WSJ Column on CBO Report Misleading: The Poor Are Getting Poorer

The May 23rd Wall Street Journal (WSJ) Outlook and Review Column, “The Poor Get Richer,” states that: “It’s been a rough week for John Edwards, and now comes more bad news for his “two Americas” campaign theme. A new study by the Congressional Budget Office(CBO) says the poor have been getting less poor.” A critical analysis of this report, “Changes in the Economic Resources of Low-Income Households With Children,” shows that the OPPOSITE of this is actually the case, and that the report actually supports the contention of the Edwards campaign that there are two Americas.

The WSJ column states that, “The earnings of these poor households are about 80% higher today than in the early 1990s.” This statement is true according to figure 1 on page 3 of the report, but is an isolated selection of data and terminology that attempts to inflate the perception of the actual increase in the overall economic well being of the poorest. It is an “inflated” figure because earnings are included in the report as a component of income, and the increase in inflation-adjusted INCOME (which INCLUDES earnings) of the families in the report for the lowest 20% from 1991 to 2005, was only 35%. The increases in income for the bottom 5%, the 2nd, 3rd and 4th quintiles were 9%, 18.8%, 17.3%, and 21.5%, while the increase in income for the top 20% of the sample group during this time was 53.2%. This means that all five of these lower groups saw NO RELATIVE INCREASE in income in comparison with the top 20%, in fact from 1991 to 2005 THEY ALL LOST significant GROUND in the economic maintenance of their lives.

An accurate translation of this data would be that the rich got richer, while the middle class and the poor got poorer, with the poorest of the poor and the middle class taking the hardest brunt. The CBO report therefore completely REAFFIRMS the economic part of the contention of the Edwards campaign, that there are two Americas.

Furthermore, the report only focuses on changes in income of households WITH children, and states that the growth in income from 1991-2005 for the poorest households overall “differs significantly” from that of income growth of households with children. As the report states, “Indeed, the lowest quintile of households without children experienced no real increase in income from 1991 to 2005.” Therefore, for all households together, the overall increase in household income was significantly less than the 35% increase indicated in the report, and nowhere near the appearance of economic growth trumpeted by the WSJ of nearly 80%. Therefore, overall the poorest lost even more ground. These statements from the report directly refute the conclusion reached by the WSJ column that the “Poor have been getting less Poor.”

The reasons given by the CBO report for the increase in earnings and income for the lowest 20% of households with children were: 1) the Welfare Reform act of 1996, along with 2) an expansion of the Earned Income Tax Credit and 3) the expansion of the economy in the mid-’90s. According to the report, the withdrawal of welfare payments forced those with children into the job market, and the result was an increase in the percentage of earnings in income for these households, and thus an increase in overall income for these families from 1996 to 2000. In other words, most of the income received in these households during this time, shifted from Government payments to earnings from employment, with a net increase in income for this group.

The main claim of the report, supported by the survey data, is that the average inflation-adjusted income of low income households with children rose from 1991-2005 by 35%. But a look at table 1 on page 12 or the report shows that the situation of ACTUAL INCOME GROWTH for middle and lower class households got much worse from 2000 to 2005, as actual household income FELL for all groups but the top two groups, with the poorest 20% experiencing the largest decrease.

From table 1 on page 12 of the report, 1991-2000 household income for:
the bottom 20% rose from $12,400 to $18,800, an increase of 51.4%,
the 4th quintile rose from $31,600 to $39,400, an increase of 24.9%,
the 3rd quintile rose from $48,700 to $59,100, an increase of 21.4%,
the 2nd quintile rose from $69,100 to $83,700, an increase of 21.1%, and
the highest quintile rose from $114,700 to $176,300, an increase of 53.7%.

From 2000-2005 household income for:
the bottom 20% fell from $18,800 to $16,800, a decrease of 10.8%,
the 4th quintile fell from $39,400 to $37,500, a decrease of 4.8%,
the 3rd quintile fell from $59,100 to $57,200 a 3.3% decrease,
the 2nd quintile rose from $83,700 to $83,900 a .3% increase, and
the highest quintile fell from $176,300 to $176,300, a 0% change.

The data clearly show that during the Bush years, the economy performed poorly for household incomes overall, with the effects on household income increasingly worsening as one follows the scale down from highest to lowest income brackets in the report. Even if the highest quintile didn’t do as well from 2000- 2005, they held ground, where the lower quintiles lost ground. Even in the bad economic times of recession, by this report, the Bush economy was better for the richest. Likewise the Bush economy during this time was hardest on the poorest, as income for this group fell by 10.8%, the most of any income group.

