The Poor Aren't Poor Forever

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The Poor Aren't Poor Forever

The question of the distribution of household income has become a popular topic. We hear about the rich getting richer, the poor getting poorer, and middle class families needing relief from “wars” waged against them. How are we as U.S. citizens and Cincinnatians doing in terms of our household incomes?

The U.S. Treasury Department has tracked people of diverse incomes for several decades. From 1987 through 2005, the purchasing power of all income groups—from the rich to the poor—has improved. In fact, the trend suggests that the poorer a household was at the start, the faster the increases in the family’s income. From 1996-2005, the income of the poorest household more than doubled. The data also suggest that the much talked about war against the middle class is somewhat of a myth. Or, if there is a war, the middle class seems to be winning. In the last 40 years, adjusted for inflation, the household income for middle class families has increased by nearly 50 percent.

However, significant income disparity is a fact in our economy. In the Cincinnati region, the richest 20% earn about 48% of total income. The poorest 20% earn slightly less than 4%. Nationally, the distribution is similar. However, income mobility - the movement in and out of the different income groups - is a frequent and dramatic factor which influences the vibrancy of any economy.

The Federal Reserve Bank of Dallas found that 95% of households who were poor in 1975 were not poor in 1991. For some households in the bottom 20%, poverty is not a permanent thing. For those investing in their own higher education, a temporary income level considered to be in the poverty class is a choice, but also a launching point to a higher paying career. For retirees, income decreases dramatically, even though their assets may be well above average. In the lowest income group the average age is 66; an evidence of a high concentration of retirees. This is not to say that there is not poverty in our communities; rather, it is an indication that low income households experience more income mobility as do other groups.

Stephen Moore, a senior economics writer for the Wall Street Journal, presents some analysis in the September/October issue of The American. He confirms that we are a very mobile and dynamic society in which all income groups have gained. Yet, according to U.S. Census Bureau, the 20% with the highest income have had the highest income gains. This is in part due to the way in which the statistics are calculated. For instance, consider someone with the lowest 20 percent of household income. If she then earns a larger income, she probably moves to the next income level and is no longer part of the poorest group. Her increase in income is reflected now in the next highest income group, not in the poorest group. However, every increase for those in the highest group is counted within that group because their classification does not change. They are already in the highest group.

While we often hear of people making incredibly high incomes, this should not be mistaken for a trend toward growing income gaps. Since the 1980’s we have seen the impact of gender and race diminish. Women have seen much faster income gains than men, and African-Americans have made faster gains than Caucasians. A study by the Pew Charitable Trusts attempts to assess the income mobility of children born to poor families compared to rich families. Of course, those children who started in high income families had advantages. However, of those who grew up in poor households in the 1960’s and 1970’s, more than half are not poor as adults.

While income equality is not a part of our economy, income mobility is a reality. Income mobility is a good indicator of a vibrant economy and remains a fundamental force for rich and poor.