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Read Poverty: Part 1 — The Sky Isn’t Really Falling, Trust Me here.

Everything is another crisis for the Left!

One of the biggest economic myths that Liberals like to spout off as gospel truth when they want to demonize capitalism is the meme of the “shrinking middle class” or the “vanishing middle class.” When papers scream, “The rich are getting richer and the poor are getting poorer,” it makes people’s blood boil because it gives the notion that some magical perennial group known as the rich are are getting richer at the cost of the lower class. They love perpetuating the myth that the evil, callous, and mega-rich 1% drink champagne and vacation in luxurious hot spots, while the rest of the populace toil long hours, struggle, barely making ends meet. It sounds pretty convincing, doesn’t it, when you read excerpts like the following?

In the 25 years from 1980 to 2004, a period during which U.S. gross domestic product per person grew by almost two-thirds, the wages of the typical worker actually fell slightly after accounting for inflation.

~ Washington Post Op-Ed, “A Rising Tide?”

This transformation is no longer just about factory workers, whose ranks have declined by 5 million in the past 25 years as manufacturing moved to countries with cheaper labor. All kinds of jobs that pay in the middle range — Clark’s $17 an hour, or about $35,000 a year, was smack in the center — are vanishing, including computer-code crunchers, produce managers, call-center operators, travel agents and office clerks. The jobs have had one thing in common: For people with a high school diploma and perhaps a bit of college, they can be a ticket to a modest home, health insurance, decent retirement and maybe some savings for the kids’ tuition. Such jobs were a big reason America’s middle class flourished in the second half of the 20th century.

Within the middle class, there has been a widening divide between those in its upper reaches whose jobs provide the trappings of the good life, and those in the lower rungs whose economic fortunes are less secure.

~ Washington Post, “As Income Gap Widens, Uncertainty Spreads”

…and plenty of jobs in the middle. But in the new services economy, the middle is missing.

~ The Atlantic, “The Declining Middle”

If this was all true, it would truly be depressing… but they’re not all true.

The statistics that claim the above fail to include the value of benefits such as health insurance and retirement benefits, etc., which have represented a growing share of compensation over the years. See Cox and Alm, The Myths of Rich and Poor, p 21. Nor do these sophists separate full time workers from part time (part time work has been growing, another indicator of rising prosperity). Of course, including the weekly wages of part timers pulls down the statistical average.

It is also important to distinguish between more Americans getting richer, and only the rich getting richer. The latter, of course, is the default position of the Old Left Media. For example, the Left bemoans the declining percentage of Americans in the moderate-income range, between $35,000-$50,000. This is regularly called the “vanishing middle class.”

What is hidden… and not by accident, is that the “disappearance” is largely due to fact that the percentage of households with real incomes higher than $50,000 increased from 24.9% in 1967 to 44.1% in 2003, and the percentage with real incomes lower than $35,000 fell from 52.8% in 1967 to 40.9%.

… in 1967 only one in 25 families earned an income of $100,000 or more in real income, whereas now, one in six do. The percentage of families that have an income of more than $75,000 a year has tripled from 9% to 27%. But it’s not just the rich that are getting richer. Virtually every income group has been lifted by the tide of growth in recent decades.

~ WSJ, “Great American Dream Machine”

I’ve inserted two income distributions which illustrate clearly how income has increased and why people have been saying the middle class has been shrinking.

Income Distribution of Median Income
Notice when income increased the curve shifted to the right over time, leaving less people in lower income. From chapter 5 of "Economic Facts and Fallacies" by Thomas Sowell.

So, as the statistical distribution of folks shifts to the right, the number of folks in the original income bracket, declines — contrary to the waves of journalistic and political rhetoric.

Thus, the middle class was growing richer, and moving up, rather than shrinking. Further, what is the basis for decrying workers having higher incomes, or, to put it another way, how can same be harmful to other workers with “less-skilled” jobs?

This also produces another conundrum. If everyone is getting richer, how is it possible that we have nearly 50 million poor people in the United States?

Well, we don’t have to believe every statistic we hear and we can question how exactly poverty is being measured. The new way in which poverty is calcuated is on a sliding scale. It is based on the average income of American families. As the average income goes up, so does the threshold for poverty. In essence poverty is defined upward every time the average income goes up. According to Rachel Sheffeld, this new measure would bump poverty up 30 percent. And as more groups have come out to voice their outrage, we can see how this has added more fuel to the fire of so-called economic inequality.

To add further confusion to the measure of poverty is the fact that statistics on income after 1987 can not be compared to income prior to 1987. Blame it on the 1986 tax reform!

The fundamental blunder in all of these studies and reports is that the 1986 tax reform radically changed what is reported on income tax returns, so income before is not comparable to income after. As Reynolds notes, the Statistics of Income Division of the IRS itself tried to warn about this, saying, ‘Data for years 1987 and after are not comparable to pre-1987 data because of major changes in the definition of adjusted gross income (AGI).’ But the studies and media reports of the class warriors began doing precisely that.

~ Forbes, “The Equality Of Reaganomics, And Fallacious Leftist Dissent”

One of the most important changes to come out of the 1986 tax reform was drastically cutting the top individual income tax rate from 70% to 28%. The new law left the top individual tax rate lower than the top corporate tax rate. After the reform, billions in business income made the switch from corporate tax returns to individual tax returns as subchapter S corporations, partnerships, LLC (limited liability partnerships), and proprietorships. This resulted in the appearance that the number of top 1% of income earners soared. But someone with a thorough understanding of the dynamics of the 1986 tax reform would realize that income didn’t change as much as how they were being reported.

Statistical illusion is used over and over again to create another catastrophe by Liberals.

On my next poverty post, I’ll discuss further why current poverty measures are inaccurate and how we can better measure poverty.

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