… is from page 196 of David Friedman’s excellent 1996 book, Hidden Order:
You read in the paper that the bottom 20 percent of households receives less than 5 percent of all income, while the top 20 percent receives more than 40 percent. That sounds like a world of radical inequality.
There are at least two things wrong with such figures. The first is that they do not distinguish between differences in people’s lives and differences in where in their lives people are. Some of those in the bottom 20 percent are retired people living comfortably on their savings in a home they own, or college students with part-time jobs. The second is that it does not distinguish temporary random differences, people having good or bad years, from permanent differences. Correcting those problems by comparing individuals on the basis of the present value of their lifetime stream of income eliminates about half the measured inequality.