Income inequality is over-exaggerated – and it’s not necessarily a bad thing
In his new book, Ed Yardeni explains that this claim, that the median wage in America has not risen in decades, is based on an “extremely flawed August 2018 study by Pew Research”, later magnified by President Biden’s bizarre claim that wages are the lowest in 70 years. 

In fact, using the more reliable Personal Consumption Expenditure (PCE) Deflator, a measure of inflation based on changes in personal consumption, rather than the Consumer Price Index, real average hourly earnings have been increasing at a solid average annual rate of 1.5% since 1995.

Median real household income, “a big favourite of economic pessimists and political progressives”, was up by 9.2% between 2016 and 2019. Deflated by the CPI, the measure was up 24.4% since 1995; and by the PCE, up by 36%. 

Moreover, the data excludes Medicare, Medicaid, food stamps and other non-cash government benefits and takes no account of the falling size of households or rising participation in the workforce. Finally, the median household income survey is based on census data rather than hard data such as payroll statistics and tax returns.

Syed’s claim that “the top 1% of the population has increased its wealth faster than at any time since the founding of the republic” is on firmer ground but raises the question of why this matters. “Income inequality is an inherent consequence of capitalism”, writes Yardeni, “and capitalism causes the most income inequality during periods of prosperity. The rich do get richer but almost everyone’s standard of living improves during good times.”

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Since wealth compounds, rising life expectancy increases inequality. “Most of the Forbes 400 tend to be older Americans.” As Mr Spock said in Star Trek: “live long and prosper.”

Wealth inequality, Yardeni agrees, has worsened slightly in recent years. But “constraining the ability of the wealthy to seize opportunities would affect the wellbeing of us all”. Economic inequality has been worsened by the Federal Reserve as the central bank’s “ultra-easy monetary policies in response to the pandemic sent the stock market to a record high and boosted the incomes of CEOs with pay packages heavily skewed towards stock compensation”.

Meanwhile, lots of households that depend on fixed-interest returns saw their incomes dive and the real value of bank deposits started to fall as inflation rose. This is not entrepreneurial capitalism, but its antithesis, crony capitalism.

Social mobility is more widespread than realised

Most analyses of income and wealth distribution over time ignore mobility or assume that it doesn’t exist. In fact, some of the rich get richer, some get poorer while some of the poor get richer. 

Some of America’s oligarchs have middle-class backgrounds, some humble backgrounds, but few were born with a silver spoon in their mouth. “On balance,” Yardeni says, “the data strongly suggests that mobility is on the upside.”

Read the whole of this article on the MoneyWeek website

Until next time,
Max

The FTSE 100 and the FTSE 250 each fell 1% yesterday to close at 7,198 and 22,549 respectively, while the FTSE All Share index was also 1% lower at 4,089. 

In European markets, France’s CAC 40 slipped 0.8% to 6,870 and the German Dax slid 1.9% to 15,239. 

In the US, the Dow Jones Industrial Average dropped 1.2% to 34,932, the S&P 500 fell 1.1% to 4,568 and the Nasdaq Composite was 1.2% lower at 14,980.

Overnight in Japan, the Nikkei 225 climbed 2.1% to 28,517 and the broader Topix rose 1.5% to 1,969. And in China, the Shanghai Composite added one point to 3,593 and the CSI 300 was 0.8% higher at 4,914.

Brent spot was trading at $71.27 early today and spot gold was at $1,798 an ounce. The pound was trading against the US dollar at 1.325 and against the euro at 1.172. Bitcoin was at $48,722 and £36,778.

Professional investors Charlotte Cuthbertson and Nick Greenwood of the MIGO Opportunities Trust pick four investment trusts that are trading at discounts to the value of their underlying investments.

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Emerging market stocks have fallen from favour with international investors, with the MSCI Emerging Markets index down by more than 4% since the start of the year.

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