http://www.forbes.com/sites/johngoodman/2014/01/02/the-five-biggest-myths-about-income-inequality/ John Goodman, Contributor

1/02/2014 @ 11:04AM

The Five Biggest Myths About Income Inequality

“Inequality is the defining challenge of our time,” according to President Obama. It’s certainly the topic of the day for Paul Krugman, Joe Stiglitz and a whole raft of liberal pundits.

But have you noticed that hardly anyone else is talking about it? When is the last time you heard a shoeshine person or a taxi cab driver complain about inequality? For most people, having a lot of rich people around is good for business. But if average folks are not complaining should they be?

Unfortunately, a lot of what passes as serious commentary is actually myth. What follows are five examples.

Myth No 1: Income for the average family has stagnated over the past 30 years.

Here is an oft-quoted statistic: From 1979 to 2007, taxpayers’ median real income, before taxes and before government transfers, rose by only 3.2 percent. Cornell University economist Richard Burkhauser, via Greg Mankiw, shows why that statistic is misleading:

If we combine the income of all the taxpayers within each household to get household median income, that meager 3.2 percent rises to a bit more respectable 12.5 percent.

If we add in government transfer payments, that 12.5 percent number becomes an even better 15.2 percent.

Factoring in middle class tax cuts over the period, the 15.2 percent figure rises to 20.2 percent.

But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2 percent to 29.3 percent.

Finally, if we add the value of employer-provided health insurance, the 29.3 percent figure rises to 36.7 percent.

So there you have it: real income for the average household actually increased by more than a third over the past 30 years.

This conclusion is consistent with other studies. A CBO study of family income over the same period of time found an increase almost twice that size: the average family experienced a 62 percent increase in real income.

Economists have a way of measuring inequality that includes the entire population, not just the average family or the top 1 percent. It’s by means of a Gini coefficient, which varies between 0 (complete equality) and 1 (complete inequality). One study found that between 1993 and 2009, the Gini value actually fell from .395 to .388 — meaning that inequality has actually declined in recent years.

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