Wednesday, October 19, 2011

Fallacy of the Rich Getting Richer and the Poor Getting Poorer - Part 1

The fallacy that "the rich are getting richer and the poor are getting poorer" is not only foolish, but dangerous.  This claim assumes that there is only a fixed amount of wealth in our society and that in order for the rich to get richer they must take from the poor.  This is also known as the zero-sum fallacy.

This is one of many fallacies covered in Thomas Sowell's Economic Facts and Fallacies (page 157):

There are various ways of measuring income inequality but a more fundamental distinction is between inequality at a given time- however that might be measured- and inequality over a lifetime, which is what is implied in discussions of "classes" of "the rich" and "the poor" or the "haves" and "have-nots".  Given the widespread movement of individuals from one income level to another in the course of a lifetime, it is hardly surprising that lifetime inequality is less than inequality as measured at any given time.  Moreover, medical interns are well aware that they are on their way to becoming doctors, as people in other entry-level jobs do not expect to stay at that level for life.  Yet measurements of income inequality as of a given time are what dominate discussions of income "disparities" or "inequities" in the media, in politics, and in academia.  Moreover, a succession of such measurements of inequality in the population as a whole over a period of years still misses the progression of individuals to higher income brackets over time.

To say that the bottom 20 percent of households are "falling further behind" those in the upper income brackets- as is often said in the media, in politics, and among the intelligentsia- is not to say that any given flesh-and-blood individuals are falling further behind, since most people in the bottom 20 percent move ahead over time to rise into higher income brackets.  Moreover, even when an abstract statistical category is falling behind other abstract statistical categories, that does not necessarily represent a declining real per capita income, even among those people transiently within that category.  The fact that the share of the bottom 20 percent of households declined from 4 percent of all income in 1985 to 3.5 percent in 2001 did not prevent the real income of households in these brackets from rising- quite aside from the movement of actual people out of the bottom 20 percent between the two years.

Even when discussions of "the rich" are in fact discussions of people who have large accumulations of wealth- as distinguished from high levels of current income- much of what is said or assumed is incorrect.  In the United States, at least, most of the people who are wealthy did not inherit that wealth as part of a wealthy class.  When Forbest magazine's annual list of the 400 richest people first appeared in 1982, people with inherited wealth were 21 percent of that 400- which is to say, nearly four-fifths of these rich people earned the money themselves.  By 2006, fewer than 2 percent of the 400 wealthiest people on the Forbes magazine list were there because of inherited wealth.  Despite the old saying that "the rich get richer and the poor get poorer," the number of billionaires in the world declined from more than a thousand to less than eight hundred in 2008, while the number of American millionaires fell from 9.2 million to 6.7 million.

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