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Income inequalities

“The growth and inequality of incomes are topics that seem to inspire many people to form very strong opinions about very weak statistics.” – Alan Reynolds

by Adrian Sobers

If you want to build a case for your position these days all you need to do is substitute repetition for evidence. Take for example the repeated reports on how the “rich” are earning more while the “poor” are falling further behind. The ninety-nine per cent versus the one per cent.

Part of the reason that this fallacy has such a long shelf life (apart from the fact that it is more emotionally satisfying and politically convenient) is because terms like “rich” and “poor” are seldom defined or, their definitions are constantly changing so that the “poor” of today look very different from the poor of 50 years ago.

In 2001, the majority of people defined as “poor” in the United States had possessions and amenities once considered part of the middle-class lifestyle — air-conditioning, a vehicle and a DVD player. Failure to differentiate between current income streams and accumulated wealth (including lump sums) can also muddy the waters. Income and wealth are different things.

Here are people who are classified as “poor” because they have little or no current income, yet some in this category (like some of the elderly) have large amounts of accumulated wealth. Similarly, there are people who may have a decent to high level of current income but little accumulated wealth due to lifestyle choices, cost of living, high taxes or “de economic down turn”.

People who protest loudly about income “inequality” or “growing disparities” act as if income brackets represent the same individuals over a period of time. Statistics on income brackets and household income tend to be misleading because people move from one bracket to another over the course of their lives.

Similarly, when looking at data on household income we cannot ignore the fact that the number of persons per household (not to mention the number of people actually working in a household), varies over time and across racial and ethnic groups.

In the United States, one economist observed that, “black household income was lower than Hispanic household income, even though black per capita income was higher than Hispanic per capita income, because black households average fewer people than Hispanic households”.

Most statistics on income only represent a particular point in time and would be more meaningful if they followed the same people over the entire course of their lives. The Congressional Budget Office recently published a report which shows that “while the average household income fell 12 per cent between 2007 and 2009, the average for the lower four-fifths fell by five per cent or less, while the average income for households in the top fifth fell 18 per cent.

For households in the “top one percent” that seems to fascinate so many people, income fell by 36 per cent in those same years”. The CBO report is based on statistics from the Internal Revenue Service who can follow both individuals and households over time.

Another study showed that three-quarters of the Americans who were in the bottom

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