The rising tide has lifted most boats

A new study by the Pew Mobility Project shows that, contrary to gloomy commentary mostly from the left, incomes have not stagnated in America. The study compares the incomes of people in their 40s with the incomes of their parents at a similar age. Using income data through 2009, it found that 84 percent of Americans surpass the inflation-adjusted income their parents earned. For males, who compete with females in the workforce to a far greater extent than their fathers did, the number is 59 percent.

The rise in incomes holds across the economic spectrum. Among the poorest fifth, inflation-adjusted income grew by 74 percent, from $11,064 to $19,202. It grew even more substantially in the highest quintile but, as discussed below, the Pew study may well understate growth in the real income of the poor.

The study also shows that movement across class lines has been reasonably robust. 60 percent of children born to the richest fifth of Americans in the late 1960s fell out of that category, with 8 percent landing in the bottom fifth. 57 percent of children born into the bottom fifth moved up, and more than half of them moved into the middle fifth or higher. Overall, 70 percent of children didn’t end up in their parents’ quintile.

On the other hand, the wealth (homes, stocks, bonds, and the like) of the poorest 60 percent of Americans has decreased since the late 1960s, even as their incomes have risen. For the poorest fifth, the decline in wealth as measured by Pew has been enormous – 63 percent.

Robert Samuelson believes that debt is the chief cause of this decline in wealth. Apparently, for many Americans it is not enough to earn more money than their parents did; the key to happiness is to own as much or more than “the other guy.” They try to accomplish this by borrowing, an option their more frugal parents tended, it seems, to eschew.

However, Tim Worstall at Forbes argues that Pew did not include all income in its income calculation, nor all wealth in its wealth calculation. Specifically, Pew excluded from income non-cash compensation, such as employer contributions to health insurance, and did not take into account the effect of taxes and non-cash benefits such as food stamps. Similarly, with respect to wealth, Pew excluded “the most important source of wealth at the bottom end of our society,” namely the welfare system.

According to Worstall, Pew’s exclusions regarding income skew the study because since 1975, when the Earned Income Tax Credit was introduced, the thrust of U.S. policy has been to reduce cash-based poverty alleviation and to alleviate poverty through “in kind” distributions and the tax system – precisely the mechanisms Pew excludes from consideration.

Pew’s wealth exclusions also skew its findings, says Worstall. He contends that, as with income, Pew is measuring wealth without considering what the government does to increase the wealth of the poor:

Simply by virtue of being a US citizen who is poor you get some $15,000 a year. Income like this is equivalent to an annuity meaning that we can calculate the capital value of such a sum. Without worrying too much about discount rates and net present values call it $400,000 to $500,000. You thus have wealth of that sort of sum purely by being a US citizen.

So a proper analysis of trends in wealth would consider to extent to which this “annuity” has increased over time.

But even with the exclusions that cause incomes of the poor to be understated, these incomes have risen considerably, as have incomes across the economic board.

Photo courtesy Shutterstock.

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