Puncturing the Two-Americas Myth

John Edwards has dropped out of the presidential race, but the left continues to trumpet his class-warfare arguments. The two-Americas theme is endlessly regurgitated, particularly the notion that the rich are getting richer and poor are getting poorer (with the obvious implication that the rich are somehow causing greater poverty). These assertions have been repeatedly discredited (most recently by a Treasury Department study), but practitioners of the politics-of-envy seem impervious to factual arguments. So it highly unlikely that they will bother to read – much less understand – a powerful op-ed in the New York Times by Michael Cox and Richard Alm of the Dallas Federal Reserve Bank. Cox and Alm look at consumption data rather than income data and they find that there is only a modest difference in the living standards of the rich and poor:

…renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being. …Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society. The top fifth of American households earned an average of $149,963 a year in 2006. …they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings. The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? …those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status. So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. …Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.