As promised earlier today, here is my review of Alan Reynolds’s book, Income and Wealth, which appeared in the June 2007 issue of Budget and Tax News:
Income and Wealth
By Alan Reynolds
Westport, CT: Greenwood Press, 2006
231 pages, $55.00, ISBN 0-313-33688-1
The past decade has brought a tsunami of complaints about increasing economic inequality in the United States, a "vanishing middle class," and a huge and increasing concentration of wealth among the top 1 percent of wage earners.
As Alan Reynolds points out in his superb new book Income and Wealth, those claims are false. Every one of them.
Reynolds, a senior fellow at the Cato Institute, has written for all the major newspapers and is a syndicated columnist. He observes that the amount of inequality one sees in the United States depends on how you define terms such as "average," "working," "family," and "real," and on what dates are used.
The definitions used by activists for bigger government grossly overstate the income of those at the top of the scale and similarly understate figures for those at the bottom.
Manipulating Income Figures
New York Times columnist Paul Krugman, for example, continuously declares real incomes in the United States have stagnated since 1973 for all but the top 10 percent.
But as Reynolds notes, "studies that use income tax data to estimate income distribution usually exclude transfer payments," which have risen substantially since 1973. The data also exclude employee benefits, which skyrocketed during that period, and include a huge amount of income "that used to be reported under the corporation income tax" and that happens to have been rising in recent years.
By artificially deflating incomes in the lower brackets and inflating those in the upper brackets, Krugman and his cronies make income inequality appear much larger than it really is.
Middle-Income Families Doing Fine
Reynolds also takes on the numerous reports about a "vanishing middle class," which suggest once-prosperous individuals are plummeting into the lower income brackets.
As Reynolds points out, these reports use a fixed definition of middle income, which "ensures that the proportion of households in that middle group must decline with a rise in general prosperity, because prosperity causes a rising percentage of families to earn more than $50,000."
And general prosperity has indeed risen. Reynolds notes, "In constant 2000 dollars, U.S. consumers spent $25,816 per person in 2004–nearly double the $13,371 figure for real per capita consumption in 1973." Similarly, "median household net worth (assets minus debts) has increased steadily and substantially."
More than 75 percent of poor households had air conditioning in 2001, whereas in 1971 less than 32 percent of all U.S. households did.
The same is true of other items such as microwave ovens and color TVs. Whereas nobody had a home VCR or DVD player in 1971, 98 percent of poor households did in 2001, and around a quarter had personal computers and cell phones.
Middle-income households have enjoyed similar improvements in living standards. For example, the average size of new homes rose from 1,500 square feet in 1970 to 2,349 square feet in 2004, while the home ownership rate rose by several percentage points. Obviously, incomes for lower and middle-income households have risen nicely in recent decades.
‘Work Matters’
The most important factor in household income is simply the number of workers in the home, Reynolds notes: "There are nearly six times as many full-time year-round workers in the top quintile as there are in the bottom quintile, according to the Census Bureau."
Contrary to the activists’ fevered assertions of a continuously rising number of "working poor," Reynolds writes, "The poverty rate among full-time workers is negligible." Reynolds aptly summarizes the situation as follows: "Work matters."
And, Reynolds notes, if we ignore transfer payments we get a distorted picture of conditions in the lower income quintiles. Reynolds suggests individual and household spending and wealth are better indicators than income figures, which have been so skillfully manipulated.
Policy Follows Falsehoods
The activists’ trick of turning good news into bad would not matter much if these debates were purely for intellectual sport, but they are in fact the driver for much of our public spending at all levels of government.
Huge increases in government spending on Medicaid and Medicare, other health insurance, and other transfer programs intended to alleviate economic inequality are destroying state budgets. And the federal budget groans under the weight of transfer programs and other entitlements.
Certainly all of these mistakes could be honest ones, but they’re falsehoods nonetheless, and an objective reader of Income and Wealth must conclude many journalists and activists are knowingly manipulating statistics to further an agenda for more government control over the economy and to undermine support for free markets.
“The World is Flat” is the title of a book written by a decidedly non-libertarian journalist.
By definition, national and local laws that vary over time and place determine which sources of income are legitimate (legal) or illegal. Libertarians may protest criminalizing minor vices (prostitution and pot are tax-exempt while work and beer are not), but they do not advocate crime.
Mr. Tooney’s remarks about foreign workers being cheaper appears to be an objection to “free trade.” But tariffs and import quotas just raise the cost of living and cost of production and make us all poorer. Forcing consumers to pay more for domestic T-shirts would not force U.S. apparel makers to pay higher wages — they’d just pocket the monopoly money.
