Reality Check

Reality Check

Vets the truthfulness of claims and measures the efficacy of public policy

Reality Check: The Real Income Gap in America

By Sam Brock
|  Thursday, Feb 20, 2014  |  Updated 9:04 PM PDT
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In this edition of Reality Check, Sam Brock looks at the evidence and pokes some holes in President Barack Obama's argument that the widening income inequality gap is the

In this edition of Reality Check, Sam Brock looks at the evidence and pokes some holes in President Barack Obama's argument that the widening income inequality gap is the "defining challenge" of our time.

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We are a society of the ‘haves’ and the ‘have nots.’

That message has been a thematic core of President Barack Obama’s second term and a driving force in the administration’s push for new tax policy, a higher minimum wage and a closing of the income gap.

To underscore his point, the president told a national audience last month that after four years of economic growth, “those at the top have never done better - but average wages have barely budged, and inequality has deepened.”

Yet you might be surprised to learn the economic gap hasn’t deepened, at least not in the shorter-term.

Picture two scenarios:

In one case, the top 1 percent actually loses money while just about everybody else watches their income go up.

In another, the top 1 percent scores a whopping 16 percent increase in year-over-year gains, while the rest of the income bracket barely manages to scrape up 1 percent.

It turns out they’re both true, and both consistent with the latest figures released by the Congressional Budget Office.

Wondering how that could be?

“Well, it’s an accurate picture of how the income gains were distributed in one particular calendar year,” said Brookings Institution Senior Fellow Gary Burtless, referring to the disproportionately large gains experienced by the wealthiest Americans in 2010.

But Burtless took the CBO figures and analyzed them for the entire last decade, 2000 to 2010, finding that the emerging trend is exactly the opposite of what you’ve been hearing.

“That’s mainly because 2000 was the last year of a long economic boom, when rich peoples’ income tends to reach a peak,” Burtless said. “And the incomes of people further down the income distribution are less cyclical.”

Consequently, 2010 was the first year of a recovery from a very steep recession, “so high-income people were still suffering as a result of that recession.”

The outcome was a 1 percent class of ‘elite’ earners who lost money throughout the decade, largely due to excessively large drops in the stock market and other investment havens.

The rest of America, meanwhile, had the benefit of relatively more stable wages and for poorer folks, government assistance.

Pull out to the bird’s eye view of income distribution in the U.S., however, and the president’s claim looks a lot more truthful.
 

The CBO figures date all the way back to 1979.

In the roughly three decades since the data has been kept, the top 1 percent have tripled their income, an increase of 200 percent.

All other earners, on the other hand, have managed respectable gains - between 40 and 60 percent - but nothing in scope or enormity compared to the richest workers.

According to noted Berkeley economist Emmanuel Saez, the top 1 percent’s wealth accumulation is incomparable to anything we’ve seen since the Roaring 20's.

“It is true that we haven’t seen this kind of wealth inequality since the 20’s,” agreed Saez’s colleague, Professor Enrico Moretti, a labor expert at Berkeley and author of the book, ‘The New Geography of Jobs.’

Moretti says there’s a logical explanation for the growing divide reflected in the CBO figures, but it’s not the traditionally-blamed culprit:an unfair tax system.

The highest quintile of earners (the top 20 percent) paid out almost 70 percent of the nation’s taxes in 2010, a staggering figure.

So what’s worsening the divide?

“Today, the worker with a college degree makes 80 percent more than a worker with a high school degree,” Moretti said. “And to me, that’s the key driver of inequality in America. [Having a] college education versus not having a college degree is way more influential than the difference between the 1 percent and 99 percent.”

Moretti’s research has led him to conclude that the middle class is losing much of its girth, giving way to positions created at the top and bottom ends of the spectrum as a result of the new, global economy and an increasingly divided education gap.

“Those well-paying, blue collar jobs don’t exist anymore,” he continued. “Today we have half of the manufacturing jobs we had 30 or 40 years ago.”

And here in Silicon Valley, we’re watching the transformation between old-school labor and new-school technology become razor sharp.

“We don’t have that many bank tellers anymore because we have ATM machines,” Moretti said. “But the same technology, computer automation and robots make workers at the high-end of the education distribution much more productive, and much more in demand.”

The end product is a growing divide in a global economy where workers without the requisite skills are sort of “left behind.”

Moretti does credit the iTech sector, however, for spawning a new wave of lower-end service jobs that have essentially replaced the blue-collar positions.

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