Listening to people like Lou Dobbs, John Edwards and Mike Huckabee lamenting the plight of America's middle class and poor, you'd have to conclude that things are going to hell in a handbasket. According to them, there's wage stagnation, while the rich are getting richer and the poor becoming poorer. There are a couple of updates that tell quite a different story.
The Nov. 13 Wall Street Journal editorial "Movin' On Up" reports on a recent U.S. Treasury study of income tax returns from 1996 and 2005. The study tracks what happened to tax filers 25 years of age and up during this 10-year period. Controlling for inflation, nearly 58 percent of the poorest income group in 1996 moved to a higher income group by 2005. Twenty-six percent of them achieved middle or upper-middle class income, and over 5 percent made it into the highest income group.
Over the decade, the inflation-adjusted median income of all tax filers rose by 24 percent. As such, it refutes Dobbs-Edwards-Huckabee claims about stagnant incomes. In fact, only one income group experienced a decline in real income. That was the richest one percent, who saw an income drop of nearly 26 percent over the 10-year period. The editors explain that these people might have been rich for a few years, had some capital gains, or could not stand up to the competition with new entrepreneurs and wealth creators.
The U.S. Treasury study confirms previous studies dating back to the 1960s, concluding, "The basic finding of this analysis is that relative income mobility is approximately the same in the last 10 years as it was in the previous decade." As such, it points to a uniquely American feature: Just because you know where a person ended up in life doesn't mean you can be sure about where he started. Most of today's higher income and wealthy did not start out that way.
What about claims of a disappearing middle class? Let's do some detective work. Controlling for inflation, in 1967, 8 percent of households had an annual income of $75,000 and up; in 2003, more than 26 percent did. In 1967, 17 percent of households had a $50,000 to $75,000 income; in 2003, it was 18 percent. In 1967, 22 percent of households were in the $35,000 to $50,000 income group; by 2003, it had fallen to 15 percent. During the same period, the $15,000 to $35,000 category fell from 31 percent to 25 percent, and the under $15,000 category fell from 21 percent to 16 percent. The only reasonable conclusion from this evidence is that if the middle class is disappearing, it's doing so by swelling the ranks of the upper classes.
What about the concentration of wealth? In 1918, John D. Rockefeller's fortune accounted for more than half of one percent of total private wealth. To compile the same half of one percent of the private wealth in the United States today, you'd have to combine the fortunes of Microsoft's Bill Gates ($53 billion) and Paul Allen ($16 billion), Oracle's Larry Ellison ($19 billion), and a third of Berkshire Hathaway's Warren Buffett's $46 billion. In 1920, America's richest one percent held about 40 percent of private wealth; by 1980, the private wealth held by the richest one percent fell to about 20 percent and has remained stable at that level since.
Demagogues duping Americans about stagnant and declining income give politicians justification to raise taxes and place regulatory obstacles in the path of risk-taking, productivity and hard work that will impede the enviable income mobility that has become a part of American tradition. Raising taxes on capital formation reduces the rate of capital formation. Raising taxes on income reduces incentives to work. Unfortunately, because so many Americans buy into the politics of envy, politicians have a leg up in enacting measures that cripple economic growth.
