Toward Equality of Incomes?

April 28, 1952

We often hear of the “equalization of incomes” in England. We seem less aware that a similar transformation has been going on right at home. But in measuring either the growth or “redistribution” of incomes there are many traps for the unwary.

On March 5, for example, The New York Times carried a long article by Will Lissner announcing a “social revolution” since the 30s. “The poor,” he wrote, “have become better off. Where three out of four families had incomes of less than $2,000 a year in 1939, only one out of three fell into that class ten years later. The well-to-do . . . have become more numerous. In the late ’30s, one family in about 50 was in the $5,000 and over income class. . . . In the late ’40s, one family out of six. . . . Over the decade [that of 1939 to 1949] median family incomes rose from $1,231 to $2.949.” And much more to the same effect.

As they stand, such comparisons, if not meaningless, are grossly misleading. They are in terms of “current dollars” (though this fact is not explicitly pointed out by Lissner), and the cost of living rose substantially in the decade selected (more than 70 percent, in fact), so that an income would have to go up at least that much in dollars in order to remain the same in terms of what it would buy. Not only is this readjustment not made in the foregoing figures; the reader is not warned of its need or given the basis for making it for himself. Yet without such an adjustment all sorts of statistical miracles are possible in any inflation. Today a Frenchman with the equivalent of $3,000 is a millionaire in terms of his own francs.

There has, however, been a striking “redistribution” of incomes in the United States, as the recent studies of Simon Kuznets and others show. The full Kuznets findings are still [on] press, but summaries have already been made public by two of his colleagues in the National Bureau of Economic Research, Arthur F. Burns and Geoffrey H. Moore. I have room to cite only a few comparisons. The upper 1 percent of income recipients in the U.S. received 16 percent of the countrywide total income in 1913. 17 percent in 1929, and 9 percent in 1948. How substantial the shift has been between 1929 and 1948 can be shown by one comparison. To achieve perfect equality of incomes, the share going to the upper 1 percent could have declined only 16 points (from 17 percent to 1 percent). But it actually declined by 8 percentage points, or half the mathematically attainable maximum.

How did this shift occur? Analysis can give at least part of the answer. Most wealthy people receive a relatively large portion of their income from property rather than from salaries. In 1929, for example, the upper 1 percent received 32 percent of their aggregate income from dividends, interest, and rent. Now on a per capita basis, employee compensation increased 134 percent between 1929 and 1948, “entrepreneurial” income 145 percent, rental income only 26 percent, and dividends only 6 percent: while interest payments per capita actually declined 21 percent.

Higher money income per capita is of course always desirable to the extent that it means a real increase in purchasing power. But whether greater equality of income is desirable or not may depend largely on how it is brought about. To the extent that it depends on maintaining artificially low interest rates, it is dangerous because such interest rates create and continue inflation. To the extent that it depends on holding down rents to uneconomic levels it means that in the long run not enough housing will be built or kept in repair. To the extent that it is brought about by excessive corporation taxes and excessive personal income taxes on the higher brackets it will undermine and eventually destroy incentives to the investment and production on which we all depend. But to the extent that it is brought about by a real increase in productivity on the part of the lower income groups it is not only wholly desirable, but tends to be solid and permanent.