their activities. There will be other impediments too. Any failures --- always a high-risk possibility for start-up firms amid uncertainty --- turn out to be severely punished in societies like those in West Europe or Japan. It's almost impossible for the owners of bankrupt firms to get a credit-card, let alone financial support for new ventures in the future. Japanese and West European societies are notoriously stingy this way when dealing with bankruptcy and bad credit ratings, in part for cultural reasons, but also for economic ones as well . . . timid paper-shuffling types running insurance companies and credit-card firms, never mind banks, fearful of taking risks themselves that might not pan out.

Suppose, however --- as economic growth stagnates along with job-creation (the problem throughout almost the whole of Continental Europe) --- that the government or its multiple bureaucracies do relax their regulations and try to cut taxes, can we predict what will happen then?

Sure, nothing hard to foresee here.

Tax-cuts will mean less revenue for government subsidies to old-line industries and increasingly fewer welfare benefits. Reduced regulations will intensify competition in product-markets, invariably at the expense of inefficient firms whatever their size, big or small. No less predictable, fewer state efforts to control labor-markets to protect unproductive jobs will lead to wave after wave of lay-offs for many of the workers in uncompetitive firms, especially if the managers have to restructure radically in order to survive. All this, to repeat, is what creative destruction requires if the national economy is to emerge updated and more competitive, based on newer technologies employed by successful entrepreneurial firms.


The Outcome?

Again, easy enough to predict. In statist systems of tightly coordinated economies like those on the EU continent or in Japan, political considerations will likely call for a retreat as soon as major resistance is encountered . . . whether in the form of hostile public opinion or electoral setbacks, never mind waves of strikes and maybe even social turmoil. The latter threat is also a big reality in most of these statist economies, just as ever higher levels of long-term unemployment and slower growth in per capita income generally are too.

In most of the EU --- in countries like France, Italy, Spain, Belgium, Portugal, Greece, or probably Germany--- social turmoil will threaten to erupt and may break out, with various degrees of violence an accompaniment, including terrorism . . . whether from home-grown radicals or increasingly from Muslim terrorists living in Europe. An exaggeration?


Last year, to clarify briefly, home-grown radicals based in Italy tried to assassinate the major leaders of the EU's executive and financial institutions. Two years earlier, a professor of law was assassinated in Italy again for drawing up a list of labor-market reforms at the request of the new conservative coalition-government. Then, too, Jose Bove became a big hero in French opinion for trashing a MacDonald's restaurant, even though the chain --- with 1000 outlets in the country --- employs 40,000 French workers, buys almost all their food from French farms, and is popular with the French public. Soon afterwards, a terrorist bomb killed a French worker at a MacDonald's elsewhere in France.

Or take Germany. In the 1970s and 1980s, left-wing terrorists kidnapped and killed businessmen in Italy and Germany over and again. Simultaneously, demonstrations against nuclear energy or environmental problems in Germany led to numerous violent confrontations with legal authorities; and though so far the wide-ranging changes in welfare policies that the current Schroeder Green-Social Democratic government has carried out have not generated violent backlashes, the history of extremism in German life --- no, not just before 1945, but since 1949 (albeit far more limited) --- does not augur happily for further peaceful changes of a radical sort in the economic and social status-quo.

More recently, on the EU regional level, any meeting of the G-8 or the World Bank in West Europe can set off new violence on a large scale, something that has happened several times in the last 3 years alone.


And It Gets Worse

Now there's whacko Islamist terrorism on a large scale all over West Europe that also has to be reckoned with by reform-minded governments favorable to major economic changes, never mind for other reasons. No less worrying, the surging growth of right-wing populist political parties --- some moderate but with xenophobic tendencies as in Denmark or Holland, others far more extremist like Le Pen's National Front or Vlaams Blok in Belgium or Haider's Freedom Party in Austria --- feeds both on discontent with economic change (including fast-moving globalization) and on backlashes against radical Islamist fundamentalism that is on the rise everywhere in the EU these days.

In Spain last year, the whackos killed over two hundred people with bombs planted on a train. When, a week later, the Spanish voters did a turnabout from what opinion polls had predicted and voted in a left-wing government that then took Spanish troops out of Iraq, the whackos weren't satisfied. Repeatedly, over the last 12 months, Spanish police have broken up new attempted bombings. No surprise. Bin Laden has cited, among his inflated and grandiose grievances against the West, the Moorish defeat at the hands of the Catholic monarchs in the 1490s as a reason to continue his mass-murdering terrorism.

