April 12, 2016 4:20PM

2016: the “Year of the 1%” or the Year Poverty Fell to a New Low?

This past weekend, The Economist uploaded and shared a short video to its Facebook page called, “The year of the 1 percent.” The video shows a graph superimposed over the Earth seen from space, while a voice narrates, “2016 is set to be a more unequal world than ever before. For the first time, the richest 1 percent of the population will enjoy a greater share of global wealth than the other 99 percent.” The video has been viewed more than one hundred thousand times.

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The Economist’s graph reminded me of another graph, which also shows two lines that eventually cross but tells a very different story. Despite population growth, there are fewer people living in extreme poverty today than ever before:

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How can both graphs be accurate? Poverty can decline even as inequality rises, as long as the total amount of wealth in the world is growing. To ignore this is to fall prey to the “fixed pie fallacy.” Throughout most of human history, global wealth hardly changed. But thanks to trade and industrialization, wealth has skyrocketed since the 1900s and continues to climb. At the same time, technological advances have also increased human wellbeing in ways not captured by looking at GDP alone. 

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Because the pie is growing, focusing solely on inequality, like The Economist’s video did, makes little sense. Most of us would rather have a relatively small slice of a gigantic pie than the biggest slice of a microscopic pie. In other words, most of us would rather be wealthier in absolute terms, regardless of our relative position. This is why many of us, if given the choice, would choose to be an ordinary person today instead of a member of the upper crust a century ago or a 17th century king

January 8, 2016 10:28AM

High Turnover Among America’s Rich

Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000 per annum) for at least one year.

How is this possible? Simple: the rate of turnover in these groups is extremely high.

Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners—a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:

Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover … But economic reality is very different—people move up and down the income quintiles and percentile groups throughout their careers and lives

What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (the latter tends to fluctuate more)?

The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees and their heirs lost their top 400 status between 1982 and 2014.

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So, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.

And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of U.S. income-earners, you’re still quite possibly part of the global top 1 percent.

November 10, 2015 10:28AM

Putting Income Inequality in Perspective

Debates about income inequality, “the top 1 percent,” and poverty typically examine those issues within the context of a single country. But, consider a global perspective. This web tool lets you find out which income percentile you belong to relative to all the other people in the world. If you make more than $32,400 per year, you are in the top 1 percent of the richest people in the world! 

And, bear in mind that the world is more prosperous than it has ever been in the past. Compared to you, the vast majority of people who have lived on this planet were desperately poor. Poverty, as Cato’s David Boaz put it in this online lecture, used to be ubiquitous. “Why are some people poor? That’s always the wrong question. The question is why are some people rich? Poverty is the natural condition of mankind, but it’s easy to forget that.” 

Fortunately, prosperity is rising and global inequality decreasing. Even as the world population has exploded, the number of people living in poverty has fallen. As a result of spreading prosperity, infant mortalityilliteracy, and malnutrition are in decline, and people are living longer. Extreme poverty’s end is in sight.

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Prosperity does not, of course, materialize without a cause. The role of industrialization and trade in bringing about economic growth and prosperity cannot be emphasized enough. 

So the next time someone brings up poverty or income inequality within the United States, keep in mind the importance of a proper perspective. From a global standpoint, you may very well be a part of “the top 1 percent.”

August 24, 2015 12:32PM

Americans Have More than They Realize

According to Gallup, more Americans think of themselves as “have-nots” today than at any point since Gallup began posing the question almost thirty years ago, while fewer Americans see themselves as “haves.” (Please see Emily Ekins’s earlier post for an in-depth analysis from a different angle). But do Americans actually have less in 2015 than in 1988? Let’s dig into the data to see whether Americans might have more than they realize.

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2015 is the first year when Americans spent more money dining out than they spent on groceries. Let’s examine why that might be. In 2015, U.S. GDP per person (adjusted for inflation) reached an all-time high. At the same time that average personal wealth is rising, many necessities like food are going down in price. As a result, spending on the basics takes up a smaller and smaller share of an American’s personal disposable income—dropping from 39% in 1988 to 32% in 2013. This means that Americans have more money left at the end of the day, which they can then choose to save, invest, or spend on luxuries like dining out.

Not only are Americans wealthier on average, but they are also working less. The average American worker in 2015 works 30 fewer hours in a year than her counterpart in 1988, and yet is almost $18,000 dollars richer in real terms.

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HumanProgress.org advisory board member Mark Perry recently pointed out that today’s young Americans may actually be the luckiest generation in history, based on what they can buy with earnings from a summer job. And increases in real wealth do not capture technological advances, which also contribute to rising living standards. The quality and variety of available goods is improving across the board. Almost no one had a cell phone in the United States back in 1990, but today they’re ubiquitous—and more useful, with an app for just about everything.

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In many ways, Americans have more today than ever before: more leisure time away from work, more disposable income left after basic expenses,  more choice in what they buy, and more advanced technologies at their fingertips.  Of course, there are still people who live in genuine need. The Great Recession and various growth-retarding policy decisions have done great harm, especially to the poor. Still, if the many positive trends that we are seeing continue, then hopefully more Americans will come to count themselves among the haves instead of the have-nots. To learn more about improving living standards in the United States and beyond, pay a visit to HumanProgress.org.

January 19, 2011 10:08AM

Farm Subsidies Benefit Landowners

Almost half of America’s farmland is operated by someone other than the owner. Critics of farm subsidies often point to examples of famous wealthy landowners receiving handouts as a reason to end the federal government’s agriculture gravy train. Notable recipients have included Ted Turner, Larry Flynt, Charles Schwab, and numerous members of Congress.

While policymakers justify their support for farm subsidies in the name of “protecting farmers,” a new academic study describes how landowners are often the real winners. Farm subsidies get “capitalized” into the price of farm land, pushing up land prices. As a result, those farmers who lease land from landowners at the inflated prices end up having a substantial share of their subsidy benefits effectively canceled out.

From the paper:

In all, the results confirm that government payments exert a significant effect on land values. The (marginal) rates of capitalization suggest that in the current policy context, a dollar in benefits typically raises land values by $13-$30 per acre, with the response differing substantially across different types of policies. This response certainly suggests that agents expect these benefits to be sustained for some time. In terms of the implications for the distribution of farm program benefits, our results confirm that a substantial share of the benefits is captured by landowners.

The authors’ conclude that the rhetoric exhibited by supporters of farm subsidies doesn’t always match the reality:

Policy rhetoric often justifies Farm Bill expenditures with the argument that impoverished farmers are in need of governmental support to remain in business. This view is pervasive outside of Washington. For example, consider the annual “Farm Aid” events intended to draw attention to the plight of the American farmer. Our analysis challenges this view. We demonstrate that land owners capture substantial benefits from agricultural policy. This is particularly problematic given that in many cases land owners are distinct from the farmers whose plight we are told we should be concerned with.

See this Cato essay for more on agriculture subsidies.

June 8, 2010 11:41AM

How to Explain Free Trade in Less Than Three Minutes

The professionally ignorant (and I'm thinking here of Lou Dobbs, among others) never "get it" about trade. They think it's some complex swindle, in which we deny ourselves "jobs," or that it should be about being "fair" or "balanced." They don't see how free trade creates prosperity and peace. I was inspired by the outstanding trade economist Doug Irwin of Dartmouth to explain what goes on when people trade. The challenge was to explain international trade in under 3 minutes. So here's the result in 2:57: The Great Prosperity Machine.

Share it with your favorite protectionist, or with professors and teachers. (There's more information at AtlasNetwork.org/BastiatLegacy.)

Watch and share: