Think Again, Senator Obama

If you've followed the campaign at all this year, it's not hard to notice Senator Obama's increasingly populist rhetoric about the "poor getting poorer" and how "free market" economic policies of previous presidents has only benefited the wealthy at the expense of the poorest Americans. However, Arthur B. Laffer and Stephen Moore of the Wall Street Journal discuss the validity of these claims, using credible evidence and economic logic to demonstrate that his claims are fallacious at best (big surprise there). Here are some highlights:

In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families -- mother and father in the home -- rose to $78,000, an all-time high.

The authors then go on to state these statistics "reflect a 25-year trend of upward economic mobility," contradicting the usual "the poor are only getting poorer" rhetoric we so often hear from politicians.

At the outset, the authors rightly identify Obama's claims as false and discuss how his economic policies are then based squarely on these false premises:

More important, Barack Obama is wrong when he states on his campaign Web site that the economic policies started by Ronald Reagan have rewarded "wealth not work." Based on this false claim -- that the rich have benefited by economic growth while others have not -- he intends to raise tax rates on high-income individuals.

Raising taxes would work to reverse the 25-year trend of large economic growth accompanied by drastic reductions in taxes for all income levels, and as the authors point out [emphasis mine]:

When all sources of income are included -- wages, salaries, realized capital gains, dividends, business income and government benefits -- and taxes paid are deducted, households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005. This fact alone refutes the notion that the poor are getting poorer. They are not.

This same lowest income quintile has also experienced a 11% increase in real after-tax income from 1983 until 1992, followed by another 10% increase between 1992 and 2002. These numbers are astonishingly positive signs of an increase in wealth even among the lowest quintile of income-earners. However, the authors point out that these significantly large income gains of the past 30 years have been systematically understated because of three factors: the fall in people per household, the earned income tax credit effect, and income mobility. Touching upon the latter of these three factors, Laffer and Moore write:

One way to quantify income mobility is to examine how many people remain in the same tax bracket over time. We compared the returns of tax filers in the lowest tax rate bracket (zero) in 1987 with their returns in 1996. Only one third of the tax filers were still in the zero tax bracket, but 25% were now in the 10% bracket, 32% had moved up to the 15% bracket and 9% were in the 25%, 28%, 33% or 35% brackets. And that was following them for a decade, not a generation.

Indeed, great strides were made in just under a decade. The evidence suggests that this mobility continued and possibly improved during the rest of the 1990s and into the subsequent decade:

From 1996 to 2005, we have the income mobility data for income quintiles. Of those filers who were in the lowest 20% in 1996 and who also filed in 2005, 42.4% remained in the bottom 20%, 28.6% were in the next highest quintile, 13.9% were in the middle quintile, 9.9% were in the second highest quintile, and 5.3% were in the highest quintile.

This is not to deny that there is relative poverty in the United States, but the data certainly demonstrates that:

America is still an opportunity society where talent and hard work can (almost always) overcome one's position at birth or at any point in time. Perhaps the best piece of news in this regard is the reduction in gaps between earnings of men and women, and between blacks and whites over the last 25 years ... But the evidence is plain that all groups across the income distribution have made solid gains during the last generation.

Naturally, much of this solid evidence will be ignored in political discussions regarding the status of low-income Americans in today's economy. Even though "taking from the rich through much higher tax rates in order to help the poor and middle class makes no sense intellectually and has seldom worked in practice," politicians will continue to discuss the need for an even more progressive tax system as a means of rallying middle-class, blue-collar support.

Playing up class warfare is certainly a key element to effective political gamesmanship during an election year, so I would count on Obama's populist rhetoric continuing unfettered, regardless of things like "facts" or "evidence."