The income gap: Reframing the debate

In his January State of the Union address, President Barack Obama declared that the American dream was under siege. The president promised to shrink the income gap between rich and poor, calling it “the defining issue of our time … No challenge is more urgent. No debate is more important.” The president continued, “We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules.”

The “debate” has already been framed by the liberal community, the “poverty industry,” and most of the media. They all agree that there is a growing gap between rich and poor. This “inequality” is the fundamental problem in our society and inherently unjust. The gap is the basis for a redistributionist policy to equalize prosperity. Requiring the “rich” to pay more is only fair, because they are inhibiting the poor from moving up the ladder of economic success, the argument goes.

Mr. President, I agree that we need a debate on the issue. So let me start by saying that the premise is wrong on three counts.

First, the statistical basis for the “gap” is derived from U.S. Census Bureau figures that only measure pre-tax, money income. The definition of money income includes earnings from salary, commissions, and bonuses; interest; dividends; Social Security benefits; pensions; alimony; workers’ compensation; and rents. Based on the Census Bureau numbers, the top quintile in America receives $15 in income for every dollar of income received by those in the bottom quintile.

Missing from the Census Bureau definition of income are items such as employee health-insurance benefits, the earned-income tax credit, food stamps, school-lunch programs, public housing, Medicare, and Medicaid. The Census Bureau figures also fail to account for taxes paid by the top quintile, which substantially reduces the differential between the highest and lowest earners. Add to this that the unit of measurement is households rather than individuals, which distorts the fact that the top quintile includes 24.6 percent of the population while the bottom quintile only includes 14.3 percent.

The gap is further aggravated by the use of the Consumer Price Index for All Urban Consumers (CPI-U). The CPI-U regularly overstates inflation, thus understating the purchasing power of those classified as poor. Over 30 years, an annual misstatement of just one percent leads to a 33-percent difference in determining median incomes. Back in 1996, the Boskin Commission concluded that the annual CPI-U bias was, in fact, above one percent.

If you adjust the Census Bureau numbers with the above considerations, the disparity drops from $15-to-$1 in the highest quintile versus the lowest quintile to just $4-to-$1. If the adults in each of the two quintiles actually worked the same number of hours, the ratio falls to $2.91 in the highest quintile against $1 in the lowest.

Second, even if we adjust for money-income figures, is that still the best indicator of an individual’s well being? Or, is consumption a better indicator of how well those under the poverty line are faring? If consumption is your guide, there is a notable rise in the material comforts of the poor over the last three decades, reflected in substantially larger percentages of the poor owning items such as homes, cars, central air-conditioners, washers, and driers. While the official rates of poverty show an absolute increase, calculations based on net income plus transfers-and-benefits plus consumption show a three-point drop in poverty.

Third, the obsession with a gap between rich and poor is based on the moral argument that inequality is unfair and poverty is the direct result of a capitalist system that inhibits mobility. The wealthy are not the reason that the poor are poor nor is the economic pie fixed so that one group inevitably takes from another. To the nation’s founders, equality meant the same right to life, liberty, and the pursuit of happiness. No one, by virtue of birth, has the right to dominate another. We all must be treated equally before the law. Finally, every life has equal value or worth, and everyone should have an opportunity to live freely and to contribute to society.

The founders also recognized that not every citizen has equal faculties nor requires equal material circumstances. They also were skeptical of government being other than a last resort to prevent its citizens from falling below a threshold of material living, preferring to rely on family, church, private charities, and civic organizations.

The focus on inequality may garner votes among the electorate by promoting a status of victimhood, but it doesn’t address the real problems of poverty such as trapping students in failing schools, excusing personal responsibility, and de-emphasizing the importance of a strong family.

We need to reframe the debate on poverty to develop policies that actually solve the problem. We need to shift our attention from redistributing the fruits of those who earned them to redistributing our moral attention. Only then will we truly help the poor.        
Norman Poltenson is the publisher of The Central New York Business Journal. Contact him at npoltenson@cnybj.com