In recent policy debates, current income trends and disparities among Americans have been a major concern. Courtesy of economist John Mauldin and River Financial, a comprehensive set of data and charts is now available to shed new light on the subject.
The most notable point raised by people about income disparities is that, adjusted for inflation, incomes of high earners have increased rapidly over the last half-century while those of middle- and lower-income folks have increased slowly or even stagnated. Or, the rich get richer and the poor get poorer.
There are two problems with this account. First, it conveniently focuses on the last half-century and ignores the trend before 1971. Indeed, the income share of the top one percent of earners relative to that of the bottom 90 percent rose greatly from 1971 to the Great Recession to a level it maintains today. That is, the total incomes of the top one percent as a group today is nearly 75 percent of the total income of the bottom 90 percent group.
Fifty years ago, however, the top one percent made just over 40 percent of what the bottom 90 percent did. Moreover, the high point before 1971 for the highest one percent was reached at the end of the Roaring 20s – at the same relative level as today. The very rich were very damaged by the Great Depression of the 1930s and World War II (WWII). After the war, their incomes rose somewhat slower than income for “The Rest of Us” until the 1970s.
So, the analyses covering only the last 50 years are not reflective of longer American history. Thus, they’re not very convincing for claims that policy or the economic system is broke. That’s not to say the current trend doesn’t indicate problems or legitimate concerns, just that it’s an incomplete and unrepresentative snapshot.
The second problem with this trend account is even more notable. Namely, the income measures include only income and not the effect of taxes and government transfers (e.g., food stamps and tax credits).
When the incomes series are modified to incorporate these effects of government, the overall distribution of total incomes (i.e, including taxes and transfers) are roughly the same as in 1971, or perhaps slightly more equal. Beginning in the 1980s, the inequality in the total incomes rose, as it did in the following two decades. After the Great Recession, however, incomes became more equal.
In sum, the basic claim about the rich and poor is false.
When we don’t adjust for taxes and transfers, the following data and trends remain.
First, wages rose in line with the gross domestic product (GDP) per person after WWII to the early 1970s – a condition we think of as being normal. However, from 1972 to 2017, productivity gains far outran workers’ compensation. The phenomenon causing this trend was that capital equipment and new innovations and inventions (technology) began to claim more of firms’ earnings. And returns to capital and from inventions and innovations accrue to the wealthy and high-income folks.
Also, incomes of Black people relative to White people after WWII rose rapidly until the early 1970s. From then until now, that gap has been closed at a much slower rate.
From the end of WWII, median incomes of women in the workforce grew slightly slower than the economy until the Great Recession. Income of men, however, rose with economic growth until the early 1970s. After that, they flat-lined up to the present day.
Overall, people’s income gains after WWII were shared widely among income classes. But since the early 1970s, the income gains have accrued much more to higher income classes than to middle and lower classes.
Further, costs of some goods and services, especially housing, have risen much faster than others and the overall measures of inflation.
Monetary inflation and deflation kept prices generally comparable from America’s founding until World War I, the income tax and the Federal Reserve. Since then, and especially after 1971, inflation has driven price levels ridiculously high.
Finally, U.S. government debt held at reasonable levels, with upward excursions after wars, until the end of the 20th Century. It has been sky-rocketing since then, especially in recent years.
Ron Knecht has served Nevadans as state controller, a higher education regent, economist, college teacher and legislator. Contact him at RonKnecht@aol.com.
“The rich get richer and the poor get poorer.” A glib trope a liberal-statist law school classmate used as an obvious and key claim in advanced constitutional law in 1995. My oral response objection was so loud and immediate the professor admonished me.
But official numbers at that time supported my objection. And sound theory shows that, in a true market economy, it’s the right result when it happens.
We’ve all heard numerous similar tropes from Democrats, liberals, progressives, the politically correct and populists nearly every day. These claims are so glib, well known and often generally accepted that the Dems, et al. usually don’t bother to back them with research, data and analysis. And Republicans, conservatives and even many limited-government empiricists often don’t even bother to contest them.
More: The rich are paying lower taxes than they used to, especially since the Trump tax cuts.
And: The rich aren’t paying their fair share, so we need to increase their taxes so they do.
Etc.
Fortunately, the Internal Revenue Service publishes the actual numbers and facts with which we can determine the validity of these claims each year. So, let’s explore the latest annual report, released last month and covering tax year 2018.
The poor get poorer? The Tax Foundation’s (TF) digest of the IRS’s data states: “Tax year 2018 was the first under the Tax Cuts and Jobs Act (TCJA). The number of returns filed and the amount of income reported grew in 2018 yet average tax rates fell across every income group and total income taxes paid decreased $65 billion.”
