A Rising Tide That Used to Lift All Boats

The following chart shows household real income for the tenth and twentieth percentiles per the data in table A3 of the Census Bureau’s Income, Poverty, and Health Insurance Coverage in the United States: 2003 (issued August 2004).

Donald Luskin’s STILL MOVIN’ ON UP is supposed to appear in the National Review print edition on July 4 – with the text available here:

The Journal and the Times are exercised by reports that, over the last three decades, a new class of what the Times calls the “hyper-rich” has arisen in the United States, resulting in a disparity in incomes between rich and poor not seen since the 1920s: the most severe income inequality in the developed world today … But none of this is exactly man-bites-dog material. What the Times reports as news is a pattern that should be familiar to economic historians: Times of great prosperity have been associated with greater income inequality (for example, the 1920s), and conversely times of economic decline have been associated with greater equality (the 1930s). The lines of causality here are complex, and no doubt run in both directions: Prosperity is both the cause and the effect of inequality, and decline is both the cause and the effect of equality. So ideological advocates of income equality for its own sake ought to be careful what they wish for … We need to focus, then, on the question: What harm has it done to have this new class of the hyper-rich on the American scene? … Average after-tax, inflation-adjusted income has risen for every income quintile in the population. Yes, it has risen the most for the highest quintile, and risen the least for the lowest—but this can be explained to some extent by the great wave of immigration over the same period. The fact remains that income has risen for all: The rising tide has lifted all boats.

This claim that faster growth causes greater income inequality is rebutted by Brad DeLong. The rising tide claim may have been true for the last 33 years of the twentieth century, but our chart shows real income for the tenth and twentieth percentiles have fallen since 2000. The chart shows the rather unsurprising tendency for real income of poorest among us to be cyclical. Let’s also look at the past 36 years in four stages. For the 11-year period ending in 1978, real income for the poorest among us grew by around 20%, but grew by less than 6% for the 11-year period ending in 1989. Real income growth poorest among us was almost 10% for the 11-year period ending in 2000, but the decline in real income since 2000 has wiped out much of the gain in real income for the poorest among us that we enjoyed during the 1990’s.

While Luskin may be correct that the rising tide lifted all boats before 1979 and during the Clinton years, the rather weak growth of the past few years has been accompanied by a decline in real income for the poorest among us. While one might reasonably conclude that part of the reason for the fall in real income among the poor is the continued weak labor market, Luskin wants his readers to believe that economic growth has been sensational in the last few years. Alas, average annual growth over the past five years has not been great and real income for many of the poor has declined.