In a famous (or infamous, depending on your perspective) article on growing income-inequality in America – an article that appeared in the October 20, 2002 issue of the New York Times Magazine – Paul Krugman wrote the following:
Although America has higher per capita income than other advanced countries, it turns out that that’s mainly because our rich are much richer. And here’s a radical thought: if the rich get more, that leaves less for everyone else.
That statement — which is simply a matter of arithmetic….
This reasoning, despite its coating of cockiness, is terribly, inexcusably wrong.
The simplest way to see why it’s wrong is to recall a principle that Krugman once wrote about so eloquently: David Ricardo’s principle of comparative advantage. This is not the place to do more with that principle beyond relating its conclusion: as people specialize in those productive tasks for which they enjoy a comparative advantage, and then exchange their output with others who also specialize according to their comparative advantages, all parties to this process of specialization and exchange are made wealthier. Total wealth grows.
Indeed, if you understand the principle of comparative advantage, you understand that "it’s simply a matter of arithmetic" that when two or more people specialize according to their comparative advantages, more wealth is produced.
A very different way to challenge the claim that the rich get rich at the expense of the poor (or, more specifically, that America’s middle-class is disappearing, or that the typical American has suffered stagnation in his living standards since the mid-1970s) is to look seriously at the data. A recent serious look at the data appears in this superb article from yesterday’s Wall Street Journal. It’s written by Stephen Moore and Lincoln Anderson. (Unfortunately, access to the WSJ requires a paid subscription.) Here are some key lines from the Moore-Anderson article:
What the [Census Bureau and Fed] reports tell us is that the vast majority of Americans have not bumped into income glass-ceilings, but rather are experiencing an astonishing pace of upward income mobility. The Census data from 1967 to 2004 provides the percentage of families that fall within various income ranges, starting at $0 to $5,000, $5,000 to $10,000, and so on, up to over $100,000 (all numbers here are adjusted for inflation). These data show, for example, that in 1967 only one in 25 families earned an income of $100,000 or more in real income, whereas now, one in six do. The percentage of families that have an income of more than $75,000 a year has tripled from 9% to 27%.
But it’s not just the rich that are getting richer. Virtually every income group has been lifted by the tide of growth in recent decades. The percentage of families with real incomes between $5,000 and $50,000 has been falling as more families move into higher income categories — the figure has dropped by 19 percentage points since 1967. This huge move out of lower incomes and into middle- and higher-income categories shows that upward mobility is the rule, not the exception, in America today.
Turning from income to wealth, data from the Fed provide further confirmation of family economic gains for the middle class. The total net worth of Americans rose to just shy of $50 trillion in 2004. The Fed has not yet calculated the median household wealth for 2004, but we estimated that number by taking the average ratio of mean wealth to median family wealth over the past 10 years. This yields an estimate of $105,000 in 2004. This is almost double the median family-wealth level of 1983 and nearly triple the level of 1962. Until very recently, for a family to attain six figures of wealth was considered quite rich. Despite all of the groans about the over-indebtedness of American households, the new Federal Reserve Board data suggest that the family balance sheet is not highly levered. The ratio of debt to assets is only 18.3%.
Data, of course, can always be challenged. But look around you at the cars on the road (they’re safer and break down much less frequently than in the past), the mobile telephony that nearly everyone today possesses, the variety of items available in a typical supermarket, and I think you’ll find that everyday observations square with Moore’s and Anderson’s account.