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2016 Is the Year of Inequality – And Prosperity by Chelsea German

This past weekend, the Economist uploaded a short video to its Facebook page called, “The year of the 1 percent.” The video shows a graph superimposed over the Earth seen from space, while a voice narrates, “2016 is set to be a more unequal world than ever before. For the first time, the richest 1 percent of the population will enjoy a greater share of global wealth than the other 99 percent.”

The Economist’s graph reminded me of another graph, which also shows two lines that eventually cross but tells a very different story. Despite population growth, there are fewer people living in extreme poverty today than ever before:

How can both graphs be accurate? Poverty can decline even as inequality rises, as long as the total amount of wealth in the world is growing.

To ignore this is to fall prey to the “fixed pie fallacy.” Throughout most of human history, global wealth hardly changed. But thanks to trade and industrialization, wealth has skyrocketed, especially since the 1900s, and continues to climb.

At the same time, technological advances have also increased human wellbeing in ways not captured by looking at GDP alone.

Because the pie is growing, focusing solely on inequality, like the Economist’s video does, makes little sense. Most of us would rather have a relatively small slice of a gigantic pie than the biggest slice of a microscopic pie.

In other words, most of us would rather be wealthier in absolute terms, regardless of our relative position. This is why many of us, if given the choice, would choose to be an ordinary person today, instead of a member of the upper crust a century ago or a 17th century king.

Cross-posted from HumanProgress.org.

Chelsea GermanChelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Americans’ Incomes Are Unequal, But Mobile by Chelsea German

Americans often move between different income brackets over the course of their lives. As covered in an earlier blog post, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives, and over 11 percent of Americans will be counted among the top 1 percent of income-earners for at least one year.

Fortunately, a great deal of what explains this income mobility are choices that are largely within an individual’s control. While people tend to earn more in their “prime earning years” than in their youth or old age, other key factors that explain income differences are education level, marital status, and number of earners per household. As Mark Perry recently wrote:

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever.

According to the economist Thomas Sowell, whom Perry cites, “Most working Americans, who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%.”

While people move between income groups over their lifetime, many worry that income inequality between different income groups is increasing. The growing income inequality is real, but its causes are more complex than the demagogues make them out to be.

Consider, for example, the effect of “power couples,” or people with high levels of education marrying one another and forming dual-earner households. In a free society, people can marry whoever they want, even if it does contribute to widening income disparities.

Or consider the effects of regressive government regulations on exacerbating income inequality. These include barriers to entry that protect incumbent businesses and stifle competition. To name one extreme example, Louisiana recently required a government-issued license to become a florist.

Lifting more of these regressive regulations would aid income mobility and help to reduce income inequality, while also furthering economic growth.

This post first appeared at HumanProgress.org.

Chelsea GermanChelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

What Are Your Odds of Making It to the 1%? by Chelsea German

Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000) for at least one year.

How is this possible? Simple: the rate of turnover in these groups is extremely high.

Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners — a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:

Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. …

But economic reality is very different — people move up and down the income quintiles and percentile groups throughout their careers and lives.

What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (as the latter tends to fluctuate more)?

The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees — and their heirs — lost their top 400 status between 1982 and 2014.

So, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.

And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of US income-earners, you’re still quite possibly part of the global top 1 percent.

Cross-posted from HumanProgress.org.

Chelsea German

Chelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

What Can the Rich Afford that Average Americans Can’t? by Donald J. Boudreaux

Raffi Melkonian asks — as relayed by my colleague Tyler Cowen — “When can median income consumers afford the very best?”

Tyler offers a list of some of the items in the modern, market-oriented world that are as high-quality as such items get and yet are easily affordable to ordinary people. This list includes iPhones, books, and rutabagas. Indeed, this list includes nearly all foods for use in preparing home snacks and meals. I doubt very much that Bill Gates and Larry Ellison munch at home on foods — such as carrots, blueberries, peanuts, and scrambled eggs — that an ordinary American cannot easily afford to enjoy at home.

This list includes also non-prescription pain relievers, most other first-aid medicines and devices such as Band-Aids, and personal-hygiene products such as toothpaste, dental floss, and toilet paper. (I once saw a billionaire take two Bayer aspirin — the identical pain reliever that I use.) This list includes also gasoline and diesel. Probably also contact lenses.

A slightly different list can be drawn up in response to this question: When can median-income consumers afford products that, while not as high-quality as those versions that are bought by the super-rich, are nevertheless virtually indistinguishable — because they are quite close in quality — to the naked eye from those versions bought by the super-rich?

On this list would be most clothing. For example, an ordinary American man can today afford a suit that, while it’s neither tailor-made nor of a fabric as fine as are suits that I suspect are worn by most billionaires, is nevertheless close enough in fit and fabric quality to be indistinguishable by the naked eye from expensive suits worn by billionaires. (I suspect that the same is true for women’s clothing, but I’m less expert on that topic.)

Ditto for shoes, underwear, haircuts, corrective eye-wear, collars for dogs and cats, pet food, household bath towels and “linens,” tableware and cutlery, automobile tires, hand tools, most household furniture, and wristwatches.

(You’d have to get physically very close to someone wearing a Patek Philippe — and you’d have to know what a Patek Philippe is — in order to determine that that person’s wristwatch is one that you, an ordinary American, can’t afford. And you could stare at that Patek Philippe for months without detecting any superiority that it might have over your quartz-powered Timex at keeping time.)

Coffee. Tea. Beer. Wine. (There is available today a large selection of very good wines at affordable prices. These wines almost never rise to the quality of Chateau Petrus, d’yquem, or the best Montrachets, but the differences are often quite small and barely distinguishable save by true connoisseurs.)

Indeed, the more one ponders this question relayed by Tyler, the more one suspects that the shorter list would be one drawn up in response to this question: When can high-income consumers afford what median-income consumers cannot?

Such a list, of course, would be far from empty. It would include private air travel, beachfront homes, regular vacations in Tahiti and Davos, private suites at sports arenas, luxury automobiles, rooms at the Ritz, original Picassos and Warhols. (It would, by the way, include also invitations to White House dinners and private lunches with rent-creating senators, governors, and mayors.)

But I’ll bet that this latter list would be shorter than one made up in response to the question relayed by Tyler combined with one drawn up in response to the question that I pose above in the third paragraph (call this list “the combined list”).

And whether shorter or not, what other germane characteristics might distinguish the items on this last list from the combined list?

A version of this post first appeared at Cafe Hayek.

Donald J. BoudreauxDonald J. Boudreaux

Donald Boudreaux is asenior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University and, a former FEE president.