Has America really been a land of increasing inequality?
It depends on what you count, as my American Enterprise Institute colleague Jim Pethokoukis points out.
If you only count wages, salaries and taxable income, income inequality has been increasing over the past decade. If you count disposable income, it hasn't. Disposable income, as Jim points out, includes not only taxable market income but also “all government transfers (such as Social Security, unemployment insurance and welfare) and subtracts tax liabilities. This is a measure of resources actually available to household members for spending.” Disposable income, importantly, includes the Earned Income Tax Credit, which goes to low earners who are actually working -- and which some conservatives have called for expanding.
Jim reprints an illuminating graph (see below) compiled by Minneapolis Federal Reserve economist Fabrizio Perri and quotes him as saying, “This is because government redistribution between the top and the middle (the distance between the blue and the red lines) is also at its historical high.”
To which Jim, perhaps puckishly, adds, “One way, perhaps, to look at this data is that government redistribution has been offsetting a failure by the U.S. education system to more broadly prepare a workforce for a labor market demanding greater skills.”