So, a tax cut preceded not just increased incomes for the poor and all income classes, but also income for all taxpayers as a group. Score one for the key supply-side claim our tax rates are so high they damage the overall economy.
What about the really rich? Per TF: “The share of reported income earned by the top 1 percent of taxpayers fell slightly, to 20.9 percent in 2018 from 21 percent in 2017.” But remarkably, “Their share of federal income taxes rose by 1.6 percentage points to 40.1 percent.”
Moreover, “Since 2001, the share of federal income taxes paid by the top 1 percent increased from 33.2 percent to a new high of 40.1 percent in 2018.” … In 2001, the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent.”
That is, the long-term trend shows the income tax has become greatly more progressive. And that trend continued with the Trump tax cuts.
But wait, there’s more! “The top 1 percent paid a greater share of the individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent).” And, “The top 1 percent of taxpayers paid a 25.4 percent average individual income tax rate, which is more than seven times higher than the taxpayers in the bottom 50 percent (3.4 percent).”
Let’s hope our current legislature will consider these important statistics as they decide on tax bills to increase taxes that are currently on the table waiting to be voted on.
On Wednesday afternoon I checked in with a Latin American friend to get his thoughts about the chaos on Capitol Hill. “It looks like home,” he quipped.
It was not a unique reflection. By evening a popular observation making the rounds was that the invasion of Congress was the stuff of banana republics. The bedlam also evoked memories of what happened in many U.S. cities over the summer when the Black Lives Matter marches turned violent.
There was a big difference between Wednesday and the American summer of terror. During the latter it was merely a presidential candidate (Joe Biden ) who refused to condemn the BLM violence—until he realized it was hurting his polls numbers. Last week it was a sitting U.S. president who stirred up the passions of his followers and continued to justify their anger even after it was clear they were breaking the law, endangering lives, damaging property, and attempting to disrupt an independent branch of government. President Trump may have set a new modern-day low.
Yet the main worry is that political violence in the U.S. on both the left and the right seems to be on the rise. It won’t recede as long as mob action is tolerated as a way to do politics.
A first step in reversing the trend is admitting that the slash-and-burn tactics of both sides are similar. Both justify violence under the banner of “participatory democracy.” Storming the Capitol or burning down a Starbucks is the people speaking.
Participatory democracy as defined by extreme groups has been put into action in the U.S. before. The leftist upheaval in the streets of Seattle against the World Trade Organization ministerial conference in 1999 is one memorable example. It is no coincidence that elements of Mr. Trump’s base oppose free trade and globalization.
Traditional American democracy is “deliberative democracy,” a process by which elected representatives use reason and debate to shape public policies. Participatory democracy tells the aggrieved: Never mind the legislature. Go to the streets to get what you want.
A 2013 paper by Italian philosopher Antonio Floridia traces the origins of participatory democracy to the 1960s in the U.S., “inspired by the great youth movements of that decade.” Mr. Floridia cites the American political scientist Jane Mansbridge, who writes that the term “came into widespread use” after Students for a Democratic Society “gave it a central place in its founding Port Huron Statement.” Ms. Manbridge adds: “What the term meant then was unclear, and it became less clear afterward, as it was applied to virtually every form of organization that brought more people into the decision-making process. In the actual organizations of the New Left, however, the term came to be associated quite quickly with the combination of equality, consensus and face-to-face assembly.”
“It looks like home,” he quipped.
It was not a unique reflection. By evening a popular observation making the rounds was that the invasion of Congress was the stuff of banana republics. The bedlam also evoked memories of what happened in many U.S. cities over the summer when the Black Lives Matter marches turned violent.
There was a big difference between Wednesday and the American summer of terror. During the latter it was merely a presidential candidate (Joe Biden ) who refused to condemn the BLM violence—until he realized it was hurting his polls numbers. Last week it was a sitting U.S. president who stirred up the passions of his followers and continued to justify their anger even after it was clear they were breaking the law, endangering lives, damaging property, and attempting to disrupt an independent branch of government. President Trump may have set a new modern-day low.
Yet the main worry is that political violence in the U.S. on both the left and the right seems to be on the rise. It won’t recede as long as mob action is tolerated as a way to do politics.
A first step in reversing the trend is admitting that the slash-and-burn tactics of both sides are similar. Both justify violence under the banner of “participatory democracy.” Storming the Capitol or burning down a Starbucks is the people speaking.
Participatory democracy as defined by extreme groups has been put into action in the U.S. before. The leftist upheaval in the streets of Seattle against the World Trade Organization ministerial conference in 1999 is one memorable example. It is no coincidence that elements of Mr. Trump’s base oppose free trade and globalization.
