The psychology of victimhood and the politics of envy are powerful
political tools and we see them being exploited this political season.
telling Americans how bad off we are reminds me of one of Aesop's
Fables where a dog was carrying a piece of meat across a bridge.
Looking down into the river, he saw his shadow, which appeared to him
as another dog carrying a larger piece of meat. Attacking the "other"
dog, he dropped his piece of meat into the river and it was gone for
good. Aesop's lesson is something to keep in mind as politicians offer
their solutions to income inequality.
Michael Cox and Richard
Alm, two economists at the Federal Reserve Bank of Dallas, penned an
article in the New York Times Feb. 10 titled "You are what you spend."
The authors noted that since 1975, the share of national income
produced by the top 20 percent of households, averaging $150,000, rose
from 43.6 percent to 49.6 percent while that of the lowest 20 percent,
at $10,000, fell from 4.3 percent to 3.3 percent. Mr. Cox and Mr. Alm
argue that household income is not a complete measure of well-being. A
far more useful measure is what households spend.
lowest fifth averages $10,000 in income, it spends almost twice that
amount. The highest fifth averages $150,000 and spends about $70,000,
the rest goes to taxes and savings. The middle fifth averages $45,000
and spends about $35,000. While there's a large income gap of 15-to-1
between the top fifth and lowest fifth, the spending gap pales in
comparison. If we look at consumption, the gap between the top and
lowest fifths declines to around 4-to-1.
takes place throughout the income distribution. The middle 20 percent
of families earned incomes more than 4 times the bottom fifth, but the
spending gap was only 2 to 1.
Another factor to consider is
that high-income households are larger with an average of 3.1 people in
the top fifth, compared with 2.5 people in the middle fifth and 1.7 in
the bottom fifth. Thus, if we look at spending per person, the
difference between the richest and poorest households falls to just
2.1-to-1 and the average person in the middle fifth spends just 29
percent more than someone living in a bottom-fifth household.
is all this possible? Low-income people have sources of income that
don't show up as taxable income such as sales of property like homes,
cars, insurance policies redeemed, or the drawing down of bank
accounts. They might be headed by retirees or those temporarily between
jobs, and thus their low income total doesn't accurately reflect their
Falling real prices help explain rising
living standards. Years ago, a worker earning the average wage had to
work 365 hours to purchase a VCR; today it's two hours. A cell phone
dropped from 456 hours of work in 1984 to four hours today. A personal
computer, with thousands of times the computing power of the 1984 IBM,
declined from 435 hours of work to 25 hours.
Nearly all American families now have refrigerators, stoves, color
TVs, telephones and radios. Air conditioners, cars, VCRs or DVD
players, microwave ovens, washing machines, clothes dryers and cell
phones have reached more than 80 percent of households. Yesteryear,
only the well-to-do could afford many of these items.
Cox and Alm say the biggest reason for the decline in prices is
increased international trade and competition that forces producers
everywhere to become more efficient and hold down prices. One of the
surest methods to reduce the standard of living for all of us,
particularly poorer households, is to buy into the special interests
protectionist talk of today's political season.