The Rich Get Richer; M. Skousen

Economics on Trial The Rich Get Richer, and the Poor Get ... By Mark Skousen "The modern market economy accords wealth and distribution income in a highly unequal, socially adverse and also functionally damaging fashion." -John Kenneth Galbraith T he allegation is appearing everywhere: Real average wages are stagnating and the distribution of wealth and income in the United States is becoming more unequal. In his latest book, Galbraith cites recent Federal Reserve statistics: "By 1992,the top 5 percent were getting an estimated 18 percent, a share that in more recent years has become sub stantially larger, as that of those in the poorest brackets has been diminishing. This, the good society cannot accept."1 According to the Bureau of Labor Statistics, average real wages have been declining since the mid-1970s. If benefits are included, total real compensation has been rising, but only modestly. Finally, Business Week (February 25, 1996) declared, "Is America Becoming More of a Class So ciety?" The magazine cites several academic studies indicating less upward mobility for less-educated Americans. The Wall Street Journal (December 23,1996) adds, "Inequal ity may grow for lifetime earnings."

Critics of market capitalism are often mis led by conventional measures of economic wellbeing, in particular the Lorenz curve, which measures income distribution. Dr. Skousen is an economist at Rollins College, Department of Economics, Winter Park, Florida 32789, and editor of Forecasts & Strategies, one of the largestinvestment newslettersin the country. The third edition of his book Economics of a Pure Gold Standard has recently been published by FEE. The Lorenz curve measures the percentage of a nation's total income as earned byvarious income classes. Typically,it is divided into five income groups. In the United States, the highest fifth (the highest income earners) usually receive 40 percent of the nation's income, while the lowest fifth (the lowest income earners) receive around 5 percent. Using the Lorenz curve, U.S. income appears to be seriously maldistributed, "now the ex treme case among the major industrial coun tries," says Galbraith.

However, the Lorenz curve establishes an unfair and misleading guide for measuring social welfare. Suppose, for example, that an "ideal" line of "perfect" equality is achieved on the Lorenz curve, i.e., the highest fifth (top 20 percent of income earners) only receive 20 percent of the nation's income, while the bottom fifth (lower 20 percent) increase their share to 20 percent. What does this ideal mean? Everyone-the teacher, the lawyer, the plumber, the actor-earns the same amount of income!2 Since few economists think equal wages for everyone is an ideal situation, why do they think moving toward "perfect equality" on the Lorenz curve is appropriate? Moreover, the Lorenz curve is unable to show an increase in a country's standard of living over time. It merely measures distribution of income. To measure changes in socialwelfare, econ omists often rely on a second measure average real income. This, too, has its short comings. A single statistic may mask improvements in an individual's standard of living over time.

175 176 THE FREEMAN • MARCH 1997 For example, average real income shows hardly any change since the mid-1970s. Yet other measures of wellbeing, such as con sumer expenditures and the quantity, quality, and variety of goods and services, show remarkable advancement over the past 20 years. Consumer spending rose a dramatic 40 percent. per person in real terms during this period. As Professor Richard Vedder says, "How many Americans in 1975 had VCRs, microwaves, CD players, and home computers?" The Work of Stanley Lebergott Stanley Lebergott, professor of economics at Wesleyan University, has probably done more work in this area than anyone else. Instead of relying on general measures such as average real income, he uses a more com monsense approach-looking at individual consumer markets in food, clothing, housing, fuel, housework, transportation, health, rec reation, and religion. His work is fascinating.

For example, he developed the following table to measure improvements in livingstan dards from 1900 to 1970: Living Standards, 1900-1970 Among All Among Poor Percentage Families Families with ... in 1900 in 1970 Flush toilets 15 99 Running water 24 92 Central heating 1 58 One (or fewer) occupants per room 48 96 Electricity 3 99 Refrigeration 18 99 Automobiles 1 41 Source: Stanley Lebergott, The American Economy (Princeton University Press, 1976), p. 8. In Pursuing Happiness, Lebergott demon strates repeatedly how American consumers have sought to make an uncertain and often cruel world into a pleasanter and more con venient place. Medicines and medical facili ties, artificial lighting, refrigeration, transpor tation, communication, entertainment, finished clothing-all have advanced living conditions. Regarding women's work, Lebergott notes that weekly hours for household and family chores fell from 70 in 1900 to 30 by 1981.The 1900housewife had to load her stove with tons of wood or coal each year and fill her lamps with coal oil or kerosene. "Central heating also reduced the housewife's tasks. She no longer had to wash the carbonized kerosene, oil, coal, or wood from clothes, curtains, and walls, nor sweep floors and vacuum rugs as persistently. Automated and mechanical equipment reduced her labor further .... By 1950,over 95 percent of U.S. families had the facilities [of] central heating, hot water, gas, electric light, baths, and vacuum cleaners.,,3 Regarding water, Lebergott comments, "The average urban resident consumed about 20 gallons of water per day in 1900. Rural families had virtually no piped water; 55 percent did not even have privies.... By 1990, American families devoted two days' worth of their annual income to get about 100 sanitary gallons every day, piped into the home.,,4 Benefits to the Poor, Too This kind of historical perspective is re freshing and eye-opening. The increase in the standard of livingas measured by the quantity, quality, and variety of goods and services has increased dramatically and profoundly in the twentieth century, for people of all incomes.

In many ways, the poor have advanced the most and are now capable of living in decent housing, owning an automobile, and enjoying many of the pleasures previously afforded by the wealthy. Cheap airline services allow them to travel extensively.Television givesthem the chance to see sports events and musical shows previously limited to the rich and the middle class. Compared to yesteryear, every house today is a castle, every man is a king. 0 1. John Kenneth Galbraith, The Good Society: The Humane Agenda (Boston: Houghton Mifflin Co., 1996), p. 50. 2. For a critique of the Lorenz curve, see my work Economics on Trial (Irwin, 1991), pp. 187-197. 3. Stanley Lebergott, Pursuing Happiness: American Consum ers in the Twentieth Century (Princeton, N.J.: Princeton University Press, 1993), p. 58. 4. Ibid., pp. 117-118. See also Lebergott's latest work, Con sumer Expenditures (Princeton, N.J.: Princeton University Press, 1996).