The data in the report ACTUALLY PRESENTS A HARSHER PICTURE than the one just described of the impact of the loss in income for the lower three groups during the years of 2001-2005. The representation by the CBO of an 10.8% decrease in income for the bottom 20% from 2000 to 2005 is accurate for a snapshot of that timeframe for relative comparison of income with other groups, but does not reflect the loss of income relative to the gains of 1991-2000. The reason for this is because the change in income during 2000-2005 calculates the change in income at the point of the achievements in income increase from 1991-2000, using the higher income figure of 2000 not the lower income figure from 1991. That’s why the figures in table 1 of the CBO report don’t add up. For example, the poorest group’s 51.4% increase from 1991-2000, minus the 10.8% decrease from 2000-2005, does not equal the 35% overall increase from 1991-2005. If we compute the percentage decreases of 2000-2005 from the 1991 income figures for all classes, we come up with income losses for the lower three groups of 16.4%, 6.1%, and 4.1%. Showing the losses in relation to the gains of 1991-2000, displays that the losses incurred during the years of 2001-2005 ACTUALLY WIPED AWAY 31.9% OF THE GAINS IN INCOME ACHIEVED from 1991-2005 for the poorest 20%, 24.5% of the gains achieved for the 4th quintile, and 19% of the gains achieved for the 3rd quintile. The years of 2001-2005 were catastrophic for the poor and the lower middle to middle classes in terms of keeping pace with the cost of their daily lives. This picture mocks the claim by the WSJ that the poor are getting richer.

The only sound conclusions that could be reached by the data in the report from the WSJ column writer that would not be inaccurate or misleading, are that:

1) the poorest 20% of participants IN THE STUDY — of only households WITH children — kept pace with the highest quintile from 1991 to 2000, meaning only that, on average, ONLY THIS GROUP didn’t get relatively any poorer during this time. However, during this time they didn’t make up any ground either relatively during this period they stayed the same. Any relative maintenance of the rate of increase in income with the rate of increase of the top 20%; from entry into the job force from 1996 to 2000 from the Welfare Reform Act; came to a screeching halt in 2000, with the onset of the recession. From 2000 to 2005, income for this group fell by 10.8%, while the top 20% saw a decrease of -0.3% which translates into an overall loss; for the poorest; of 10.5% in relative income, in keeping pace with the top 20%.

2) That for participants in the lowest income group, in the study and on average, the Welfare Reform Act and the expansion of the Earned Income Tax Credit appear to have worked in improving, in the short term, the income of low-income households with children. And

3) The 3rd and 4th lowest income groups, while losing ground in actual income in the percentage loss of income from 2000-2005, lost more ground relatively from 1991-2000, than they did from 2000-2005. The Bush administration will somehow claim this as a victory, that the lower two middle class did better relatively better under them than from 1991-2000. It, however, would be the most Pyrrhic of victories, when actual income for these classes fell 10.5% and 3%, which represent wiping away 24.5% and 19% of the gains from 1991-2000. I don’t know how ANY administration could claim these kind of losses in the income of their citizens somehow as a victory.

The report does no breakdown of the increase in net worth of the upper percentiles of the top 20% during the time periods of the study, which would provide a more accurate picture of the disparity in actual economic growth between the various groups.

The data in the CBO report, when critically analyzed, paints a very serious picture of the deteriorating economic conditions of the ordinary American citizen. It appears that the economic contention of the Edwards Campaign of “Two Americas” is on sound footing, and sadly for the economic health of the ordinary American citizen, much needed.

Richard J. Luczak II is a writer on business, economics, citizenship issues, and philosophy. His columns have been published in the Kansas City Star, The Origination News, and other publications. He has written a book on Immanuel Kant: The Kant Variations, and has been published in the academic philosophy journals Philosophia at the Research Center for Greek Philosophy at the Academe in Athens, and in Explorations In Knowledge, Manchester University. Read other articles by Richard, or visit Richard's website.

5 comments on this article so far ...

