In times of economic prosperity, economic inequality always gets worse, but only at the small cost of general prosperity.
Most Americans are living better now than ever. It's an easy fact to prove, but to say so now is at the risk of being arrested by the cancel-culture police. Because it runs counter to a core belief behind progressive policies that life has never been better for only the wealthy America.
However, this simple belief is wrong. According to progressives, the standard of living of all but a handful of Americans has stagnated in recent decades. This may be because much of the increase in national income is made at the expense of labor remuneration for corporate profits. It is said that since the early 1970s, productivity gains have gone mainly to profits, which means that employers have exploited employees.
So how should this be solved? Governments must redistribute wealth by taxing businesses and high-income households, while also providing more support to low-income households. This is nothing new. In fact, the argument that most Americans are struggling to survive has spawned many social safety nets, including unemployment insurance, Social Security, Medicare, Medicaid, SNAP ,food stamps, and Obamacare.
Let us be realistic to say that the progressives have made a great deal of progress. But for them, these advances are never enough. In fact, the belief in stagnation is based on several myths.
Myth 1: Productivity/Income Gap. Progressives, including the Economic Policy Institute in Washington, assert that the gap between productivity and inflation-adjusted hourly wages has been widening since the mid-1970s.
However, this calculation eliminates hourly wage compensation through the Consumer Price Index (CPI), which has long been considered upwardly biased. Doing so is misleading in terms of actual hourly wage compensation. And with the use of the personal consumption expenditure deflator, a more accurate measure of consumer prices, the gap narrows.
Myth #2: Wage stagnation. From the first quarter of 1995 to the second quarter of 2021, hourly pay grew by an average of 2.1% per annum after adjusting for inflation using the Personal Consumption Expenditure Deflator. The steady increase in living standards is in line with the growth of gross domestic product.
Progressives often counter that they prefer to use the CPI, a data series compiled by the Census Bureau, to measure Americans' purchasing power, or median household monetary income. But this series of data distorts the fact that it is based on a survey that asks respondents to provide pre-tax income. Medicare, Medicaid, food stamps and other non-cash government benefits are excluded.
However, these sources of income are included in the Personal Income Series compiled by the Bureau of Economic Analysis (BEA), which makes this series a more accurate measure. In addition, the data of the Bureau of Economic Analysis is not based on survey responses similar to the census series, but on "hard" data such as monthly wage and employment statistics and tax returns.
The Bureau of Economic Analysis has also compiled a series of after-tax personal incomes that reflect the government's tax incentives, such as the Labor Income Tax Deduction Boycott Reserve System. The Bureau of Economic Analysis' personal income, disposable personal income, and personal consumption expenditure data all refute the idea of stagnant income. The data is household-based, using the PCE deflator rather than the CPI index to adjust for inflation.
The standard criticism for using the Bureau of Economic Analysis data on a per-household basis is that they are averages, not medians. Thus, those with the highest incomes, the so-called top 1 percent, could theoretically have the mean distorting the overall data and the data for each household.
This is possible for personal income, but not for the average personal consumption per household. The rich consume only so much more than the rest of us, and they are not numbered enough to distort overall consumption and consumption per household, since they actually make up only 1% of the taxpayer population.
Myth Three: Exploited Workers. Since the early 1990s, the share of national income used for remuneration for labor has shown a downward trend, while the share representing corporate profits has risen, angering many progressives.
But these proportions are misleading. They do not reflect the fact that pass-through businesses, including S corporations, sole proprietorships and partnerships, have grown rapidly in recent years. In general, the owners and employees of such enterprises account for more than half of the total number of employees. Many companies are small businesses run by entrepreneurs. S-class companies account for about a third of corporate profits, while sole proprietorships tend to earn about 80% of corporate profits.
What is the true story of inequality? The progressive view of income and wealth inequality is correct, and I acknowledge that. It does get worse, but they ignore the larger context: Economic inequality always gets "worse" in times of economic prosperity, but that's only the small price of universal prosperity. The vast majority of workers benefit on an absolute basis, especially since they have greater upward mobility of income during economic booms.
So what drives economic prosperity? Mainly corporate profits. It is those profitable companies that expand capacity and employment, drive the engine of development, and create economic prosperity. Whether the income ladder is up or down, profit is so vital to all of us in our society that we can't undermine profit motives through the unintended consequences of well-intentioned but ill-conceived progressive policies.
About the Author: Edward Yardney is president of Yardney Research and the author of Praise for Profit
| Edward Yardeni
Editor| Peng Ren
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