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Obama, the Great Equalizer, Forgets About Economic Growth

The essence of the Obama presidency and Obamanomics revolves around redistributing wealth and reducing income inequality. Those are the president’s Big Ideas. To him, fixing those problems means fixing what he perceives has gone wrong with America during the past generation.

In Osawatomie, Kansas, last year, Obama said the election, “was about making choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefit the middle class, and those fighting to get into the middle class, and the economy as a whole.” Obamacare, the Buffett rule, letting the Bush tax hikes expire, raising taxes on corporations — none of that has anything to do with economic growth or job creation. They’re all about the Great Leveling that Obama desires.

And liberals like Obama think the numbers justify their focus on inequality. They point to the much-publicized work of economists Thomas Piketty and Emmanuel Saez. Using IRS data, they find a sharp rise in the share of pre-tax income earned by the top 1%. It roughly doubled over the past thirty years. But there are a number of issues with the Piketty Saez approach. One big one: The study ignores transfer payments such as Social Security, Medicare, food stamps, and other low-income programs.

Another way to gauge standards of living over time is by measuring consumption, since it better tracks the overall economic resources at a person’s command. And unlike income, consumption remains more or less steady throughout life since individuals borrow during years with low income and save in high-income years.

Turns out that the consumption gap across income groups has remained remarkably stable over time. AEI’s Kevin Hassett and Aparna Mathur in the WSJ today:

According to data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, if you sort households according to their pretax income, in 2010 the bottom fifth accounted for 8.7% of overall consumption, the middle fifth for 17.1%, and the top fifth for about 38.6%. Go back 10 years to 2000—before two recessions, the Bush tax cuts, and continuing expansions of globalization and computerization—and the numbers are similar. The bottom fifth accounted for 8.9% of consumption, the middle fifth for 17.3%, and the top fifth for 37.3%.

While this stability is something to applaud, surely more important are the real gains in consumption by income groups over the past decade. From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

Hassett and Mathur also have a paper on the subject.

And even if you want to focus on incomes, the picture looks not nearly as dire as Piketty and Saez argue. Work by economist Richard Burkhauser suggests middle class incomes rose 37% from 1979-2007 vs. 53% for the top quintile and 63% for the top 5%. Income inequality increased, but everyone made out pretty well.

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Bottom line: America’s biggest problems are slow economic growth and anemic job creation. That is what Washington should be focused on.