The Sense of a Gap

So flawed is the construction of the ballyhooed income gap finding that one hardly knows where to begin. How about with a statement of principle on page 17 of the source report (PDF)?

The United States was built on the ideal that hard work should pay off, that individuals who contribute to the nation's economic growth should reap the benefits of that growth.

It's curious that the folks at the Center on Budget and Policy Priorities and the Economic Policy Institute should declare such a thing, because (apart from the reality that their policy suggestions would retard Americans' ability to receive a pay off) a citizen who is rewarded for hard work would be very difficult to trace in their measurements. "Climbing the ladder," in other words, brings one's family out of a lower quintile and to a higher (from the bottom 20% to the middle 20%, say). A person who moves from an entry level position in the lowest income quintile into a management position will no longer contribute to the former's statistics. At the same time, the entry level position is likely filled with somebody at a lower rate commensurate with experience. For those who reach the high end, by contrast, hard work pushes the upward boundary farther.

The report doesn't define the income ranges of each quintile, so it's impossible to illustrate this using the relevant numbers, but the method of "adjusting" income also skews results: The reported family income is divided by the square root of the number of people in the family, and only households of two or more people are included. In other words, every actual income is divided by at least 1.4. So, a young couple finishing school and living off an entry level salary of $24,000 would be reported as having income of $16,970. If that couple chooses to begin building its family, having one child, the working parent would have to receive a 22.5% raise just to maintain the same reported income (the denominator now being the square root of three). A family that, like mine, grew from two to five people between the analyzed periods would have to increase its actual income by 58% just to maintain the same "adjusted" income.

On the other end of the family cycle, a higher-income couple with children grown up and leaving (hopefully) would shoot up, even if its income were stagnant.

If all generations were of the same size, this dynamic would merely create a cycle pulling the quintile lines up and down the income scale, and the report's findings could be interpreted as proving that we're in a large-gap period. But recent generations have been smaller, which one would expect to pull the quintiles up, resulting larger increases on the bottom over time.

Here the methodology strikes again: the report's quintiles are defined by number of people, not number of families. Therefore, Baby Boomers, ostensibly at the high-end of their income trends, are experiencing their adjustment bursts, but are more than counterbalanced by the quintiles' shifting down toward young families. We don't have the data to determine whether the Boomers had the opposite effect when they were kids, but it's notable that the report explains that the lower quintiles kept pace from the 1940s to the 1970s, when this particular methodology would have most closely tracked the progress of those larger families over their actual lifespans.

The genius of our economy — which the likes of the report's authors seem intent on replacing with their own flawed ingenuity — is that it creates new avenues toward wealth, improving the lives of all. Being in the bottom quintile means something different, these days, than it did fifty years ago, even if the salaries of grocery baggers have not increased at the same rate as those of our country's most successful families.

The invention of new means of wealth creation is important to note, in this context, because the report deliberately left out capital gains, although previous iterations had included it. The reason? Current Census data (soon after a change in its own methodology) shows an "unrealistic" increase in such income among those toward the bottom.

I'd be perfectly willing to argue against "income gap" rhetoric on ideological and philosophical lines, but in this case, I can't help but feel that the other side's conclusions dictated its findings.