Follow-Up on Inequality

In this post, I challenged Alan Reynolds' unconventional view that inequality has not been rising in the U.S. like many have claimed. The post shows that most other conservative economists do not share his view on this topic.

Showing how far Reynolds' views on inequality are from most other observers wasn't satisfactory to some readers, they want a more detailed rebuttal. That was the first post on this topic, I didn't expect that it would be convincing by itself -- I plan on addressing this topic in a variety of posts, so that will come, but for now let me use the little time I have to assemble a few points directed at Reynolds' main objections. As I said, there will be more to follow:

Reynolds' objections are:

1. Piketty-Saez use tax returns, but not everyone files a return, etc., so this is different from total income.

The Census data he uses in rebuttal is a sample too. See below. Tax-returns are used because it provides a homogeneous series over time, Census data do not. Again, see below.

2. The study uses pre-tax income (actually, it is after employer payroll and corporate taxes, but before income taxes). Reynolds argues this is a problem and that after-tax and transfer income that income that includes Social Security and other transfers are a better measure and do not show the same inequality trends. Here's the EPI on this point from a 2000 paper (many of Reynolds' points are not new at all):

The weakest of these critiques, such as the one by Alan Reynolds from the Hudson Institute, ignored a key issue ... and simply argued that there are different ways to measure inequality at a certain point in time (Reynolds 2000). ...[T]hese types of analyses reveal nothing about the key question of whether inequality has increased over time. As we show below, no matter which income definition is applied, the finding of increased inequality stands. ...

So the measurement question is whether differing definitions of income yield different trends in income growth and inequality. We show below that they do not. We agree (and document) that analyses using different income measures will result in different levels of inequality at a specific point in time (e.g., examining a single year). What is important to note, though, is that studies using comparable measures of income inequality demonstrate that income inequality in the U.S. is now historically high, and high relative to other advanced countries.

It's not at all clear to me that we should be using after-tax and after-transfer income. This WSJ report notes the latest data that we have looking at after-tax income inequality (but without transfers):

The share of all income earned by the top 1% of taxpayers rose to 19% in 2004 from 16.8% in 2003, the IRS said. That remains below the 20.8% high hit in 2000, when it was elevated by capital gains related to the stock boom. ... After tax, the share of income of the best-off 1% jumped to 16.5% from 14.4%...

Although dated, the IRS figures are among the best ways to compare the gains of the rich, middle class and poor because they include things that some other reports don't, including capital-gains income and taxes paid. Because capital gains are volatile and mainly reflect swings in the stock market, some experts prefer the Census Bureau data. That showed the richest families' share of total income in 2004 equaled its previous high and rose to a new high in 2005. ...

There's a bit more on the consumption (i.e. including transfers, etc.) versus income inequality measures here in a recent Fedgazette discussion about measuring poverty. It concludes:

Acs and Austin tend to disagree over the utility of consumption-based poverty measures. According to Acs, “Ultimately, consumption is a better measure of well-being than income, but I think it is harder to measure, and income is not a bad proxy for consumption.” But Nichols responded, “I disagree that consumption is a better measure of well-being,” in part because researchers don't know how much consumption is financed by unsustainable borrowing. He added that consumption measures “have just as many problems as income-based measures.”... Said Acs, “I think Austin and I agree that there are pros and cons to all the ... approaches,” both income and consumption.

3. Reynolds says the Piketty-Saez results do not agree with Census data.

Again, see below for the problems with Census data.

4. He notes that "Piketty and Saez measure income per tax unit rather than per family or household." He says that per unit measures show more inequality than per family measures. But this has been addressed. Here's Piketty and Saez:

Because our data are based on tax returns, they do not provide information on the distribution of individual incomes within a tax unit. As a result, all our series are for tax units and not individuals. A tax unit is defined as a married couple living together (with dependents) or a single adult (with dependents), as in the current tax law. The average number of individuals per tax unit decreased over the century but this decrease was roughly uniform across income groups. Therefore, if income were evenly allocated to individuals within tax units, the time series pattern of top shares based on individuals should be very similar to that based on tax units.

And, in a footnote:

Obviously, income is not earned evenly across individuals within tax units, and, because of increasing female labor force participation, the share of income earned by the primary earner has certainly declined over the century. Therefore, inequality series based on income earned at the individual level would be different. Our tax returns statistics are mute on this issue. We come back to that point when we present our wage estimates.

So, that point is well-known and covered.

Much of his rebuttal uses Census data. But there is a problem here:

The first point of call is data from the Census. Census numbers are based on the Current Population Survey, a questionnaire filled out by a sample of Americans, then extrapolated to the nation as a whole. For historical comparisons, go to Historical Income Tables.