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  1. jsalvati said on June 23rd, 2007 at 5:23am #

    What the report indicates is that everyone got richer, including the poor, but inequality also increased. To claim that “the rich got richer, while the middle class and the poor got poorer, with the poorest of the poor and the middle class taking the hardest brunt” is just silly. While the increase in inequality is interesting and worth discussing, if you are concerned about the poor, you shouldn’t care about what happened to the rich. What does it matter if the rich got richer faster than the poor got richer? You could state that you don’t think the poor are getting richer fast enough, ignoring what happened to the rich, and that would be worth discussing, but you chose to argue that the poor are worse off because they got relatively less wealthy.Would it be good if the opposite had occured? What if all incomes dropped, but the incomes of the rich dropped by more? It is useless to define welfare by relative wealth, because you can’t buy food with relative wealth. I would do some serious introspection and decide if your sympathies really lie with the poor.

  2. Richard J. Luczak II said on June 23rd, 2007 at 11:47am #

    J Salvati writes 4 points that I will respond to:
    1) “To claim that “the rich got richer,
    while the middle class and the poor got poorer, with the poorest of
    the poor and the middle class taking the hardest brunt” is just silly.”
    2) “While the increase in inequality is interesting and worth discussing, if you are concerned about the poor, you shouldn’t care about what happened to the rich.”
    3) “It is useless to define welfare by relative wealth, because you can’t buy food with relative wealth.”
    4) “I would do some serious introspection and decide if your sympathies really lie with the poor.”

    My response to J. Salvati:

    A) Salvati makes two points in #2- a )”While the increase in inequality is interesting and worth discussing, b) if you are concerned about the poor, you shouldn’t care about what happened to the rich.”-

    The logic of Salvati’s argument in #2 is flawed because these two points directly contradict each other. Any increase in INEQUALITY is measured precisely by relative comparison, and helps to establish what makes it worth discussing- the fundamental unfairness of it. So if one wants to discuss an increase in inequality shown in a report, relative comparison of what happened with the poor in comparison to what happened with the rich is EXACTLY what one would want to discuss. One cannot discuss an increase in INEQUALITY without treating what happened with both. This is precisely what I did discuss here- the increase in income inequality- by showing that the poor and middle class fell behind the rich during the years of the CBO report.

    B) Salvati writes in #3- ” you can’t buy food with relative wealth.”
    On the face of it the point appears to be correct so lets discuss it. In terms of the real things that the middle class and the poor can buy, from 1979-2004, the data show that the poor and middle class fell further behind in this as well. This is clear from the economic data available. The CBO report shows that middle class income rose 18% from 1979-2004, while the Consumer Price Index rose 77% from 1984-2003. [http://qrc.depaul.edu/StudyGuide/Constant%20Dollars.htm) I didn’t include the latter in my argument because I wanted to deal with solely the information in the CBO report. A St. Louis Post-Dispatch editorial this month also noted that according to the CBO, income for the top 1% went up %176 in that same time. So it appears this relative decrease for the poor and middle class in relation to the top 20%, also had the effect of a real decrease in spending power. Thanks for bringing up this point.

    C) Salvati writes in #1- “To claim that “the rich got richer,
    while the middle class and the poor got poorer, with the poorest of
    the poor and the middle class taking the hardest brunt” is just silly.”
    And states in #3 that- It is useless to define welfare by relative wealth”.

    Using relative comparison to determine economic welfare of a business, organization, family, or individual is hardly silly, (but thanks for the term of diminishment), and hardly useless. Relative variation comparison in income performance is one of the two fundamental metrics in our economy in evaluating any kind of income or unit performance variation, and is used by most- if not every- business owner, executive, manager, and investor in taking account of their respective economic positions, extending this to the evaluation of all their managers and all employees.

    This is what it means for our economy to be fundamentally competitive- to compete against others for economic reward. The two questions we always ask first are: 1) How did we or our organization do in actual dollars compared to last year, and 2) how did we or our organization do in relation to the performance of others- i.e. in relation to direct competitors, to industry standards, and to businesses, investments, investors and organizations of other kinds.

    Relative variation comparisons have fundamental impact on the industry perceptions and on the inner workings of both public and private companies, investors, and employees. If Toyota increases 53%(like the top 20% in the CBO report) in net income and units over a period of time, and in that same period of time, Ford increases 20% and GM 24%, Toyota stock will gain more value than Ford and GM in that time. If this variation persists for any length of time this will cause a reevaluation of strategy, processes and procedures at every level of company management at Ford and GM, from the board of directors down to dealership sales. If the variation persists Toyota will be seen as a better investment, and a percentage of investors of the other two will sell their stock and buy Toyota. The WSJ story will not be- “Toyota, Ford and GM all do well”, it will be “Toyota Gains Market Share- Ford and GM Slip”.

