10.31.11

The 'Rich-Get-Richer' Myth

A new income analysis has fueled news stories about the middle class getting screwed that are off the mark—but play well with a public that believes wealth should be distributed more evenly.

When the nation’s most prestigious newspaper runs a misleading headline proclaiming “IT’S OFFICIAL: THE RICH GET RICHER,” why should ordinary Americans respond as if this amounted to bad news?

After all, consider the alternatives: wouldn’t stories suggesting “THE RICH GET POORER” or “THE RICH SEE THEIR INCOMES STALL” constitute far more discouraging reports?

Financial setbacks of the most privileged among us serve as indications of continued hard times, just as surging income for the wealthy generally constitutes a sign of recovery. No theoretical model can suggest a way that the overall economy would boom and grow while the rich somehow failed to “get richer.” If businesses were expanding (and hiring), even the most misguided, meddling government policies couldn’t stop the bosses who run these successful operations from making more money.

But unfortunately, growth remains fragile and anemic at the moment, which makes The New York Times headline of Oct. 26 even more dubious and deceptive. The subhead announces “Top 1 Percent Doubled Share of Nation’s Income, Report Finds,” but readers must make their way to the sixth paragraph to find that the referenced “report” is actually a historical analysis by the Congressional Budget Office, covering a 28-year span between 1979 and 2007, and pointedly concluding before the economic meltdown of 2008.

Figures from the IRS, however, demonstrate that since the recession began the rich hardly got richer:  the number of Americans earning $1 million or more fell a staggering 40 percent between 2007 and 2009 (declining to 236,883), while their combined incomes fell by nearly 50 percent—a vastly greater loss than the 2 percent drop in total incomes of those making $50,000 or less. Could anyone make a plausible case for how a massive reduction in the number of top earners (with nearly 200,000 fewer million-dollar incomes) could conceivably benefit the economy, or count as good news for anyone?

Nevertheless, the Times chose to stress the inflammatory finding that in the 29 years preceding the Great Recession the top 1 percent of earners (those pesky millionaires and billionaires) boosted their average, inflation-adjusted, after-tax income by 275 percent. 

Surely worried readers might conclude that such “obscene” enrichment by the greediest would inevitably impoverish the neediest, leaving only miserable crumbs for the beleaguered middle class. But the CBO numbers actually showed that big gains for top earners did nothing to prevent simultaneous (if more modest) improvements by every other income group. For instance, the middle class (the 60 percent of the population in the 21st through 80th percentiles), raised their average inflation-adjusted, after-tax household income by a healthy 40 percent. Even the bottom 20 percent of the population moved ahead during the Reagan, Clinton and George W. Bush booms, lifting their earnings 18 percent.

Moreover, the CBO acknowledged (but The New York Times failed to report) that it’s important to keep in mind that these numbers disguise considerable movement from group to group by the real people who sometimes get lost in statistical portraits. Other studies have demonstrated that the majority of households that found themselves in the bottom 20 percent three decades ago have moved up the income scale, with their places taken by young people just beginning their careers and by newly arrived immigrants.

The full report of the Congressional Budget Office should also deprive Democrats of one of their favorite talking points, since it makes clear that federal tax policy played no significant role in the “rise of the rich.” The impact of federal taxation and transfer payments, even at the height of the Bush era in 2007, reduced the share of after-tax income that went to the top 1 percent, dropping their portion of the nation’s economic productivity from 20 percent (of before-tax “market income”)  to 17 percent (after tax and transfers). As the CBO pointedly concluded, “government transfers and federal taxes are both progressive,” taking more from the rich and giving more to the poor, so that distribution of household income after governmental adjustments is “more equal” than before the progressive tax system and direct payments to the poor kick in. 

There’s also no evidence at all that more equal distribution of rewards is associated with more robust economic growth. In fact, the CBO notes that the “distribution of market income became more unequal almost continuously between 1979 and 2007 except during the recessions in 1990-1991 and 2001,” showing that the dreaded “economic gap” stops growing only when the economy itself stops growing.

Even without misleading media accounts, these facts would stand little chance of getting through to a skeptical public. On the same day the Times ran its silly RICH GET RICHER headline, the paper also reported a New York Times/CBS News poll showing two-thirds of respondents saying that wealth should be distributed more evenly, objecting to tax cuts for corporations, and favoring tax increases on millionaires.

These responses indicate that the sweeping tax reforms promoted by GOP presidential candidates Herman Cain, Rick Perry and Newt Gingrich will make no headway with the general public, since they all involve substantial, undeniable (and, to most conservatives, desirable) reductions of tax burdens on the wealthy. Mitt Romney’s less aggressive position—featuring opposition to tax hikes on anyone during a fragile recovery, and capital gains tax breaks to those earning below $200,000—may gain more traction. So far, none of the candidates has seized the most marketable option—declaring total war on loopholes, and promising to raise revenue by reducing complications and distortions in the tax code, while making sure that all wealthy Americans (not just most of them) pay their fair share.

Could anyone make a plausible case for how a massive reduction in top earners could benefit the economy?

Even in the midst of a presidential campaign, Republicans should try to disarm the appalling popular instinct to follow the words “the rich get richer” with the puzzling non sequitur “and the poor get poorer.” If you believe that these two phenomena are actually connected, then you’re embracing the altogether illogical proposition that creating wealth causes poverty. And you’re a gullible idiot.

In my most recent book The 5 Big Lies About American Business, “When the Rich Get Richer, the Poor Get Poorer” counts as Big Lie No. 2. The first instance I could find of an American politician promoting this line came in the presidential campaign of 1840, when Gen. William Henry Harrison slammed the policies of his opponent, the incumbent President Martin Van Buren, “as directed to the purpose of making the rich richer and the poor poorer.”

Harrison won that campaign as a phony populist, identifying himself as the “log cabin and hard cider” candidate despite his status as the son of a Virginia governor who grew up on a vast plantation. On inauguration day, the new president set an all-time record with the length of his address (an excruciating one hour and 40 minutes), caught pneumonia, and died 30 days later, before he could do serious damage.

The rich-get-richer/poor-get-poorer line ought to be buried along with him.