Obama doesn't understand income inequality

President Obama doesn't understand how income inequality works. Here's why. Photo: (Flickr / White House)

WASHINGTON, July 28, 2013 -President Barack Obama doesn’t understand how income inequality works. By focusing on misleading statistics, he encourages unjustified class warfare.

In his speech at Knox College last Wednesday, the President argued that we are further progressing toward a “winner-take-all economy where a few are doing better and better and better while everybody else just treads water.”

SEE RELATED: As the median family income falls, the rich get richer

If this were true, it certainly would be worrisome. If the income of most Americans was stagnating, we would certainly have cause for alarm. However, the President is wrong. Just because “nearly all the income gains of the past 10 years have continued to flow to the top 1 percent” does not mean the rich are getting richer at the expense of the poor. In fact, it demonstrates that we have opportunities to rise higher than ever.

“Simply put, how much the top 1 percent of the population earns has no bearing on whether the bottom 20 percent can move up,” says David Azerrad of the Heritage Foundation. That may sound counter-intuitive, but the logic is sound.

The common phrase “the rich are getting richer, and the poor are getting poorer” seems to underlie every aspect of the President’s talking points. The truth, however, is that the rich are getting richer – but the poor are getting richer too. “People in the bottom fifth of income-tax filers in 1996 had their incomes increase by 91 percent by 2005,” says Thomas Sowell, an economist.

We must resist the temptation to think of income brackets as closed groups of people. In reality, people move up and down between income quintiles throughout their lifetimes. This concept is clearly demonstrated bya short video with LearnLiberty’s Steven Horwitz.

SEE RELATED: The absurdities of the income tax

It should come as no surprise, for example, that a recent college graduate would not be in the top 20 percent of earners upon graduation. But 10 or 20 years later, that graduate may likely be in the top 5 percent of earners.

The same is true for reverse movement. “Only 15 percentof people who file as millionaires do so for two consecutive years,” says Azerrad.

study by the Federal Reserve Bank of Minneapolis illustrates this perfectly. Economists tracked the actual people in the top quintile of earners in 2001. By 2007, only six years later, 34 percent of these people had moved to a lower quintile.

The same study corroborates the importance of upward economic mobility, showing 44 percent of those people in the bottom fifth in 2001 had moved to a higher quintile by 2007.

There are other ways to measure mobility as well. The Economic Mobility Project reports, “Ninety-three percent of Americans whose parents were in the bottom fifth of the income ladder and 88 percent of those whose parents were in the middle quintile exceed their parents’ family income as adults.” This is something worth celebrating.

Income inequality is only distressing if there is reduced economic mobility — that is, if people are not able to move among sections of income. The evidence shows the opposite, that we are still a dynamic, mobile economy where it is quite possible for people to move up or down the rungs of the economic ladder.

Perhaps the president should learn this and reject his pessimism toward the American economy. What happened to “hope and change?”

READ MORE: Consider Again

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Danny Huizinga

Danny Huizinga is currently studying at Baylor University, pursuing three business majors in Economics, Finance, and Business Fellows with minors in mathematics and political science. Although originally from the Chicago area, he is a Texas resident. Danny writes a political blog called Consider Again located at consideragain.com and is also syndicated at The College Conservative, RedState, PolicyMic, and the Baylor Lariat.

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