Then there's Holland.

A country of 15 million noted for its consensual, pragmatic politics --- with an impressive record on human rights to boot --- Holland has experienced a wave of growing violence, crime, and political assassination the last three years, much to the astonishment of the unusually tolerant Dutch people. Among the fall-out consequences, the numbers of native Dutch deciding to emigrate --- usually to Canada, New Zealand, Australia, or the US (if the wait isn't too long here) --- have soared lately. It's a clear sign, however regretable, that they are beginning to write off the future of their country's social peace and consensual politics. See the NY Times article, February 27, 2005, for a good updated account. (It's also a sign of just how illusion-laden politically correct multiculturalism has been, not just in Holland, but throughout the EU.)


The International Outcome of Diverse Innovative Systems Across Countries?

If the world divides into countries with various degrees of flexible and efficient economic institutions and policies when it comes to radical innovation, then the long-term waves of breakthrough technologies will not only transform some of them more rapidly then others --- not only change their domestic economies and structures and hence the ways people in them live, work, and spend their leisure --- but tend as well to reshape the distribution of global power.

The rise of American power and influence --- whether welcomed or deplored --- is precisely the result here, an outcome of how the forces of creative destruction have worked out across countries.

Right now, US per capita income is 55% higher than the average for the EU-15 countries in West Europe, and after two decades of absorbing the dislocations of creative destruction, the US economy has benefitted from a big-boost in productivity. Not so the EU. The rise in its labor productivity thanks to new breakthroughs in information and communications technologies hasn't yet materialized, and it's not clear when it will. Worse, unemployment runs consistently about twice as high on an average in the EU than here --- most of it long-term too, unlike in the US --- even though Britain and a couple of tiny Continental countries have done well in job-creation.

Slow or stagnant growth in per capita income; rigid labor markets and high-levels of unemployment, especially among youth and Islamic minorities; and a failure to reap the benefits of ICT breakthroughs do not augur happily for the future of West Europe's economies, aside from those like Britain and Ireland with their pro-business, free-market orientations and two or three tiny North European countries with fairly cohesive, well-educated populations like Sweden. The auguries are all the more discouraging as West European countries, one and all --- no exceptions --- rapidly age and face social security crises within the next decade or two. That crisis is imminent. It's not like the hyped-up scare-scenario, foreseen in the Bush administration's rhetoric, about a possible dismal future for American social security that faces --- or so we're told --- some sort of dubious crisis after 2042. That's a good four decades off, based on only one of different scenarios that an official social security commission has available.

Something else too. Unlike in West Europe where the native populations' birth rates are far too low to prevent a serious decline by mid-century, the US enjoys two other advantages: a much higher birth-rate, and much higher levels of immigration that Americans tend to favor, at any rate if the immigrants are legally here.


(iv) A Final Point To Remember

Compared to Japan and the EU Continental countries, the US is rightly regarded as favoring free-market policies. That doesn't mean, though, that its economy can be described as laissez-faire in the 19th century sense, far from it.

Come to that, even in that century, the US federal and state governments were far more active than Britain's centralized government in fostering economic progress: whether in infrastructure development, a massive funding of public education decades earlier than in Britain or elsewhere in Europe (save, oddly, Prussia), the creation of land-grant universities that specialized in technical, agricultural, mining, and manufacturing education, and of course massive transfers of public lands to American-born residents and recent immigrants. And anti-trust legislation to regulate the rapid growth of powerful corporations, plus the creation of the Federal Reserve system shortly after 1900, also reflected a fairly active role for government by 19th century standards. Then, too, the federal government instituted a variety of protective tariffs after the civil war to help foster manufacturing here. Only by comparison with the statism of Continental Europe or Japan at the time does the US look laissez-faire in retrospect.

Whatever, we currently have in place a far-flung set of policies --- taxes, welfare transfers, insurance policies, and regulations --- that have transformed earlier American capitalism in fundamental ways.