    The same dynamic of relative variation comparison applies to every public company, private company, investment and investor in every industry. If there is negative variation in relative performance that persists in any form, there are “come to Jesus meetings” gnashing of teeth and recriminations, about what the organization is “doing wrong”, or “not doing” to accomplish the same increase as the competitor. The owner and investors feel left behind.

    For the WSJ to equalize the differences in income increase between groups by stating that “everyone saw increases” from 1991 to 2005, is more than a bit hypocritical, given it’s own predilection for relative comparison, and when considering the top 1% – 3% of income earners are in business- so that they can be in the top 1% -3%!!

    Relative comparison is the social instinct of power that drives competition- to be the best, and to be rewarded the best, which means to be rewarded better than others. As we saw above, companies, investments, employers and employees are compared relatively in every other facet of economic performance, yet when it comes to comparing income the WSJ and Salvati think the poorest 20% and the middle class shouldn’t be concerned with losing significant ground comparatively over 25 years.

    Relative comparison and the anger from the loss of relative ground, was the crux of the argument made by banks and companies against the inflation of the Carter years- that they were losing wealth because inflation was favoring home owners and wage earners, because wages went up with inflation, while loan payments stayed the same, thereby diminishing the relative value of a loan as an investment for a Bank. (See secrets of the temple) It is the same fear of loss of position of the business and banking class that fuels the Feds fight against inflation today.

    An opponent could make an argument stating that business owners are entitled to more income than employees because of entrepreneurial risk. The opponent would be correct. However this was already accomplished by leaps and bounds in 1979, yet to extend the right and theory of entrepreneurial risk to include not only greater compensation than employees in a given year, but that also each and every year owners should be compensated with an even greater increase, relative to what others receive, teeters on claiming the divine right of kings.

    If the WSJ and Salvati wish to make the argument that individuals in the lower groups of the CBO study should not try to compete against companies and business owners, then this just embeds the contention and feeling among business owners- in this argument- that they should be treated differently, and that ownership gives them a right to make increasingly more each year at a more accelerated rate of increase. This is the embedding and assumption of a class argument, that business owners and rich investors are in a different class and should be treated differently, and again borders on resurrecting the ‘divine right of kings’.

    D) Salvati writes in #2- “If you are concerned about the poor, you shouldn’t care about what happened to the rich.”
    Salvati here attempts to separate what has happened to the poor (relative income decrease), from what has happened to the rich (relative income increase), and thus implicitly makes the claim that there is no connection between the two. The Data in the report support otherwise, that the fundamental increase in inequality over 25 years, was actually a fundamental change in structure- and thus a REDISTRIBUTION- of the flow of income from the poor and the middle class to the rich during the 25 years of the report. This suggests that the two flows of income are interconnected, that at least in part that the rate in increase of income for the top 20% was caused by the falling behind of the lower and middle classes.

    E) “I would do some serious introspection and decide if your sympathies really lie with the poor.”
    Thanks for the suggestion, maybe you can pitch your own “Dr. Phil” show to Oprah. It is the unfairness and impact of this fundamental change in the structural redistribution of the flow of income for the poor and middle class, after research and introspection, that my analysis and thus also my sympathies speak to.

  3. jsalvati said on June 25th, 2007 at 9:27pm #

    My first post was a bit dickish, and I apologize. I think I now understand the source of our disagreement. I don’t think you understand the variables reported by the CBO. Any inflation adjusted already takes into account the CPI (the CPI is a measure of inflation), including inflation-adjusted income. The data shows that the purchasing power (ability to get goods and services) of all reported income brackets rose, including that of the botom 20%.

    I think we have to distinguish between caring about distributional equality (or inequality) and caring about the physical needs of the poor. I am concerned about the physical needs of the poor, but I am not particularly concered about distributional equality. That’s why I am concered about improving the purchasing power of the poor, but not about a widening income distribution.

  4. jsalvati said on June 25th, 2007 at 9:32pm #

    Please, e-mail me. I would love to continue this discussion, but I don’t really want to keep having to check this website.

  5. jsalvati said on June 25th, 2007 at 9:33pm #

    er, I just I should leave my e-mail: jsalvat i -at- u -dot- washington.edu