Traditional American democracy is “deliberative democracy,” a process by which elected representatives use reason and debate to shape public policies. Participatory democracy tells the aggrieved: Never mind the legislature. Go to the streets to get what you want.
A 2013 paper by Italian philosopher Antonio Floridia traces the origins of participatory democracy to the 1960s in the U.S., “inspired by the great youth movements of that decade.” Mr. Floridia cites the American political scientist Jane Mansbridge, who writes that the term “came into widespread use” after Students for a Democratic Society “gave it a central place in its founding Port Huron Statement.” Ms. Manbridge adds: “What the term meant then was unclear, and it became less clear afterward, as it was applied to virtually every form of organization that brought more people into the decision-making process. In the actual organizations of the New Left, however, the term came to be associated quite quickly with the combination of equality, consensus and face-to-face assembly.”
Mary Anastasia O’Grady
Opinion Columnist, The Wall Street Journal
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Mary Anastasia O’Grady writes “The Americas,” a weekly column on politics, economics and business in Latin America and Canada that appears every Monday in the Journal. Ms. O’Grady joined the paper in August 1995 and became a senior editorial page writer in December 1999. She was appointed an editorial board member in November 2005. She is also a member of the board of directors of the Indianapolis-based Liberty Fund.
In 2012 Ms. O’Grady won the Walter Judd Freedom Award from The Fund for American Studies. In 2009 Ms. O’Grady received the Thomas Jefferson Award from The Association of Private Enterprise Education. In 2005 Ms. O’Grady won the Bastiat Prize for Journalism awarded by the International Policy Network for her articles on the World Bank, the underground economy in Brazil and the bad economic advice the U.S. often gives to Latin American countries. In 1997 Ms. O’Grady won the Inter American Press Association’s Daily Gleaner Award for editorial commentary.
Ms. O’Grady received a bachelor’s degree in English from Assumption College and an M.B.A. in financial management from Pace University.
A truly Distinguished Nevadan, great American and all-around Mensch, Sheldon Adelson, died Tuesday. This self-made fabulously wealthy entrepreneur, businessman, philanthropist, and political and communications force of nature was also a great human being who will be hugely missed.
In this hour, we send condolences and prayers to his wife, Dr. Miriam Adelson, and family and friends.
Many people know some aspects of his remarkable life, but only some. Born into a one-room Boston tenement in 1933 to a Lithuanian-Ukrainian cab driver and knitting-shop owner daughter of a Welsh coal miner, Sheldon became the third-richest person in America in 2007. Following some ups and downs, he left a fortune of $33.5-billion, plus a vast legacy of gifts to many good causes.
At 12, he began his career by borrowing $200 from his uncle to buy a license to sell newspapers on street corners. He went on to create nearly 50 other businesses in his life. He attended college but dropped out and attended trade school, hoping unsuccessfully to become a court reporter, before joining the army. By his thirties, via entrepreneurial ventures, he had twice built and lost million-dollar fortunes. Later, he lost $25-billion and recovered that.
In the 1970s and 1980s, he also adopted and cared for the three children of his first wife.
He didn’t invent trade shows, but he and partners bought the fledgling COMDEX computer industry shows in the late 1970s. Sheldon’s vision and creativity built it into one of the largest trade shows in the world in the next two decades – and remade the resort and casino industry into its modern form.
Previously, the casino business overwhelmingly concentrated on the gaming floor, with cheap accommodations and food. Besides pioneering trade shows to diversify the business and upgrade the eats and accommodations to world-class levels, he also recognized the tourist business could be much more than merely gaming.
Honeymooning in Venice in 1991 with his second wife Miriam, he envisioned the mega-resort hotel and casino. He added exotic shopping, entertainment and recreation to lavish rooms and food to set off the Las Vegas explosion that made him and many others very wealthy. The first such property, the magnificent Venetian, opened in 1999.
Soon, he realized the model of bringing tens of millions of visitors annually to Las Vegas was insufficient, and he led the industry to the People’s Republic of China, opening the 1,000,000 square-foot Sands Macao in 2004. It multiplied his fortune by a factor of fourteen, and he built many more from there. Today, Macau’s industry dwarfs Las Vegas’s.
In 2010, he opened the $5.5-billion Marina Bay Sands in Singapore, the sixth-most expensive building in the world. It has the greatest amenities of any such building and was featured extensively in the 2018 mega-film Crazy Rich Asians.
But here’s what’s important about all this. In 2008, the Nevada Policy Research Institute gave him its Chairman’s Award for efforts to advance free market principles in Nevada. Before 1996, he was a Democrat, but since then has been a free markets and Republican stalwart.
In 2010, as a Regent, I nominated him and Miriam for the Distinguished Nevadan award from our system of higher education. Why?