Specifically, as you read through this article, keep in mind that we have a social security apparatus for retirement and dependent children and spouses whose main earner has died before the age of 65; Medicare for the retired; unemployment insurance, and Earned Income Tax Credits (federal subsidies to low-wage workers), all supplemented by various forms of supports at the state level . . . not to forget cash transfers for people in poverty, along with a series of non-cash benefits like Medicaid, rent subsidies, and food-stamps. In the 1990s before the reform of the welfare-system, about 25% of the American population was receiving some form of means-tested support. In the year 2000, income-tested social expenditures amounted to almost $400 billion --- a huge surge over the previous three decades, roughly three-fold in constant dollars. (For these statistics, see Nicholas Eberstadt, The Poverty Rate. )

Whether or not poverty itself is accurately measured in this country --- to stay with the 11-12% of the US population reported as officially in that category --- is very much another matter. Among other things, as we'll see later, that figure doesn't count non-cash benefits that reduce actual poverty by about a third. Worse yet, the official rate doesn't accurately reflect the material conditions in which those in poverty actually live in a wealthy country like ours, something an earlier buggy article bought out clearly in a table reproduced here from an outstanding study by two Swedish economists, Frederik Bergstroem and Robert Gidehag. (All references to this table and the comments should fully acknowledge the Swedish study.)


Is The Public Much Concerned?

Note the way the section heading here is worded. Those who worry about the changes in the distribution of income aren't the vast majority of Americans, who both historically and at present are generally indifferent to any equality of economic outcomes . . . something we showed in the earlier articles in this buggy mini-series.

You might recall, for instance, that in a very good study carried out by Sidney Verba of Harvard and a team of American and foreign scholars, it turned out that Swedish industrial managers and owners favored a more narrow spread of income between the affluent and poorer members of their country than did American trade-unionists and civil rights workers. (Sidebar clarification: The Verba book in question probed the ideas of equality in Sweden, Japan, and the United States. The US and foreign scholars found, to their surprise, that even American trade union leaders were willing to tolerate a much larger range of income inequality as something desirable, a goal to achieve, than were the owners and managers of Swedish corporate industry. The same was true, interestingly enough, of the leaders of American civil rights movements. (See Sidney Verba, Steve Kelman, and others, Elites and the Idea of Equality: A Comparison of Japan, Sweden, and the United States (Cambridge, MA: Harvard University Press, 1987)

Has it changed since then?

Yes, recent survey data reveal some changes in public opinion on this score, compared to the 1980s. Whereas Gallup Polls in the late 1980s showed that abou 26% of Americans thought we were a country divided between the haves and have-nots, that figure had risen to 39% by the end of the 1990s --- after a decade of remarkable economic growth, with the bottom quintile of wage-earners experiencing a faster growth in income over the previous three or four years than the top quintile did; and it has risen since then to a surprising level of 69% in an academic study carried out by the Maxwell School at Syracuse University during the fall of 2004. Click
here. How much that surprising result reflected the rhetoric in the presidential election, or recent changes in the job market since the recession of 2001, isn't clear, but the big leap does indicate that the conventional view of growing inequality purveyed in the media has had an impact.

That said, despite several economic issues that divided George Bush from John Kerry in the most bitter partisan election for decades --- the question of income distribution played only a minor or indirect role, usually in reference to how the tax cuts of the first Bush administration favored the rich and well-to-do. Much more important were issues like the tax cuts and federal deficit or jobs and employment or --- finessed somewhat but raised rightly so --- social security and medical care. Only Senator Edwards, Kerry's running mate, tried to drum up enthusiasm for his primary campaign by emphasizing the gap between the rich and the poor; and even among the Democratic faithful, the drum-beat failed to elicit much enthusiasm.


The Standard Way of Representing the Changes in The Distribution of Income

The following two tables bring out the noticeable changes that have occurred since 1970, with the first having the advantage of covering the entire post-war period down to 1999. The two are based on the work by a gifted, prolific scholar, Timothy M. Smeeding of Syracuse University and the director of the Luxembourg Income Study. His concerns and worry about the growing inequality come through with forceful clarity in a number of articles he's published. The first table is a direct reprint from the Smeeding article cited there, and all references to both should be to it. The second table has been updated by the buggy prof.

The initial table makes clear just how much the lower quintile has lagged in income growth after the late 1970s. Note, though, that for all the changes, the distribution is about what it was at the start of the post-war period.

Changes In The Growth of Income In US Quintiles Between 1947-1999, Plotted By Decades.

