Rethinking the Income Gap

The Second Middle Class Revolution

Paul Ryscavage

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351493116
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

The ethical question implied by discreparcies between the distribution of income and the economic foundations of our country is at the heart of much of today's political debate. The answer according to the left-and often the mainstream media-would require major changes in the way our economy functions so as to further redistribute income among households. Higher tax rates on the upper middle class and rich, more restrictive corporate regulations (including higher taxes), more centralized economic planning, in short more governmental intervention into the free market, would all be in our future-and their deleterious effects would soon begin working their way into American life, according to Paul Ryscavage in Rethinking the Income Gap. This book is written by an economist who has spent his career studying and analyzing income inequality. News reports of mushrooming fortunes, most recently among CEOs and hedge fund managers, alongside reports of a struggling middle class and an intractable poverty class, have been common topics for the nation's media. Ryscavage asserts that the media has misused many of the facts surrounding the increase in income inequality. He calls for a reexamination of the facts and what they mean and do not mean-and ultimately shows that, contrary to media reports, income inequality can no longer be used as a measure of economic fairness. He also writes that, notwithstanding the economic downturn of 2008, the "real" news that the media have not reported is the expansion in recent decades of our nation's middle class, especially the upper middle class. Ryscavage argues that we must reexamine what the income gap means. Its relevance as a measure of economic fairness has diminished significantly in recent years. Instead, the income gap is now linked to a variety of economic problems confronting the nation and used as a rhetorical device for stirring up social concern and advancing political agendas. Rethinking the income gap is overdue. This book does just that.

1

The Income Gap “Muddle”

Perplexity is the beginning of knowledge.

—Kahlil Gibran

Yes, the verdict is in: income inequality has increased over the last few decades. Indeed, there is more certainty about this than there is global warming. But please note, I said “income inequality” and not “income gap.”

This chapter is about the income gap and how it was turned into the income gap muddle. Before I get to that, however, you need to read a few words about income inequality—from a smart man, with a tough job.

Ben S. Bernanke is the Chairman of the Federal Reserve Board—he’s in charge of our country’s banking system. In early 2007 he gave a speech in which he summarized the primary causes of growing income inequality.¹ He mentioned three: skill-biased technological change, globalization, and certain institutional changes, such as, declining union membership and erosion of the Federal minimum wage. He could have mentioned others.

More importantly the Chairman also reviewed the “bedrock principles” underlying America’s economic system and our roles in it. First, he said, everyone should have the opportunity to be whatever they want to be given one’s skills, talents, and abilities. Second, and consistent with the first, everyone’s economic outcome should be linked to the contributions they make to the nation’s economy—and these outcomes need not be equal nor guaranteed to be equal. And third, everyone should receive some economic insurance against adverse economic outcomes.

I mention these principles because they are often forgotten by Americans these days—forgotten because of the income gap rhetoric that has riddled much of our public discourse. I also mention them because flowing out of these principles was his answer to those worrying about inequality: “…the challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible.”

Think about this for a moment. How often have you seen such a message reported in today’s mainstream media? Not very often I would suspect. That’s because over the years they’ve equated the words, income inequality, with something negative, something bad, something harmful to American society—and called it the income gap.

The Muddle: How It Came About

You may think now I’m parsing words and engaging in semantics. Let me back off for a moment and use the terms “gap” and “inequality” interchangeably so I can advance into the subject of the chapter (the income gap muddle)—and then you’ll see more clearly the significance of the Chairman’s words.

As far as I can tell, the first time The New York Times—the elite of the mainstream media—used the words “income gap” was in 1962. In an article in their Sunday magazine section, the Times printed the following headline, “Is the Income Gap Closed? No!”² The article was written by Herman P. Miller, a Census Bureau demographer, but whether he or a Times’ editor wrote the headline is not known. What is known, however, is that the purpose of the article was to dispel the myth that family incomes in America were “leveling” or becoming more similar—and more importantly, it was meant to sound the alarm that a segment of society was being left behind economically, the poor.

Although this piece of history is dealt with later in the book, it’s interesting to note that back then—forty-five or so years ago—some people were concerned, not that income inequality was increasing, but that it was not decreasing. As will be discussed, income inequality had been very stable in the 1950s and actually reached its lowest point of the twentieth century during the 1960s.

It should be remembered that it was around this period when national attention was being focused on the poor and the civil rights movement-and it was only a few years later that President Lyndon B. Johnson would launch his War on Poverty. So originally, usage of the words “income gap” immediately brought to mind the poor and poverty, or the lower end of the income distribution.

The writings of Miller and other researchers during the 1960s led to a number of academic and government studies of poverty and the economic conditions of blacks. Indeed, references to the black-white “income gap” became more numerous in the media as well. But again, these particular words were linked very strongly to the poor and downtrodden of American society.

Fast forward to more recent years and mention the words “income gap” to the average man or woman in the street and observe the difference. As already discussed, a very popular response one would hear would concern the “gazillion” dollars the CEOs of the nation’s companies are receiving in comparison to the “nickels and dimes” the factory workers are making. Others might tell you about the difficulties the middle class is having in “making ends meet” in contrast to the rich and famous living in Manhattan, Hollywood, and Palm Beach. And still yet others might simply point their fingers at the hedge fund managers on Wall Street and say “That’s the income gap!”

So, be clear about two things: First, there is this economic phenomenon referred to in our popular culture called the “income gap,” which is generally regarded as a negative or bad thing and whose definition is subject to change; and second, there is “income inequality,” a fairly well-defined economic phenomenon studied by economists and other researchers, which has a much less pejorative connotation.

