Presidential candidate Bernie Sanders has said that, “The issue of wealth and income inequality is the great moral issue of our time,” and “for the last 40 years the great middle class of our country—once the envy of the world—has been disappearing.”
Sympathy for this kind of outrage is reflected in the polls, which show Sanders to be a legitimate threat to Hillary Clinton in New Hampshire and Iowa. But is this outrage justified?
Like so many socialists before him, presidential candidate Bernie Sanders has fallen for the fixed pie fallacy. This causes him to overlook the great progress made in American living standards and income mobility for the majority of the past 40 years. As a result, he has called for the usual socialist remedy for perceived inequality—more government spending and taxation.
The truth is “wealth inequality” is a great catch phrase, but assumes that a fixed rich one percent of the population has attained that status at the expense of a fixed 99 percent. On the contrary, while it is true that inequality has increased, it is due to more people moving into higher income brackets. This wealth increase is even more pronounced by America’s growing population.
In their book “Myths of the Rich and Poor,” W. Michael Cox and Richard Alm provide a data set from the University of Michigan’s Panel Study on Income Dynamics. It shows that from 1975 to 1991, almost 95 percent of poor families moved out of the lowest quintile over the 16 year period and 60 percent of them ended up in one of the top two quintiles.
Other data sets from Cox and Alm using US Treasury reports show that from 1996 to 2005, just over 50 percent of the poorest families moved up at least one quintile, with 50 percent of the second lowest quintile moving up over that period. Around 75 percent of middle-class families either stayed middle class or moved up.
Furthermore, Javier Díaz-Giménez, Andy Glover and José-Víctor Ríos-Rull, showed in “Facts on the Distributions of Earnings, Income, and Wealth in the United States: 2007 Update” that 44 percent of poor families moved up a quintile or more between 2001 and 2007. They found that more households in the second lowest and middle quintile moved up than moved down.
I, along with free market economists, acknowledge that mobility has been stagnant recently, more so since the crash of 2008. But this is a far cry from an inequality epidemic that Sanders claims has been on a path of destruction for 40 years.
Indeed, Sanders proclaiming that the middle class needs to be saved from extinction shows ignorance about the positive reason for this reduction. Steven Horwitz, professor of economics at St. Lawrence University, showed in his paper, “Inequality, Mobility, and Being Poor in America” (2014), that America’s middle class has shrunk because more households went from middle class to rich than went from poor to middle class between 1980 and 2006.
Lastly, consider the living standards of today’s American poor in comparison to the entire population 40 plus years ago. According to the American Housing Survey, in 1970, only 36 percent of the entire population had air-conditioning, in comparison to today in which 80 percent of poor households have air-conditioning. Nearly three-quarters of today’s poor have a car or truck, two-thirds have cable or satellite television, half have a personal computer and over half have a cell phone. Inequality in consumption is even less than inequality in income or wealth, not to mention the continuing increase in the quality of goods.
It is understandable for Americans to be outraged at the recent uptick in economic stagnation due to a lack of recovery from the 2008 financial crisis and the taxpayer-funded government bailouts of banks and companies. However, as Professor Horwitz observes, “this is not a continuation of a generation long […] trend,” but a “reversal of long-term real gains.”