Untitled Document
USA UK Australia Canada France Germany
Inequality (1994-97)
Ratio Of Top 10% Income Earners
To Bottom 10%
4.6 4.3 4.1 3.5 3.2
Per Capita Income
$32,184 $39,334
$21,673 $28,370 $24,192 $29,890 $25,179 $32,320 $21,132 $28,452 $23,010 $27,090



(1) Expenditures Are A Better Gauge of Well-Being Among The Poor

Almost all those working with Luxembourg income studies or use similar approaches ignore tradeoffs and omit all or most of the major causes of the growing income gap. We'll look later at tradeoffs later such as growing unemployment in West Europe and far slower economic growth on the Continent, especially compared even in the EU to Britain and Ireland, two countries that have resisted much of the trend towards ever higher taxes, regulations, and welfare transfers. For the time being, let's look at some of the shortcomings that are left dangling in mid-air if the changes in American income-distribution are depicted in the standard ways set out in the two previous tables.

As it turns out, the standard depiction is misleading on some key measures of well-being among poorer Americans, and ---no less important --- the reasons for the growing gap between the more affluent and less affluent Americans, both within a strict US context and compared with West Europe.

As a jump-off point here, shift your attention away from the reported income of Americans --- especially the bottom 20% --- and rivet it to what they are able to spend each year to maintain a certain standard of living. When you do so, a far different picture of trends in American expenditures emerges than of income. Among the bottom quintile of American income earners, it turns out that they spend $2.31 for every dollar of reported income. For the time being, don't concern yourself with how that's possible. Keep in mind simply that the gap between reported income and spending among the poor is not uniquely American: in Australia, the expenditures of poorer people there are almost $2.10 for every reported dollar earned, and good studies find a large gap of a noticeable if lesser sort in Britain. See
this link.

Something else to remember. Far from being an ideological twist in the way at looking at economic equality or inequality is gauged, it turns out that even Eurostat --- the EU's official statistical --- itself argued in the late 1990s that expenditures were a better gauge of economic well-being than were income data themselves. In short, the shift to looking at expenditures is hardly a parochial American matter, let alone one that is simply ideological or partisan.


Reported Income vs. Reported Expenditures: A Graphic American Depiction

Probably the best way to depict the gap between reported income and reported expenditures is found in the following table, which traces it over the last several decades. Note that this table is directly copied from an excellent introductory textbook on economics, the best available in the buggy prof's view (a brand new edition, the 11th, will be out this coming March, 2005): James D. Gwartney et al, Economics: Private and Public Choice. The table appears in chapter 27 of the 10th edition.

Untitled Document
  Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile Top 20%
Family Income Before Taxes
1950 4.5% 12.0% 17.4% 23.4% 42.7%
1960 4.8% 12.2% 17.8% 24.0% 41.3%
1970 5.4% 12.0% 17.6% 23.8% 40.9%
1980 5.1% 11.6% 17.5% 24.3% 41.6%
1990 4.6% 10.8% 16.6% 23.8% 44.3%
2000 4.3% 9.80% 15.5% 22.8% 47.4%
Impact of Taxes on 2000 Household Income
Before 3.7% 9.0% 14.8% 23.0% 49.5%
After 4.6% 10.3% 15.7% 22.7% 46.7%
Household Expenditures
1961 7.1% 13.2% 18.2% 24.1% 37.4%
1972 7.1% 12.9% 18.0% 23.9% 38.1%
1980 6.8% 12.8% 18.1% 24.1% 38.2%
1990 7.1% 12.4% 17.1% 23.3% 40.1%
1995 7.4% 12.9% 17.5% 23.4% 38.8%

As you can see, there has been no increase at all in inequality as measured by expenditures since 1972 --- this despite a clear growth of such inequality in reported income. On the contrary, for all the hullabaloo about growing inequality in American life, poorer Americans were actually spending more as a % of GDP in 1995 than at any time in history. What's more, 1995 --- the cut-off point for this table --- is itself not a good gauge of the growing prosperity at even the bottom of the income-ladder. In particular, as unemployment fell below 5.0% for the first time in decades by 1996 --- and then fell further to 4.0% --- then it turned out that wage-earners in the bottom quintile found their incomes were growing faster than those in the top quintile. Yes, that's a fact; really.

How that affected their expenditures is something prof bug hasn't been able to find, but a reasonable surmise would be that they were able to spend even more as a % of GDP as their wages rose.


How Can People Spend $2.31 For Every $1.00 Earned?