Income Gap vs. Income Inequality…Moral Implications

Words are important. If I was a TV news anchor that broadcast the nightly news and I said, “The nation’s income gap widened last year,” this would be considered a negative piece of news. But if I had said, “Income inequality in the nation increased last year,” it would be considered a less negative piece of news. This is because “gap” is a more potent word than “inequality.”

The income gap muddle begins to arise because of this very distinction. The mainstream media has equated “gap and inequality,” but as Chairman Bernanke pointed out, inequality, per se, is not necessarily bad. Consider the following example involving a room full of kings. They are all very rich, but King A suddenly becomes five times as rich as Kings B, C, D, and E. As the TV news anchor I could announce that there was a widening “income gap” among the five kings and I bet there would be some people out there in TV-land who would start feeling sorry for Kings B, C, D, and E. But if I had announced that “income inequality” was increasing among the five Kings no one out there in TV-land would really care because they were all kings anyway. In today’s America, moral implications are more closely linked to the words “income gap” than to the words “income inequality.”

Economic Perceptions vs. Economic Reality… Income Gap Implications

An income gap muddle is created in the minds of many Americans when economic perceptions and economic reality are out of synch. As we know the media is fond of reporting bad news—and in numerous instances, featuring it. In the case of economic news over recent years, haven’t we all heard the following: incomes and wages aren’t rising, job growth is anemic, jobs are being sent overseas, health insurance isn’t available for everyone, health care and education costs are skyrocketing, pensions are under-funded, the Federal deficit and national debt are out of control, and on and on. Sure, some of these stories have elements of truth to them, but not for everybody in the country, nor even a majority of families and households. But each story can have an effect—an effect that invites you and me to believe that the American economy is letting us down and treating us unfairly.

After three decades of this treatment, I contend that many Americans, whether consciously or unconsciously, have rejected this notion that our economic system is a failure, regardless of what the polls say. The reason they have either rejected this notion or have doubts is this: Life has been pretty good in America for the vast majority of us over the last several decades! Sure, there are the nagging economic difficulties—there always are and there always will be.

When one looks at the big, economic picture of the nation back into the last century, the only conclusion that can be reached is that the economy has worked pretty well. Consider some of the evidence:

• The poverty rate in 2006 (12.3 percent) was not much different than it was thirty years earlier.

• Middle-class incomes stretch upwards to a $150,000 a year and probably beyond, with thousands of upper middle class households being created in recent years.

• The rich are more numerous and have flourished like they never did before.

But there are still millions of other Americans for whom the frightening economic news coming from the media has had an impact. For a broad swath of citizens across the land, the rhetoric of the mainstream media has turned the income gap (which long ago was linked only to the poor of this nation) into the income gap muddle. For these folks there is bewilderment and confusion about the rising income inequality reported by the Federal Reserve Board Chairman Ben S. Bernanke and other organizations.

Perpetuation of the Income Gap Muddle

The existence of an income gap muddle in our society is not something recently thought up by some wild-eyed, right-wing economist. It has been around for a long time. The muddle usually becomes more palpable as the income gap rhetoric (and associated “bad economic news” stories) is ratcheted up during periods before presidential and congressional elections, and especially economic recessions.

Back in 2006, David Brooks, a columnist for The New York Times, sensed its existence in a political context, when he wrote in one of his columns:

…Democrats have generally conceived of America as a society between comfortable haves and insecure have-nots. Having read thousands of gloomy articles about downsizing, outsourcing and wage stagnation, they’ve tried to rally the insecure working majority against the privileged minority—or as Al Gore put it, the people against the powerful.

But since this strategy has notably failed, some analysts are thinking maybe there is no frightened majority longing for government succor.³

This majority that Brooks refers to no doubt contains many in today’s income gap muddle, which we have been discussing. Simply review some of the topics of the past economic news that have helped create it—and perpetuate it every day via the mainstream media:

• Wal-Mart, the employer of workers with low wages and poor benefits

• Immigrant laborers, how we love them, how we hate them

• Haves vs. the have mores, the new class war

• Gilded paychecks, the very rich are leaving the rich behind

• Anxious middle class, families missing out on the benefits of growth

• Money, does it make us happy?

• Auto workers, their “end of the line”

These topics, and others like them, don’t have to mention the income gap—it’s there, buried in the verbiage. Some of them have merit, of course, when the income gap implications are subtracted out; however, most of them imply that someone or something is to blame. Indeed, the message, the subliminal message if you will, is just that: This is not fair and someone or something must be blamed!

The fact that the mainstream media in our country tilts politically to the left is nothing new, notwithstanding the recent crusades of Bernard Goldberg and others.⁴ Over twenty years ago, Ben Wattenberg, from the American Enterprise Institute, a conservative “think tank” in Washington, DC, was making a similar argument about the media.⁵

But it is very evident that the mainstream media’s messages in more recent years, which I’ve pointed to, also have had their affect. According to a Pew Research Center survey in 2007, the percentage of respondents that agreed with the pro...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables and Figures
• Preface
• Introduction: You…and the Income Gap!
• Chapter 1. The Income Gap “Muddle”
• Chapter 2. The Reality of Growing Income Inequality
• Chapter 3. Understanding Economic Fairness Today
• Chapter 4. The Income Inequality–Economic Fairness “Disconnect”
• Chapter 5. America’s Evolving Middle Class
• Chapter 6. Inside the Middle Class
• Chapter 7. So, Forget about the CEOs and the Top 1 Percent!
• Chapter 8. Good Inequality vs. Bad Inequality?
• Appendix A. Income Data and Other Related Issues
• Appendix B. The Socio-Economic Dynamic: A Conceptual View
• Index