The View From 1776

Blunting a Democrat/Socialist Campaign Spear Point

The much decried “income gap” between different income sectors is considerably less than Democrat/Socialists and mainstream media propagandists declare it to be.

Forbes Magazine columnists Brian S. Wesbury and Robert Stein report on a study by Northwestern University economist Robert J. Gordon. 

Professor Gordon’s analysis corrects for statistical errors imbedded in the Democrat/Socialist version, and the numbers reveal no significant gap between productivity increases and income growth.  Moreover, when the apples-to-oranges comparisons of household incomes employed by liberal-progressive propagandists is replaced with individual income statistics, even more of the putative gap disappears.  The reason is that, in the earlier periods used by liberal-progressives as a base for comparison with more recent numbers, households had several times more members on average than today.  In recent years, households have become much smaller: more young workers live alone in apartments; the number of single-parent families has mushroomed; and the growing proportion of the population constituted by the elderly mostly live as one or two people per household.

Most workers now work fewer hours than during the Democrat/Socialist base period, which means that average hourly income has increased more than liberal-progressive allow. 

The consumer price index (CPI) is not uniform from the top to the bottom of the income scale.  Average prices for the lower income ranks have increased much less than at the top, because of what may be called the Wal-Mart phenomenon, which has kept price increase of non-fashion staples well below the increases for higher-income fashion items for the upper income levels.  This means that lower tier workers’ incomes have greater effective purchasing power than do the incomes of the higher tiers, who disproportionately live in much higher-cost cities on the East Coast, upper Midwest, and the Left Coast.

Finally, Professor Gordon observes that the much faster growth of top tier earners’ incomes is partly the result of Clinton administration regulations that limited the tax deductibility of executives’ high cash salaries.  The result was a general switching from cash compensation to granting of stock options, which became bonanzas as the Fed-inflated money supply boomed the stock market.

Professor Gordon’s analysis can’t be dismissed as uninformed opinion.  According to Wikipedia:

From 1995 to 1997, Robert J. Gordon served on the Boskin Commission to assess the accuracy of the United States Consumer Price Index (CPI), having written the definitive criticism of CPI inflation overstatement in 1990. He is also a member of the Business Cycle Dating Committee of the NBER, which determines when recessions start and end.

Robert J. Gordon’s popular text Macroeconomics was the first to incorporate the rational expectations hypothesis into the analysis of the Phillips curve. Soon all subsequent macro textbooks were expounding the “Expectations Augmented Phillips Curve.” And, now as some twenty years have passed from the first appearance of Gordon’s text, it is still the standard approach to the question of the trade-off between inflation and unemployment in the short and long run.