Actually, that's not hard to answer. For one thing, most people in the bottom 20% of income in the US aren't there very long. No need to single out the studies here; we'll do so later, though there are more than one such study --- all carried out by the Bureau of Labor and other agencies --- and one such study of the 1980s and early 1990s found that a clear majority of those at the bottom at the start of the decade spent at least one year in the top quintile. And a clear majority by the end had risen into the second, third, or fourth quintile by the end of the study.

For another thing, to clarify this briefly, almost all graduate students in law, medicine, science, engineering, business, architecture, or the humanities will be found in the bottom 20% of household earners while they are in school, only to start earning in the top two quintiles almost immediately upon starting their careers. Even teachers and nurses --- those who pursue their studies beyond the bachelor's level --- will be in the middle quintile when they draw their first check. In the meantime, they are either taking out loans to support their studies and livelihood, or are on fellowships, or are teaching assistants, or are being subsidized by their families, or are running up credit debts.


As a third thing, there are those who are briefly unemployed --- either voluntarily after they quit a job and are looking for another or involuntarily but not yet employed again. They can draw on their savings, or depend in the latter case on unemployment benefits for a while, or get support from family or friends as they continue their job-searches.

Then too those in poverty --- roughly 11-12% of the US population as measured by cash-benefits --- can count on welfare-support for a certain period of time. If they are mentally and physically able to work, they have to show that they are actively looking for work, and since 1996's reform of federal welfare they can count on drawing benefits only for so long now. Note --- a matter we'll discuss later when we look at poverty in detail in the next article --- that cash-benefits are themselves not a fully accurate gauge of welfare-support. Add in various non-cash benefits --- food-stamps, rent subsidies, medicare, and the like --- and almost every analyst grants that actual poverty falls by at least a third from the official levels.


Another cause of higher expenditures is unreported income support ---- say, an absentee father who helps the mother, the official head of the household, rear the children. Much more serious would be outright criminal activities --- theft, robbery, burglary, drug-dealing, and the like. Somewhere in between is simply tax cheating: unreported income to evade income taxes --- federal and state --- by those who are moonlighting or doing honest work, but manage to conceal it from the tax authorities.

Whatever the causes, the reality is clear: people who are reported as being among the poorest 20% of Americans manage to have each year a much higher standard of living than official income statistics reveal.


(ii.) Further Perspective Here, Briefly Sketched.

Oh, Oh. This follow-up argument, not even half done yet, looks like it's beginning to spill beyond its boundaries, and so another installment --- maybe even two --- now seems increasingly needed to finish it. No matter. We've arrived at a good point to stop for the day. Before we do so, though, you might glance at the following matters that will be delved into in the next article or two:

1. The average household income in the US at the start of this decade was about $50,000. If a household had a married family, its income was 12% higher at $56,000. If, in turn, the married family had two working spouses, its income was $66,000 --- almost 33% higher. That's one of the key demographic changes at work, a shift to two-income earning spouses among the top three quintiles in the American income distribution . . . even as, oppositely, the huge reduction in marriage among low-income earning households, especially African-American and Hispanic, has further increased the growth of inequality.

Consider hurriedly an implication or two. If 70% of African-American babies are born to unwedded mothers these days --- a drastic turnabout since the early 1950s, when two-parent families in the white and African-American communities were roughly the same (about 88% for each) --- then, not surprisingly, the actual reported income of African-American households will be much lower than for white households: to be more exact, about 60% of the latter's income. But note. When an African-American household contains a two-parent family, then --- allowing for differences in age (African-Americans are younger on an average than whites) --- their income is virtually the same as white income.

You would never guess any of this if you read 90% of the studies on poverty found at the Luxembourg Income Site.

2. As for reputed discrimination against African-Americans on the job market, it turns out that whereas white income between 1989 and 1999 rose 13% on an average, it rose 24% for African-Americans. (See, for these figures, the journalistic account by a very talented scholar, Thomas Sowell, at Stanford's Hoover Institute. (Sowell has written several impressive books on ethnicity, culture, and development, both in the US and elsewhere. They usually have a lot of well-marshaled historical information and statistical data, and they are also written with terse clarity, a pleasure to read. )

3. As you'll also see in the next article, household income --- which is what the Bureau of Labor and the Census Bureau and other agencies look at --- is very misleading when it comes to looking at the number of actual people across income-quintiles. Households can contain one person or several. More to the point, there happen to be 64 million Americans living in households among the top 20% income earners, almost all in two-parent families --- for that matter, in families where the two spouses work full-time --- as opposed to 39 million in the bottom 20% . . . many single elderly people, or a married couple whose children are grown up and working, or fatherless families, or students supporting themselves.

