The Rich Get Richer, and So Do the Poor – Eccentric Economics

May 19, 2019

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There is an old saying that nearly everyone has heard: The rich get richer, and the poor get poorer. This depressing observation precedes the claim that the American middle class is shrinking. This is quite a generalized statement, and in some circumstances it may hold truths. However, if we are to define “rich and poor” by standard of living, income to purchasing power, and the poverty rate, this has little merit.

Although I have my reserves with utilizing GDP to measure economic inquires, it is a very handy tool that professional economists employ for various measurements. To evaluate the standard of living of a given population, economists use GDP per capita. Adjusted for inflation, there has been a consistent increase in GDP per capita, which doesn’t even account for the many consumer products and utilities only the wealthy could afford decades ago such as plumbing, televisions, cell phones, laptops, etc.

There are many everyday knick-knacks, widgets, and utilities that are taken for granted. This is not to say that many everyday needs are necessarily affordable, as we have seen many necessities required to navigate through life outright expensive. This includes rent, mortgages, tuition, and healthcare. What do these have in common?

Regarding wages, we’ve heard that “wages have been stagnant when adjusted for inflation since the 1970s, while productivity has increased.” This is true, but utterly misleading. Money wages (nominal) of income earners do not matter per se; rather, it is their purchasing power, or their real income that is pertinent. If productivity increases, this reflects capital investment in the production process which allows companies to efficiently produce higher quantity and quality goods at a lower cost to the consumer. As long as inflation is kept to a minimum, consumers’ purchasing power toward these goods ensures they can obtain them at affordable costs.

The middle class is indeed shrinking, though not in the manner many believe it to be.

Those departing the middle class are not slipping into the lower class, rather moving into to the upper class. In a study conducted by the Urban Institute, it was concluded that:

“… the proportion of the population in the upper middle class went from under 13 percent in 1979 to over 29 percent in 2014. The effect of this growth was magnified by the greater income differences between this group and the rest of the population. Although wealthier people always have a greater share of total income, this report documents a major shift in the distribution of economic resources. In 1979, the bottom three income groups controlled 70 percent of all incomes, and the upper middle class and rich controlled 30 percent. By 2014, this distribution shifted to 37percent for the bottom three groups and 63 percent for the upper middle class and rich groups. The middle class alone saw its share of income decline from 46 percent in 1979 to 26 percent in 2014.”

You read that right.

Although the upper classes grew over the past four decades, the lowest economic classes have shrunk. If one is to look at it from a two-dimensional perspective, there indeed has been an increase in economic inequality, but not at the expense of one over the other. There is increased inequality because those who were once in the lower classes are moving to the upper classes, while some of the poor remain in their respective lower class.

The notion that the “rich get richer and the poor get poorer” is simply not a valid statement in the United States. Yes, the very rich have seen an increase in their wealth. But as the data shows, the standard of living for the poor has increased, while their representation of the population has decreased.

There will always be inequality in various aspects, especially income. Not everyone can offer the same marketable skills as other members of society, and to punish those who have these skills and innovative knowledge in demand is counterproductive. The focus on the expansion of the 1% has introduced many misconceptions, causing many politicians and activists to shout only half-truths. They neglect these very important nuances, and overlook that the only way to effectively obtain the results they desire is to reduce the income of those who gravitated toward the upper middle class.

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Logan Davies

Logan Davies is a Regional Manager in the Banking Services industry, and the director of the non-profit organization, Voluntaryism in Action. He graduated from Middle Georgia State University with a degree in Business Administration. He is the father of a loving son, an avid outdoorsman, firearm enthusiast, and unwavering supporter of liberty.