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Income gap between the rich and the poor

by Lynn Lenart, Law Librarian on February 5, 2011

in Banking & Finance Law,Government,Legal Resources

Is there an increasing gap between the rich and poor? 

This isnât news but based on some of the comments to Thursdayâs blog post I decided to point readers to government information on this topic.

First… data on poverty:

  • The nation's official poverty rate in 2009 was 14.3 percent, up from 13.2 percent in 2008 â the second statistically significant annual increase in the poverty rate since 2004.
  • This was the highest poverty rate since 1994.
  • There were 43.6 million people in poverty in 2009, up from 39.8 million in 2008 â the third consecutive annual increase.
  • This is the largest number of people in poverty in the 51 years for which poverty estimates have been published.

The current poverty thresholds for 2010 (released in Jan. 2011) are:

  • $22,162 for a family of 4
  • $11,369 for one person (under the age of 65)

Source:  Income, Poverty and Health Insurance in the United States, 2009.  Statistics were released by the Census Bureau in Sept. 2010. 

More information:

Census Bureau web page on poverty

Updated 2011 data

Census Bureau alternative poverty estimates that factor in a range of poverty thresholds and different assumptions.  

How poverty is measured

Let us not forget those that work but are still below the poverty level.  A Profile of the Working Poor, 2008 data released March 2010.  The working poor are those who spent 27 weeks or more in the labor force but whose income still fell below the official poverty level.  Update statistics will be released in March 2011.

The U.S. Dept. of Health and Human Services version of the U.S. Federal Poverty Measure.  There are other factors to look at such as housing vacancy rates, homeownership, food stamp recipients, etc.

~~~~~~~~~~~~~~~~

Data on wealth:

Income inequality is increasing, according to the Census Bureau.  ââ¦comparing the change in household income between 1999, the year that household income peaked before the 2001 recession, and 2009 suggests income inequality is increasing.â

âIn 2009, the share of aggregate income received by the highest quintile (those making $100,000 or more), was 50.3%.â   In fact, the Census Bureau calculates the income inequality at least 3 different ways (Gini, Theil, Atkinson), and each way shows that about 50% of the wealth is made by those in the highest quintile.

The problem is not the fact that the rich are getting richer.  The problem is – those that make $100,000 or more are getting a larger and larger percentage of all income generated in the United States.    The changes from year to year are not much, but this percentage has doubled over the last thirty years, widening the inequality gap.   Source: Income Inequality section of this report (see page 9, PDF page 17)

Additional, this income gap is the largest among the Western industrialized nations.  See here and here, more here and here. 

More data on the wealthy:

Income distribution by household (see Table A1, page 33, PDF page 41, Table A2, page 40, PDF page 48).

2009 Income statistics reported by the Census Bureau

Income Inequality (historical data)  

Bureau of Labor Statistics, Earnings

~~~~~~~~~

What about the Middle Class?

So more and more people are below the poverty level, and less and less people control a larger and larger share of the annual income.   America used to have a strong middle class.  Some could say one of the strengths of our country was having a large middle class.  What has happened to the middle class? 

They are losing too. Loss of jobs, furloughs or other economic hardships caused some to slip down into the poverty ranks, or households saw their incomes drop.    Median household income for 2009 was $49,777, a drop of 1.8% from 2008. 

More information:

Defining the Middle Class

Middle Class Task Force (Office of the Vice President)

{ 8 comments }

Scott February 5, 2011 at 11:04 pm

Remember that the poverty threshold is raised each year according to the CPI, and we've known since before the Boskin commission that CPI overstates inflation by about 1%. Changes have been made since then, but the BLS estimates that the CPI overstatement is still about 0.7% per year. With a poverty threshold that continually grows faster than inflation, we should expect the percentage counted as "in poverty" to grow over time. What's remarkable is that we haven't seen that at all. In 1959, the poverty rate was 22.4%; that fell to current levels in less than a decade, and it's been remarkably consistent since then. In fact, we have to look back to 1973 to find a year where the poverty rate was more than one standard deviation away the mean.

I think it's also misleading to highlight the fact that this is the largest number of people who have been below the poverty line without mentioning that the total population is also higher than it's ever been. In fact, the 2009 number, 43.6 million, is about 10% higher than the number of poor in 1959. However, the total population in 2009 is about 72% higher than the number of poor in 1959. That makes a huge difference.

Dan S. February 6, 2011 at 1:33 am

Thank you for posting the well organized collection of links and data points. Most relevant to the issue are these items: “In 2009, the share of aggregate income received by the highest quintile (those making $100,000 or more), was 50.3%.” and: "The problem is not the fact that the rich are getting richer. The problem is – those that make $100,000 or more are getting a larger and larger percentage of all income generated in the United States."

Those statements, if true, pretty much define the problem.

Scott, on the other hand, seems to place more importance on minor statistical variations than the fact that no matter what label you want to put on my 'class', we are still losing ground as consumers and as the smallest of the small business persons.