The Cato Institute welcomes a variety of “world views,” including mine (Karnick correctly describes my views on immigration law).
There is no theory in my book, and therefore none to defend. The facts in the book cannot be “juggled” because I provide easy links to all sources. Indeed, “Income and Wealth” is largely an expose of how liberals and conservatives juggle the data on incomes, wealth and wages to promote their own pet policy agendas.
Thanks for your comment, Mike, which I think accurately points out some of the major problems with libertarianism. However, I would strongly argue that Alan is not a libertarian but is in fact a classical liberal like me.
For example, when you note that the libertarian position on immigration has made a mess of things, you are correct; but Alan does not support that position; he is for limits and a skills-based system.
Similarly, Alan is absolutely not for ignoring ecomomic inequality. Quite the contrary: his point is that inequality has been steady or declined in the United States, and that the rise in living standards has been so powerful and beneficial that even if inequality had increased in recent years, which it hasn’t, I will again emphasize, it would be worth the tradeoff because the benefits of liberal market principles have been so great for the lower ends of the economic scale that no truly sympathetic person would ever want to jeopardize that.
You see, when it comes to inequality, Alan and Krugman want the same thing (at least if Krugman’s claims of sympathy for the underclasses are really true). Alan’s point is that Krugman et al. have their facts wrong, and that following their prescriptions, which are based on bad facts and bad economic premises, would be bad for everybody.
So I would indeed recommend Alan’s book to you, and I hope that you will enjoy it greatly.
Dear S. T.:
I am not an economist, but I do understand one thing about economists: They are as prone to error as anyone else. Despite all the mathematical razzle-dazzle they engage in and seek to impress the rest of us with, economists attend selectively to some factors while ignoring others that often have a bearing on whatever it is they are considering at the moment. Paul Krugman is the perfect example of such on the left; however, Alan Reynolds (and most other libertarians) on the right are equally neglectful of certain factors which, if included in their equations, would invalidate their ideological positions, and hence they tend to file-thirteen them if it upsets their little apple cart.
Certainly Alan Reynolds is to be praised for his support of the free market, and he does well to include the economic factors–selectively ignored by Krugman and his ilk–in his analyses. But Reynolds is afflicted as badly in his own way as Krugman, et al, are: Libertarians also have ideological baggage which impairs the validity of their conclusions. Libertarian thinking is by and large limited to the “bottom line.” Libertarian policies in the past several decades have guided the United States into massive trade deficits that benefit only the wealthy elites; into dangerous economic alliances with foreign powers that would doubtless have alarmed George Washington and dismayed Thomas Jefferson; into several resource wars of negligible benefit to the average American citizen; and into the patently stupid attempt to legalize millions of aliens living in this country and the long train of relatives to follow them. Libertarian economists seem blithely ignorant–or perhaps willfully ignorant–of the decline of the quality of life; economics is, despite its imposing arrays of graphs and formulae, one of the “softest” “sciences” around–“softer,” perhaps, than sociology, politics, or psychology.
At first I was sympathetic to the libertarian world view, but over time I have changed my mind; I really don’t think any single political, social, psychological, or economic theory can fully explain human behavior and serve as a reliable predictor of subsequent events. As someone once observed, if we could take all economic factors into consideration, we would be able to predict the future. If only! (That would be a neat trick indeed, like predicting the exact quantum states of every subatomic particle in the universe–for the next two seconds!)
So Alan Reynolds is only marginally better than the Krugman crowd. If more libertarian economists would shed the idiotic notions that the world is flat (and they intend to make it flatter); that it doesn’t matter where that worker is from (he’s cheaper to buy than any American worker, and it’s the bottom line that counts–and so what if local communities come to resemble Third World slums; we have our profit margin to comfort us and our gated communities to insulate us); that America’s national sovereignty is a quaint relic from a more primitive time (throw away that copy of the Constitution; those Founding Fathers are so yesterday); and that the marketplace is beyond good and evil (the implication being that money earned legitimately is no different from money earned any other way–from, say, prostitution, drug dealing, child porn, or smuggling illegals).
If Alan Reynolds can refute any or all of the points made in the last paragraph and offer up useful remedies for them while still retaining the Cato Institute’s world view, then I will join Cato as a dues-paying member. Until then, he, like all other economists I’m aware of, can juggle numbers all day long “proving” their theories while the United States continues to sink beneath the waves of illegal “immigrants” and criminally naive economists.
Respectfully,
Mike Tooney