Today I decided to discuss a section of Thomas Sowell’s book, Economic Facts and Fallacies, second edition. The section is about income stagnation and the growing inequality in income; more on point it is about those fallacies and twisted statistics that make people think the rich are getting richer, and the poor are getting poorer. As chance would have it, I ran into an article with a chart that shows the world poverty rate. Turns out the number of people worldwide living on $1 a day (in 1987 dollars) fell from 26.8% in 1970, to 5.4% in 2006; an 80% reduction in the worst category of worldwide poverty in just 30 years. This should be top news, as nothing in the history of the world can quite compare to this rise in the standard of living of hundreds of millions of people.
Now this is probably a shock to many of you, because we are constantly bombarded with the media distortion that income gaps are widening. In reality, the rising tide has been lifting all ships, and only recently has government intervention into the free market accumulated enough to threaten to reach the breaking point where the market is not free enough to continue raising the worldwide standard of living. Globalization is the most likely cause of this worldwide reduction in poverty, with popular demand forcing governments to keep markets at least semi-free, which allows individuals to pursue their own gains, and trade their profits.
So why do college courses teach and the media preach that the greed of the 1% is making the poor poorer? Well as Mark Twain might have said, “There’s three kinds of untruths, lies, damn lies, and statistics”. Colleges, the media, hollywood: they’re all left wing institutions, so they just picked the statistics that support their worldview, and therefore appear to support their call for the need of government control over the economy. Technically, all of these statistics are true. Where the fallacies come in is when the interpreters try to use two different categories of data as the same information. For example: (emphasis added)
“Average real income… of American households rose by only 6% over the entire period from 1969 to 1996″ (Sowell, 141). This statistic is true, and gives the impression that incomes in general only rose by 6%. So then how could this statistic also be true, that per person real income in the U.S. rose in that same time frame by 51%? The answer, because households are getting smaller. Sowell explains that 21% of households in 1950 had 6 or more people, while only 10% of households in 1998 had 6 or more people. As a personal example I live in a house with 2 roommates. If our real incomes matched what they would be in 1950, each of us would still be living at home. Because purchasing power has increased since the 1950’s (real incomes have risen in general), now 4 households have the same income that 3 previously had. Household income has declined, while real income has given 3 recent college grads the ability to move out of their parents’ houses. When someone touts declining household income, they either do not understand the difference between individuals and households, or they are deliberately misleading their audience.
Another thing the media will portray with statistics is the image of the “toiling poor”; that would be people in poverty who work full time, but still can’t get by. This statistic usually accompanies discussions of greedy corporations who do not pay full time workers a “living wage”. In fact, 56% of households in the bottom 20% of incomes do not have anyone working even part time. This brings up another thing to remember about statistics: income does not equal wealth. Many retirees could easily be in the bottom 20% of earners, while still being quite wealthy from earnings over the many decades that they did work.
Furthermore, we must be careful when comparing categories like top 20% of household income and bottom 20% of household income. These categories may seem comparable, but the bottom 20% of households actually contained 25 million fewer people than the highest bracket. The stat was meant to show a growing divide among “the rich” and “the poor”, but it cannot prove anything since it does not compare equal numbers of people. “The poor’s” real purchasing power has actually increased to a point where fewer people have to live in each household, showing a trend of falling household income, while real spending potential for an individual has increased.
And the only reason I say “spending potential” instead of “income” is because using statistics about income to describe how much money the bottom 20% has to spend ignores welfare, free housing, and other transfers of cash to the poor. “In 2001, for example, cash and in-kind transfers together accounted for 77.8 percent of the economic resources of the people in the bottom 20 percent” (Sowell, 144). And you want to talk about the definition of poor in America? In 2001, here are the resources that people defined as “the poor” had:
- Three quarters of the poor had air conditioning, while only 1/3 of all Americans had AC in 1971
- 97% had color TV, and 98% had a VCR or DVD player
- “72% of “the poor” owned a car or truck” (Sowell, 145)
And the point here is not, “we shouldn’t care about the poor, they’re fine”, the point is that the divide between the rich and the poor is not actually growing, and the standard of living of the poor has risen along with the rich. These are certainly not the exploited working masses that we may picture, at the suggestion from MSNBC or CNN. “Despite a New York Times columnist’s depiction of people who are “working hard and staying poor” in 2007, Census data from that same year showed the poverty rate among full-time, year-round workers to be 2.5%” (Sowell, 145).
Read Thomas Sowell’s Economic Facts and Fallacies, for a more in depth discussion of these statistics, and many more. He can shed some major light on the fancy statistics politicians and the media will use to make their point, but that don’t give an accurate depiction of reality. Remember things are not always as they seem. The more free the market is, the more wealth is created. The more wealth created, the more everyone benefits. The poorest American today enjoys a standard of living unheard of by Kings and nobility just 4 centuries ago.