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The Income Race

Posted By Russ Roberts On April 1, 2007 @ 10:37 pm In Inequality | Comments Disabled

Paul Krugman foresees [1] an increasing left-leaning electorate. The cause?

The main force driving this shift to the left is probably rising
income inequality. According to Pew, there has recently been a sharp
increase in the percentage of Americans who agree with the statement
that “the rich get richer while the poor get poorer.”

Could be. Could be that there really is a "sharp" increase in that percentage. But should there be, Paul? Should Americans agree with that statement? Is it true? Do the rich get richer and the poor get poorer? I know it sounds catchy, but is it true? I don’t think Paul Krugman believes the statement is true that for a minute. I think he knows that the data that support that claim are unreliable. But he ignores the issue of whether it’s true and goes on:

Interestingly,
the big increase in disgruntlement over rising inequality has come
among the relatively well off — those making more than $75,000 a year.

The implication is that even the relatively comfy, those making $75,000 a year or more, have come to believe that the system is rigged against them. But again, is it true or just something people believe after hearing it so many times? Whether you are rich or poor, no matter how much they make, there’s no way you can have any feel for what’s really going on in the income distribution. Opinion polls on inequality tell you what’s going on in the media as opposed to what’s going on in the real world.

Indeed,
even the relatively well off have good reason to feel left behind in
today’s economy, because the big income gains have been going to a
tiny, super-rich minority.

Ah, a fact. Or at least an alleged fact. Krugman thinks those over $75,000 people are onto something. Maybe not that the rich are getting richer and the poor are getting poorer but something close enough, "the big income gains have been going to a tiny super-rich minority."

Enough hyperbole for you? I guess he could have written "the enormous, gigantic, income gains have been going to a teeny tiny miniscule super-duper rich minority."

On the face of it, it’s a ludicrous statement. Of course, the "big" gains can’t go to everyone. They have to go to a minority rather than a majority. If they went to a majority they wouldn’t be the big gains, they’d be the typical gains.

And as I have written before, the evidence for this more modest claim is grossly misleading [2].

But the implication is that if I’m doing fine, even if my income is growing, I get resentful if I see that the income of others is growing a lot faster than mine. Do you feel that way? When you read about CEO’s making a killing or Alex Rodriquez or Oprah or Jennifer Hudson making a ton of money, do you get angry and resentful?

Recently, LeBron James’s 35,000 square foot house was in the news [3]:

LeBron James [4]
35,440-square-foot house under construction in nearby Bath Township is
shaping up as a castle fit for a king — with a theater, bowling alley,
casino and barber shop.

…..

A first-floor master suite, which includes a two-story walk-in
closet, will be about 40 feet wide and 56 feet long — bigger than half
the houses in Bath Township.

The house has a dining hall,
roughly 27 feet by 27 feet, a "great room" at 34 feet by 37 feet and a
bigger, two-story "grand room," according to the Akron Beacon Journal, which reported on the blueprints.

The "family foyer" off the six-car garage near the elevator will be
dwarfed by a "grand foyer" inside the front entrance with a sweeping,
divided staircase leading to four second-story bedrooms. An outer wall
will feature a limestone sculpture — a bas-relief of LeBron’s head,
wearing his trademark headband.

Why is this a news story? Because people find it interesting. Do they resent it? Do you resent it? Do you resent that LeBron James whose only skill in life involves a basketball has received an enormous increase in income. He didn’t start off rich [5]. He’s a perfect example of what’s wrong with the standard analysis of the gains going to the super-rich. LeBron’s salary catapulted him into the category of super-rich. He wasn’t rich to start with. His income gains help create the super-rich category.

Do you resent it? Do you resent the fact that he can entertain millions with his skills?

LeBron James is doing much better financially than say, Julius Erving did when he played or even more dramatically, Bob Cousy, because James has had the good fortune to come of age at a time when America is much wealthier and the demand for basketball talent has skyrocketed while the supply has only increased modestly. True, he does what he does very well. But had he been born 30 years ago or 50 years ago, he’d make much less money. Does that push you to the left? Should it?

Ironically, the wealth of James and his extravagant house are generally a benefit rather than a cost for most Americans. Most Americans love the idea of extravagance. They don’t get upset about James’s house. They want to gawk at it. They want to see it featured in Architectural Digest or on television. If anything, James’s wealth provides even more entertainment, not the resentment that Krugman thinks is the source of our political views.

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URL to article: http://cafehayek.com/2007/04/the_income_race.html

URLs in this post:

[1] Paul Krugman foresees: http://select.nytimes.com/2007/03/26/opinion/26krugman.html?n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists%2fPaul%20Krugman

[2] is grossly misleading: http://cafehayek.com/2006/07/krugman_raises_.html

[3] in the news: http://sportsillustrated.cnn.com/2007/basketball/nba/03/27/bc.bkn.lebron.shouse.ap/index.html

[4] LeBron James: http://sportsillustrated.cnn.com/basketball/nba/players/3704

[5] He didn’t start off rich: http://en.wikipedia.org/wiki/Lebron_James

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