…the evidence offered up by those so concerned with income inequality (I’m more concerned with improving the fortunes of the less fortunate without regard to the pace of advancement at the top rung of the income ladder), is, candidly, the definition of dubious.

The above was part of my reply to a recent question from a reader. I directed him to this blog post featuring two short videos. The deafening crescendo of the income inequality chorus inspires me to direct you to it as well. As you’ll see, Robert Reich does a perfect political poster-child of a job on (among other things) middle-class stagnation and income inequality. Don Boudreaux, on the other hand, does what good economists do. He takes us below the surface and disabuses us of what politicians and their promoters—seeking to exploit our misconceptions—would have us believe.

One point before you proceed. In his video, Boudreaux states that women and immigrants entering the workforce for the first time brings the average income statistic down, but not the actual pay of actual people. A reader found that statement to be “absurd, even offensive”. He somehow took it to mean that Don was discounting women and immigrants to the status of non-actual people. And that not considering their low incomes is just plain wrong. Clearly, my reader misinterpreted the message: When Don made that point, he was in no way disparaging women or immigrants. He was simply making the point that more folks entering the workforce for the first time (thus, with low skills) naturally brings down the average income—as does having a baby bring down the average height of your children (a perfect analogy he illustrates in his video). This point, ironically, also makes Reich’s assertions all the more dangerous, in that his argument seems meant to inspire a public response (that could result in hiking employers’ tax rates and/or raising the minimum wage) that would hurt the very group he claims to advocate for. You see, when folks enter the workforce for the first time, not only does it not bring down “the actual pay of actual people” it dramatically brings up the pay of the very people who bring down the statistical average. I mean, going from zero to, say, $7.25 an hour is a massive increase in income for low-income individuals. And it’s those very individuals who will bear the burdens of policies that would add costs to their employers.

It is so important, for the sake of the neediest among us, that we get this right…

Reich delivers several other statistics that, while I suspect are, in and of themselves, accurate, under even minor scrutiny suggest a likely intent behind the MoveOn.org-sponsored election year presentation. For example:

The economy has doubled since 1980. “Almost all of the gains have gone to the super rich. The top 1% used to take home about 10% of total income, now it takes home 20%”.

While disproportionate, doesn’t that leave huge gains (the size of the economy has doubled) to everyone else?

The super rich hold 40% of the nation’s entire wealth.

I suppose that’s why they call them “super rich”. I suppose as well that the remaining 60% of the wealth of a country that has doubled the size of its economy over 30 years is a huge amount. And of course you’d expect that the folks who are largely responsible for the growth of the economy, the innovators (the Gates’s, Jobs’s, etc.), would see their fortunes expand at a greater pace than the rest of us. But, my, how we’ve benefitted along way! Where Reich and I do agree is where big money buys big favors from politicians. We’re on opposite sides, however, as to the fix: Reich would have us vest yet more power in the politician, all the more incentivizing the very cronyism he pretends to despise.  

Before 1980 the top tax rate was up to 70%, now it’s down to 35%, and capital gains are only 15%.

Before 1980 you could write off the moon. Not any more. Deductions have declined right along with tax rates. Today’s top 1% pays 30% of the total income taxes paid in the U.S.. Guess what that number was in 1980…. it was 19.05%! That’s right, Reich would have us believe that the rich are somehow getting away with tax murder. When, in reality, they’re paying 50% more of the total tax bill than they did 3 decades ago. 

Government spending is down to 15% of the total economy, the lowest in 60 years. So public services are being cut at all levels of government.

Let’s see, the economy has doubled since 1980; to suggest, therefore, that government spending of 15% of today’s GDP somehow equates to the devastation of public services is beyond insulting. The federal government spent $591 billion in 1980. It spent $3.4 trillion (nearly a sixfold increase) in 2012. So, again, the economy has doubled (the population btw has grown by 36%) since 1980 and government spending has increased by 6 times. If you don’t feel abused by Reich’s video, you’ve totally drunk that Kool-Aid.  

The vast middle class is unable to borrow as it did before.

True, however, much of the vast middle class is unwilling to borrow as it did when the credit bubble was expanding out of control, Hallelujah!