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One America

Democrats' focus on income inequality misses important points

Few ideas animate today's Democratic Party as much as the firm belief that income inequality is growing at a grossly unfair rate. The ultra-rich, we are told, are growing much richer while the middle class and poor fall behind. The blame usually goes to globalization or tax cuts as candidates promise to reverse the slide toward what presidential candidate John Edwards calls the "two Americas."

Democrats aren't making these claims without evidence, and several studies indeed show income gaps growing over the past two decades. The problem, says Cato Institute senior fellow Alan Reynolds in a study for Cato and in his book Income and Wealth, is that these studies rely on data from flawed sources-namely, the IRS-that paint too bleak a picture.

At first glance, this argument-that income tax returns are a bad way to measure income-seems odd. But Reynolds points out that money the government gives to poor Americans doesn't show up on returns. Neither does income from 401(k) plans, which have mushroomed for the middle class in the last 20 years. Changes in tax law in the late 1980s, meanwhile, induced many businesses to file under the income tax system instead of the corporate tax system, making wealthy Americans' incomes suddenly appear larger with no real gain.

"Aside from stock option windfalls during the late-1990s stock-market boom," argues Reynolds, "there is little evidence of a significant or sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth over the past 20 years."

Reynolds' take certainly has its critics, but their whole focus on income gaps misses an important point: Countries with greater equality, often held up as models by liberals, also have lower living standards for the poor and middle class. The poor may have incomes closer to the rich in those countries, but they're not better off.

A 2004 study by Swedish economists Fredrik Bergstrom and Robert Gidehag found that living standards are far higher in the United States than in Western Europe. Forty percent of Swedes, for instance, live below the U.S. poverty line (compared to 12 percent of Americans), and by many measures poor Americans are wealthier than middle-class Europeans.

"Most Americans," they argued in the study, "have a standard of living which the majority of Europeans will never come anywhere near." Europeans may have less inequality-but they are also poorer across the board. Only someone motivated by envy and obsessed with "keeping up with the Joneses" would consider that a model.

Balance Sheet

MEDIA: It took $8.2 billion, a deal with employees, and a lot of debt, but real estate magnate Sam Zell won a bidding battle last week for the Tribune Co., owner of the Chicago Tribune, the Los Angeles Times, WGN, the Chicago Cubs, and TV stations and newspapers throughout the country. Zell said that other than selling the Chicago Cubs, he wants to keep the company together.

TRADE: U.S. and South Korean negotiators last week signed on to the biggest U.S. free trade deal since NAFTA. The United States and South Korea already do $75 billion in business together annually, but the new agreement faces hostility and skepticism in both countries. The deal won't take effect unless U.S. and South Korean lawmakers approve it.

HOUSING: The mortgage market took another hit last week as New Century Financial Corp., the nation's second largest subprime mortgage lender, declared bankruptcy and fired 3,200 workers. A spike in mortgage defaults has caused numerous subprime lenders to shut down. New Century is also under investigation by the SEC and the Justice Department.