In bestowing the award, I emphasized that the money he had made in business and investment only reflected the even bigger value he bestowed upon customers, his 100,000-plus employees and legions of investors, as well as Las Vegas and Nevada. When people talk abut giving back, they miss the fact that fearless entrepreneurs like Sheldon become wealthy by the great value they deliver to others via their creativity, investment, vision and guts.
In 2014, he was named to CNBC’s list of 200 people who transformed business in the previous 25 years: “top leaders, icons and rebels, a definitive list of people who have had the greatest influence, sparked the biggest changes and caused the most disruption in business.”
There’s so much more to tell. He has been a major force in philanthropy, newspaper publishing, diplomacy and politics in America, Israel and the world.
But his humanity showed perhaps brightest when the Coronavirus pandemic hit. He’s kept the ten-of-thousands of Southern Nevadans he employs on payroll and covered by health insurance.
Ron Knecht, MS. JD & PE(CA), has served Nevadans as state controller, a higher education regent, economist, college teacher and legislator. Contact him at RonKnecht@aol.com .
For more information about Washoe County Republican Party visit us at: washoegop.org
Recently, I spoke to the Carson City Men’s luncheon group about my big picture view of public policy, economics and politics. Herewith, some things I told them.
Let’s start with the duty (beyond integrity, etc.) of elected officials and high-level bureaucrats – something most of them get wrong. Their duty is to represent the people and the broad public interest to the agencies of government. That is, to control the agencies and whole of government to serve the people’s interests and the broad public interest.
Not, as most politicians and bureaucrats do, to represent and advocate for government and its agencies to the people, often at the expense of the broad public interest.
For example, too many school board members and superintendents are consumed with telling the people endlessly the district needs more tax revenues and special-interest legislation. That benefits mainly teacher and administrator unions, whose political captives they’ve become. Instead, they should spend their time and energy seeking to incorporate cost-reducing technologies and business-model innovations to serve the interests of students and the people.
Also, some local planning departments serve as advocates for new infrastructure, business subsidies or proposed developments. Thus, they become agents for crony capitalists seeking money, special privileges, or both from local governments.
While we need to rein in regulatory over-reach and tax and fee burdens on business, the people and public interest are not served by using special favors to offset government excess. These departments need to be more focused on the public interest and objective analysis.
All this begs the question: What is the public interest? That question has been central to my work as a state economist, controller, legislator, regent and college teacher. Even as a writer.
From all my experience, I conclude there are two main elements to the public interest: economic growth and fairness among parties.
Increasing economic growth means we maximize the size of the pie. That allows us to take better care of folks who, through no fault of their own, cannot adequately care for themselves. It means we have greater overall wealth and incomes via both more effective private markets and improved public services. Better education, diets, health care and human flourishing in general.
Our measures of economic provision – primarily gross domestic product – are, of course, imperfect, albeit improving. Until someone devises a better measure for aggregate human wellbeing, maximizing economic growth seems self-evidently a key public interest.
Fairness comes in many forms, including civil and criminal laws and regulations to minimize conflicts and establish equity among individuals. To keep one person’s free actions or choices from harming others.
In economic matters, I submit the institutions, principals and policies that promote growth also are the essence of fairness. Foremost among these is that our primarily market economy and political system allows people to keep most of the fruits of their labor, creativity, investment, and productivity.
Market systems are fair because they reward people for the value they deliver to others, whether by labor, creativity or investment. Mandating equal outcomes for everyone is simply not fair.
It’s certainly true public services and goods play a role with private inputs in creating the value firms and people deliver. However, this does not mean, as Barack Obama claimed, that “You didn’t build that.” Overwhelmingly, the value delivered to people by a mixed economy comes from the private sector.
Essentially, contributions of the public sector justify its role in spending, taxation, fees, borrowing, law and regulation. However, extensive empirical research has shown that the optimal levels of public spending and other intervention are far lower than actual levels have been for over half a century. In short, we would have higher degrees of aggregate human wellbeing and fairness with a smaller public sector at all levels.
The sum of human experience has shown the following items are central to economic growth and fairness: the rule of law (not “living constitution” judges or the administrative state); constitutionally limited government; and separation of powers between national, regional and local governments.
Also, separation of functional powers (legislative, executive and judicial) at each level; individual sovereignty and personal liberty; individual rights, not group rights and identity politics; strong property rights; and high levels of economic freedom.
Ron Knecht, MS, JD & PE(CA), has served Nevadans as state controller, a higher education regent, economist, college teacher and legislator. Contact him at RonKnecht@aol.com.
On Wednesday afternoon I checked in with a Latin American friend to get his thoughts about the chaos on Capitol Hill. “It looks like home,” he quipped.
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