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Gresham’s Law Of Income Data

Liberals in the news media have long ceased arguing that they’re not really liberals. Now they claim that their bias …

Liberals in the news media have long ceased arguing that they’re not really liberals. Now they claim that their bias does not affect their reporting.

Last March, a page one story in The New York Times purported to prove that during the 1980s, the rich got richer-primarily at the expense of the middle class and the poor. The Times report lent ersatz authenticity to the claim, but Gov. Bill Clinton and-to a lesser extent-Jerry Brown, also have made income inequality an issue. They cite the Reagan tax cuts as a reason for the allegedly growing gap between rich and poor.

The Times based most of its conclusions on two sources: a Congressional Budget Office “study,” which claims that two thirds of the aggregate gain in household income from 1977 went to the top one percent of earners, and Paul Krugman, an MIT economist who claims the richest one percent got 70 percent of the gain.

Buried in the story is an acknowledgement that personal income data can be sliced and interpreted in many different ways. The Wall Street Journal recently quoted CBO director Robert Reischauer as saying: “There was no study. It was Paul Krugman sort of manipulating some numbers that we had given the Ways and Means Committee in December. We never did the calculation of the sort Krugman did.” Many claims and data are suspect because they fail to capture the complex reasons for changing income distribution. Most projections of growing inequities, for example, do not take into account family size (which decreased by 17 percent between 1970 and 1986) or increasing nonwage income such as health and life insurance (which increased from 12 percent of total wages and salaries in 1970 to 20 percent in 1986).

In a recent report from the Center for the Study of American Business, Adjunct Fellow Richard B. McKenzie computed real median income using a consistent measure of changes in the cost of living-the CPI-X-and adjusted for the economies associated with smaller families. He found that real family income jumped 20 percent between 1970 and 1986. (The Bureau of Labor Statistics considers the CPI-X a more consistent cost indicator than the original consumer price index and recommends its use.)

McKenzie found that overall, not only did income increase during the past two decades, but that contrary to what is popularly asserted, real mean incomes of all five quintiles rose as well. Using the CPI-X index, average incomes of the lowest and second lowest fifths of households rose 4.7 percent and 4 percent, respectively, between 1973 and 1989. During the 1983-1989 boom, these quintiles rose 11.1 percent and 10.1 percent.

The middle and fourth quintiles during the boom went up 10.7 and 11.6 percent. The top quintile rose by much more-18.8 percent. But McKenzie thinks it’s naive to assume that the top fifth is a static, exclusive club. “Students who were in school in the early 1980s had jumped several quintiles by the end of the decade simply by taking their first job or marrying someone with an income,” he writes.

There’s no doubt that the incomes of the fiendish rich increased both absolutely and relatively, but it simply doesn’t follow that gains came at the expense of others. As Forbes’ Peter Brimelow cogently observed in “The Tax Tree,” the awkward political reality is that “most of the income is earned by most of the people. In 1989, 44 percent of all income was reported by the 44 percent of filings in the $15,000 to $50,000 range. And 71 percent of all income was reported by 95 percent of filings below $75,000. –

To be sure, reality is far trickier than the retailers of class antagonism would have us believe.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.