Ask a Democrat and they’ll tell you America's problems stem from increasing income inequality.
By their telling, all the growth and all the increase in productivity is just being stolen by the plutocrats. And we're going to do something about this: We're going to tax those rich folks and send the money to the poor to restore some order around here.
Nearly every Democratic plan for the coming election would in some form take these supposedly ill-gotten gains and righteously redistribute them.
Of course, this is a simplification, but not by much. The real problem with these plans is that the underlying analysis isn’t true: The rich aren't gaining much more of everything, and incomes for the likes of you and me haven't actually stagnated. In reality, we have been increasing taxes and giving more money to the poor. This is outlined in a new paper authored by people who really understand these things.
Here’s how it works.
Conceptually, there are a number of ways that we can measure incomes.
The most obvious one is what everyone gets in the first place, their nominal income. The second useful measure of income is the amount that everyone has after we change the distribution, so, post-taxes and post-transfers. The analysis of “rising inequality” the Democrats employ in pushing their policies depends upon us looking at the nominal incomes, the first measure that simply shows the sticker price on our incomes.
But that isn't actually the important set of numbers. How people get to live is the logically important kind of inequality, not what they're paid before our redistribution system kicks in.