When you see conventional income reports by quintile then --- or deciles as in the Smeeding articles from which the tables noted earlier are taken --- you need to remember that they are not taking into account that there are 1.7 people in the top quintile for every 1.0 person in the bottom quintile (or decile).

4. Similar problems haunt the official measures of income inequality when it comes to hours worked. Households in the top quintile work almost three times as much as households in the bottom quintile, which includes lots of people who are retired or not working at all.

5. And finally, as you'll see, you'd hardly be able to infer from any of the Luxembourg Income Studies --- or media reports that push scare-stuff daily in their reportage about the American economy --- that since the big changes in the immigration law in 1965, legal immigrants have totaled about 30-35 million, while the latest estimate of illegals puts them somewhere between 15-20 million. Most of these immigrants, legal or otherwise, are poorly educated and have enormously swollen the poor of workers at the bottom of the wage-scale. Almost all the changes in reported income in the bottom two quintiles ofincome that aren't explained by hours worked or marriage status across quintiles turns out to be accounted for by the impact of immigrants keeping wages low for unskilled labor.

Is that undesirable?


Replies: 2 comments

On the issue of American exceptionalism, I wonder what impact the institutional and policy effects a generational pendulum swing in this country to the right may have on the trends you elucidate. The left today seems incapable of finding new ideas to redefine itself and stay relevant in response to the successes of American exceptionalism, which is manifest 1) in the stridency and shrillness of the left's political opposition to all ideas that compromise its dogma, no matter how reasonable or otherwise fitting with its professed goals and historical inclinations; 2) its relegation to protected positions in academia, foundations and the public sector where there tends to be lower public or economic accountability and 3) its resort to democracy-remote bodies to effect its policy agendas (be it through judicial activism, lawsuits or US devolution to international bodies where most of the other players are still left of the US).

I proffer that the shrinking influence of the left in the US will be further accelerated by the fact its leadership and constituencies are guided and defined by the sixties generation, whereas what's driving the pendulum swing to the right is in part the growing ascendance and influence of the post-sixties generations who seem to be trending as follows-- many of such trends, in a global context, seem uniquely American (and thus fitting to your theme of exceptionalism):

-- Viewing the great goals of Civil Rights/feminism movement as largely accomplished to the extent they can be fixed by the government-- noting that we certainly still have a way to go as a society to end bigotry and sexism, but the salience of these issues will continue to recede with each succeeding generation as an ever more ethnically and culturally diverse American melting pot becomes the norm. (As an aside, this has a corollary impact on one's standing with respect to current disputes about the role of the judiciary and judicial activism which sometimes seeks to extend government's role in those issues beyond a consensus view, which today is not as compellingly legitmated as the glaring injustices addressed by the Civil Rights activism of generations ago.)

-- Living in a ruthlessly competitive society where meritocracy is more dominantly a factor of success than ever in the past with an attendant belief in having worked for-- and deserving-- one's socioeconomic status (vs. guilty, idle rich having been born to a self-perpetuating class) as well as a class fluidity which makes leftists' class-based arguments ring more hollow to such ears (a trend that could reverse based on the poor education system in a highly competitive knowledge economy dooming classes of people to the lowest end of the economic ladder, which the left could capitalize on but their protection of even the most failing and decrepit public school systems against any reform makes that unlikely);

-- A diminishment of the view that government needs to do a great deal more (if not having a view that government should do a lot less) to address issues of poverty or economic inequality (through redistribution/government entitlements) based on

(1) the concept of a basic level of social welfare statism being sufficiently entrenched and not up for serious debate in society (the most radical of conservatives tinkering on the margins);

(2) solid economic growth, relatively low unemployment and burgeoning affluence over the past 25 years in which people feel more financially secure and poverty is less glaring (which affluence generally otherwise would tend to give rise to a willingness to spend more if the problem of poverty were perceived more acutely-- to boot most of the government's wealth transfers go to a middle class that as you point out is materially better off than almost all of the rest of the world); and

(3) weighing whatever marginal benefit of increased government involvement against

