The Poverty Hype

[MtnBiker]

Despite claims that the rich get richer and the poor get poorer, poverty is nowhere near the problem it was yesteryear -- at least for those who want to work. Talk about the poor getting poorer tugs at the hearts of decent people and squares nicely with the agenda of big government advocates, but it doesn't square with the facts.

Dr. Michael Cox, economic adviser to the Federal Reserve Bank of Dallas, and Richard Alm, a business reporter for the Dallas Morning News, co-authored a 1999 book, "Myths of Rich and Poor: Why We're Better Off Than We Think," that demonstrates the pure nonsense about the claim that the poor get poorer.

The authors analyzed University of Michigan Panel Study of Income Dynamics data that tracked more than 50,000 individual families since 1968. Cox and Alms found: Only five percent of families in the bottom income quintile (lowest 20 percent) in 1975 were still there in 1991. Three-quarters of these families had moved into the three highest income quintiles. During the same period, 70 percent of those in the second lowest income quintile moved to a higher quintile, with 25 percent of them moving to the top income quintile. When the Bureau of Census reports, for example, that the poverty rate in 1980 was 15 percent and a decade later still 15 percent, for the most part they are referring to different people.


Cox and Alm's findings were supported by a U.S. Treasury Department study that used an entirely different data base, income tax returns. The U.S. Treasury found that 85.8 percent of tax filers in the bottom income quintile in 1979 had moved on to a higher quintile by 1988 -- 66 percent to second and third quintiles and 15 percent to the top quintile. Income mobility goes in the other direction as well. Of the people who were in the top one percent of income earners in 1979, over half, or 52.7 percent, were gone by 1988. Throughout history and probably in most places today, there are whole classes of people who remain permanently poor or permanently rich, but not in the United States. The percentages of Americans who are permanently poor or rich don't exceed single digits.

It doesn't take rocket science to figure out why people who are poor in one decade are not poor one or two decades later. First, they get older. Would anyone be surprised that 30, 40 or 50-year-olds earn a higher income than 20-year-olds? The 1995 Annual Report of the Federal Reserve Bank of Dallas found that "Average income tends to rise quickly in life as workers gain work experience and knowledge. Households headed by someone under age 25 average $15,197 a year in income. Average income more than doubles to $33,124 for 25- to 34-year-olds. For those 35 to 44, the figure jumps to $43,923. It takes time for learning, hard work and saving to bear fruit."

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Walter William has a good way of explaining things in a simple manner.

 

[Bonnie]

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Walter William has a good way of explaining things in a simple manner.

Walter Williams is quite a communicator.

On a similar subject

With the economy growing rapidly and the unemployment rate hovering around 5 percent, it’s getting harder and harder for critics to find current economic statistics about which they can register concern. Gone are the days when pundits (or political candidates) could compare the current economy unfavorably with the 1970s with a straight face. Economic criticism -- dropped with a poker face during the ’04 campaign -- has become an exercise in slogging through obscure statistical data to dig up ever smaller “ah-hah” moments.


In a recent column entitled “The Joyless Economy”, Paul Krugman argued that “Over the last few years GDP growth has been reasonably good”, but “that growth has failed to trickle down to most Americans.” He goes on:


“It should have been a good year for American families: the economy grew 4.2 percent, its best performance since 1999. Yet most families actually lost economic ground. Real median household income - the income of households in the middle of the income distribution, adjusted for inflation - fell for the fifth year in a row.”


Apart from anything else, the “lost economic ground” to which Krugman refers is so statistically insignificant that the Census Bureau release states that real median household income “remained unchanged between 2003 and 2004 at $44,389”, and that 2004 was “the second consecutive year that households did not experience an annual change in real median income”. The drop to which Krugman referred was a $93 change that fell well within the Census Bureau’s $126 margin of error. “The Median Household lost statistically insignificant economic ground” doesn’t have quite the polemic ring to it, though.


When times are good and statistical sledgehammers are scarce, “statistically insignificant” will have to do. But since it will do -- and the Democratic Party is already arguing that wages are flat and “the Bush economy is not working” for working Americans -- it’s best to address it head on before it becomes uncontested common knowledge.


Craig Marxsen addressed one of the reasons for the occasional decline in real wages recently in TCS, writing that environmental regulations “took a heavy toll” by both driving costs up and depressing multifactor productivity. Those intrusive regulations have certainly been a significant component in restraining the growth of real wages, but let’s not cede the march to the critics by granting critics a focus on real wages just yet.


First, there’s a statistical sleight of hand here: workers earn wages, but that’s not all they earn. In recent decades, compensation composition has changed, with benefits now accounting for 32.2 percent of compensation costs. This is sometimes known as the total compensation package.


Focusing on real wages -- which accounts for changes in inflation, but doesn’t account for compensation that helps to cover those increased costs -- obscures the fact that total compensation has increased faster than inflation. In fact, total compensation has been growing faster than it did during much of the latter half of the 1990s, while inflation, though more volatile, has remained about the same.

link
http://www.tcsdaily.com/article.aspx?id=010606H