Their conclusion was clear. A recent Federal Reserve study tells us that the rich are getting richer. A closer look, though, reveals it is a lot more complicated.
We need to be aware of two issues.
- How should we define income and wealth? Calculating income, certain variables are obvious such as wages. However, should we include workplace benefits? “Psychic income” from the environment is even a possibility. You might think “psychic income” is ridiculous but think for a moment about Manhattan and Missoula. If the cost of living is much higher in Manhattan than Missoula, should we add the “psychic income” of the pleasures of Manhattan to offset its added expense? Similarly, assessing wealth involves decisions about what to include. On page 32 of the Federal Reserve study, you can see the variables they selected.
- Are the same people becoming more affluent or have others replaced them? A recent report from the Treasury tells us that the “rich” consistently change. As average net worth grows, different people move into the top “slots.”
Our point? Basing tax policy on income distribution statistics returns us to the mathematician, Benoit Mandelbrot. The closer we look, the more we see.
The Economic Lesson
Using Lorenz Curves, we can divide family incomes into quintiles and see the proportion of total national income possessed by each group. The answer, though, is only a starting point when we try to grasp income distribution.
An Economic Question: Knowing that income distribution is a complex subject, still, we can decide whether our bias is toward equality or efficiency. As a voter, would you prefer the equality that results from more redistribution through higher taxes or less redistribution that encourages competitive behavior and growth.