Anyway, who really cares how they are labeled on a graph? Does it make, as Scott suggests, a huge difference (in anything)?

Scott February 7, 2011 at 7:37 am

Those statements don't define any problem at all. Would you rather live in a country where every resident earned $1 a day, or a country where the mean income was $100 a day, but the top 20% got 50% of the total income? It's a no-brainer. Inequality is not itself a problem– true poverty is. Why should I care whether the top 1% is earning a million dollars a year or a billion dollars a year, if what I am earning stays the same?

People who worry incessantly about income inequality are usually committing the zero-sum fallacy. They assume that if the rich are doing better, it must mean that somehow, the poor and middle class are doing worse, despite all evidence to the contrary.

The "minor statistical variations" I bring up are not minor when summed over four or five decades. If the true rate of poverty is the same as it was when the CPI-adjusted poverty rate was first recorded in 1959, we would expect recent CPI-adjusted poverty rates to be about 32% [22.4*e^(0.007*50), using the 1959 value of 22.4%, assuming 0.7% CPI overstatement per year (actually closer to 1.1% before Boskin) for ~50 years].

The fact that actual recorded CPI-adjusted poverty rates are less than half what we would expect is astonishing. Clearly, the poor are MUCH better off than they used to be. Similar calculations using middle-class wage data from the BLS lead to a similar result for the middle-class. The poor are better off, the middle-class is better off, and the rich are better off. It's a win-win-win scenario.

Dan S. February 7, 2011 at 1:00 pm

Let us not forget that the original question in the Professor's initial posting was: "Is the increasing gap between rich and poor a problem?"

That statement alone establishes, for this conversation, the understanding that there is an 'increasing gap'. The Law Librarian's cited information supports that too.

My position is: yes, that is a problem. I based that position, in part, on the statements that I included in my first comment in this thread. You should note that at no point did I claim that the top individual earners in this country make too much money. Nor did I claim that the physical standard of living I enjoy today is inferior to that of my grandparents.

My position is based on my view of the world around me, not calculus. But is it not true that over time, if one group ceaselessly increases it's percentage of ownership of even an enlarging bucket of cash that eventually they will still possess ~100% of the cash? Of course, in the real world that cannot happen. But it is still the trend in that direction that bothers me.

Bottom line:
your view is It's a win-win-win scenario.
my view is It's a losing groundgaining ground scenario.

larry d. February 7, 2011 at 5:27 pm

"That statement alone" doesn't establish anything, Dan. And if you could follow Scott's reasoned argument, you'd be able to see that the cited information is more or less bogus.

Scott February 9, 2011 at 4:25 am

I accept that there is an "increasing gap" between the rich and poor. My position is that it's not the gap that matters, it's the absolute level of income that matters. If the poor are getting poorer, that's a problem. But if the poor are getting richer, just not as fast as the rich are, that's simply not a problem.

The only reason to care about the "increasing gap" rather than the absolute level of income is outright jealousy. If what my neighbor gets is more important to me than what I get, there's no other way to describe it. And I simply don't think that we should be basing national policy on jealousy.

larry d. February 9, 2011 at 8:50 am

I understand what you are saying and agree that it's more a case of (manufactured) class envy than injustice. But from what I've seen here I cannot see evidence that the "gap" between rich and poor is widening because there seems to be a lot of slippage between what is termed "rich" and "poor."

If I understand your initial post correctly, the number of truly poor has been shrinking over the past 50 years when inflation is accounted for accurately. At the same time we seem to be using $100,000 as the threshold for "rich" who are getting a larger and larger share of income (50 percent), simply because that number marks the highest quintile. Now of course "rich" is a subjective term but I'd think any reasonable person would admit that $100,000 does not qualify, unless a household with two working teachers or nurses or technical writers or whatnot is "rich." That's middle class, and a level of income that should represent more than 50 percent of wealth, and more than a single quintile, in my estimation.

The gap between the truly rich and truly poor may be widening in terms of wealth, but the numbers that have been given here suggest instead that what should be considered "working class" and lower middle class has grown while the middle and upper middle classes have contracted. The distribution of wealth in our country has flattened in that respect. It seems like a fairly predictable outcome in an increasingly welfare state, and I have to believe it is by design. Those who rise to power and control such things aren't interested in eliminating or lessening the power of the truly elite class, because that's them.

larry d. February 6, 2011 at 8:34 am

Those statements are idiotic, Dan. Just because someone calls $100,000 "the highest quintile" doesn't make those people "rich." Lyn asks where the middle class has gone — a middle class household often makes $100,000 or more these days. The salaries of a teacher and a nurse would add up to that, for instance.

Comparing 2008 and 2009 numbers in order to suggest an ongoing trend is a little silly, if not dishonest, as well. Unless you've forgotten that the bottom fell out of the economy in late 2008.

So yes, labeling on graphs makes a lot of difference in the propaganda game.

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