The reality of the 1 and 99 percent

Income inequality statistics paint a distorted picture of wealth discrepancy.

by Derek Olson

Occupy Wall Street’s biggest accomplishment was embedding the view of the “1 percent” into political discourse. Now more than ever, political commentators use the statistics of income distribution between the top 1 percent and the bottom 99 percent to illustrate the wealth discrepancy. Unfortunately, these statistics do more to obfuscate our understanding of inequality.

The top 1 percent and the bottom 99 are mere abstractions. They are not set groups of people across time periods. The Americans who make up the 1 percent are ever-changing. Data from the Internal Revenue Service show that in a decade, a majority of people who were in the top 1 percent were there for only one of those 10 years. Of the individuals in the top 1 percent in 1996, more than half were no longer there in 2005.

Income is also transient at the bottom. Of Americans who were initially in the bottom 20 percent of the income distribution, more of them end up in the richest 20 percent than remain in the poorest 20 percent. According to data published by the Federal Reserve Bank of Dallas, less than 1 percent of the population remains permanently in the bottom 20 percent of income earners.

Statements that some people take as a given, such as “the poor are falling behind” and “the middle class is stagnating” become wholly unsupported when we grapple with these facts of income mobility. There is little to learn from a shortsighted comparison of the bottom 20 percent of 30 years ago with the bottom 20 percent today. The majority of them are not the same people.

It is true that income inequality has consistently grown for about four decades, but that alone tells us very little. A far more realistic measure for inequality is consumption. If someone stashes $1 million in their closet, their standard of living doesn’t improve much, but what those dollar bills can purchase certainly does.

The inequality of consumption in America is far less striking than the inequality of income. The top 20 percent of households earn 15 times more income than the bottom 20 percent, but they consume only four times as much. Furthermore, because the average household size of the top 20 percent is nearly twice as large, the average consumption per person is only 2.1 times higher between the richest and poorest quintile of Americans.

This is because people with high incomes often don’t expect their incomes to stay high. Thus, they save money for when their income falls. People with low incomes may have savings from when their income was previously higher. Or, like many students, they go into debt in order to pay for consumption today when they expect higher earnings in the future. If one only looks at income, a medical student would appear to be in abject poverty. In reality, they may soon be in the top 1 percent.

Studies have shown that consumption inequality is rising much less rapidly than income inequality. Some studies have concluded it is not even rising at all. When discussing inequality and its trends over time, it’s important to realize  that what we really care about is living standards. Income is merely a proxy for measuring living standards, and it’s an inferior proxy to consumption.

Above all, we should demand that the inequality alarmists present more compelling evidence. But the political left will probably never stop using misleading facts about inequality. It’s one more reason every college student should know the old adage. There are three types of lies: lies, damned lies and statistics.