(A) the tremendous social degradation unwittingly released by Great Society social welfare programs, which undermined family structures and allowed the abdication of personal responsibility without consequence (in addition to proliferating client organizations inside government and without that seek to perpetuate the need for their existence and otherwise engage in mission creep by fanning small fires to make other, subsidiary issues into crises in need of their advocacy which increasingly lack much moral authority relative to the facts) and

(B) the impact of globalism + demographic trends making the direction of European welfare statism unappealing in terms of its long term unsustainability and short to long term side effects of chronic high unemployment, lack of international competitiveness and diminishing standard of living (not to mention cloying European style nanny-statism being anathema to the American experience);

-- The legacy of Vietnam being nothing more an abstract history lesson (e.g., middle aged people today were just kids or politically unaware teens when Vietnam was happening and have no real emotional connection to it-- so for vast segments of decision makers and voters Vietnam is as relevant as WWII, the Korean War or the Civil War for that matter). It's also a casualty of America's poor educational system (little knowledge) as regards that sensitive period for the 60s generation. Compare that legacy to the memory and experience of subsequent generations of the widely perceived successes (or at least-- unlike Vietnam-- not perceived failure or ignominious retreat) of Reagan (aggressive against the "Evil Empire" to facilitate the end of the Cold War and set the table for the Eastern Bloc revolutions), Bush I (a popular war against Iraq in Gulf War I) and now Bush II (Iraq, Afghanistan) in asserting a more muscular and interventionary foreign policy, thereby engendering greater patriotism and a more positive view of American hegemony and the projection thereof in the world with 9/11 simply accelerating the trend toward viewing muscular, interventionary foreign policy positively;

-- Being grown up products of broken homes or absentee parents who understand first hand the damage of that and seek to avoid it for their families (as well as being receptive to political arguments against governmental policies viewed as undermining families);

-- View the "coarsening of society" through Hollywood and the mainstream media, which is perceived as encouraging the sexualization of children and celebrating social taboos, as having gone too-far and contributing to a fraying of the social fabric and are starting to backlash against it;

-- Increasing interest in religion and more traditional family structures/values as a turn away from a coarsening of society as well as a desire to find structure and direction (guidance about making good, judicious choices with hard-to-miss-on positive outcomes)-- and thereby find meaning-- in a harshly competitive world characterized by unlimited choices and little connection to one's fellow person in the social vaccum created by a highly mobile society with weakened family bonds and a post-1970s era world of anything goes / it's up to you to define yourself and set your own limits and values (i.e., backlash against 60s-70s psychocultural shift cited by Yankelovich in the piece you had us read in Poli Sci 121 in the late 1980s);

-- The movement of people to suburbia, exurbia, the South and the so-called "ambitious cities" (as coined by George Will) of Atlanta, Houston, Las Vegas, etc. (i.e., from the Blue to the Red States) where Red State values perpetuate themselves socially (just like we're influenced living in the deepest of deep blue areas);

-- The disaggregation of media through talk radio, internet, blogs, cable tv, indy films, specialty publications, etc. that is increasingly diminishing the mainstream media's monopoly over message and the left's capture thereof, thereby offering both alternative views and challenging the status quo monopoly of the left which has grown intellectually weak in defending itself against conservative arguments as a result of its past monopoly, too often now resulting in PCisms and ad hominem attacks in lieu of using reason and marshaling evidence. You've discussed several times your amazement over the lack of diversity of view in the European press, but I think the same was true for a long time in this country.

The foregoing oversimplifies a lot but I throw it out for comment...

Posted by John @ 03/04/2005 02:26 AM PST

Hello, Dr. Gordon. Could you recheck the formatting of the tables? I'm viewing with IE on a Mac, and the tables have one line per year in a vast expanse of different colors (one colored expanse per year). Each expanse covers better than 2 screens as I scroll through it. Thank you, Don Gesink


I just checked, using a pc and IE 6.1, then Netscape 6.2. Both showed the tables formatted properly, and so the trouble, I fear, must be on your side . . . though whether that's due to macs in general or to your version of IE, I can't say. I do format the buggy site using a 1024 x 768 pixel setting, and you might adjust your display setting to that.

Please let me know if that helps. If not . . . well, you're the first person to say that he's having trouble of the sort you mentioned, and we'll have to see whether anyone else posts a similar complaint.

Best, the buggy prof

Posted by Don Gesink @ 02/28/2005 11:24 AM PST