Data there are gathered under several categories: households (people living together), families (they have to be related), and individuals. (Formal definitions) As of now, only the household data have been updated to 2005, which is why I recently turned to Table H-13 – Educational Attainment of Householder – to show that most Americans with a college education have lost ground in recent years.

The Census data are the key source for assessing how most Americans are doing. However, they do a poor job of tracking incomes at the very top, for two reasons. First, because Census data are based on a limited sample, not the whole population, they’re unreliable in tracking the income of small groups – and the really rich are a small group, who just happen to bulk large in the economy. Second, the questionnaire is “top-coded”: if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999. Since a lot of income growth in the last few decades has taken place among people with multimillion-dollar incomes, the Census data miss an important part of the story. In particular, what you won’t learn from Census data is the extent to which rising inequality is a story, not about the top 20 or even the top five percent of the population, but about the top one and the top 0.1 percent.

Fortunately, there’s another source of information: income tax returns, which aren’t top-coded. Tax return data are especially useful if you want to look at long-term trends going back before 1947, which is when the Current Population Survey data begin; high-income Americans have been paying income taxes since 1913. The I.R.S. does its own analyses of these data, and the Congressional Budget Office produces reports based on a merge of Census and I.R.S. data, but the most convenient and comprehensive analyses come from Thomas Piketty, at the Ecole Normal Superior in Paris, and Emmanuel Saez at UC Berkeley. Their latest data set is at Prof. Saez’s Berkeley home page (Excel file.)

5. Reynolds says much of increase at high income levels due to tax-shifting. Here's Piketty and Saez on that point:

One additional motivation for constructing long series is to be able to separate the trends in inequality that are the consequence of real economic change from those that are due to fiscal manipulation. The issue of fiscal manipulation has recently received much attention. Studies analyzing the effects of the Tax Reform Act of 1986 (TRA86) have emphasized that a large part of the response observable in tax returns was due to income shifting between the corporate sector and the individual sector [Slemrod 1996; Gordon and Slemrod 2000]. We do not deny that fiscal manipulation can have substantial short-run effects, but we argue that most long-run inequality trends are the consequence of real economic change, and that a short-run perspective might lead to attribute improperly some of these trends to fiscal manipulation....

This list is not exhaustive, but it covers his main objections. I expect additional objections will arise, but as I said, this will be followed by other posts so there's no need to take everything on at once, particularly the more obscure points.

Brad DeLong has more rebuttal here. PGL at Angry Bear comments here.

Update: Brad DeLong has a second follow-up.

Comments

[spencer]

Also note that the census data does not confirm his argument that there was a big one time shift after the 1986 tax reforms in the share of income going to the top income bracket.

[maria]

In the face of the overwhelming expert opinion and evidence, why someone like Reynolds would persist in his nonsensical arguments is completely clear: he and the WSJournal (a reactionary Zionist-dominated, warmongering publication) have axes to grind and want to try to dupe people with more reactionary lies. They spare no time and effort in do so. It is really sad,---and disgusting.

[maria]

This gives you the flavor of the guy. He is an unabashed shill for the greedy plutocracy that has gotten established in the US, and is desperate to stay there.

http://www.cato.org/pub_display.php?pub_id=6819

[maria]

I meant to say "gotten control in the US......and is desperate to hold on to it."

[pgl]

Well done so far but how would you address the argument that consumption inequality - which has shown less of an increase - is the preferred measure assuming the permanent income hypothesis. My rebuttal way back was really a challenge to whether the permanment income hypothesis really explains the data.

[anne]

"Well done so far but how would you address the argument that consumption inequality - which has shown less of an increase - is the preferred measure assuming the permanent income hypothesis."

Good grief, read the New York Times:

http://www.nytimes.com/2006/12/12/opinion/12tue2.html?ex=1323579600&en=f5dd4ceb951b887a&ei=5090&partner=rssuserland&emc=rss

December 12, 2006

Consumption Gap

[Then, think. There is always a trick and the trick of radical conservatives is now to show that no matter wealth and no matter income disparities, consumption is diverging less for rich and middle and poor. Why the middle is consuming more than the rich now, according to the National Reviewers. So, no inequality after all however much inequality there may be.]

[Noni Mausa]

My anecdotal experience is that my effective income topped out in the early 90s at around $35k, collapsed with a slow hisss between then and the late 90s, dove like a penguin off an ice floe at early retirement to a third of that, and has now lifted slightly to within binocular distance of the poverty line on a clear day with no clouds. For my current job I have no contract and no benefits.

I'm a well educated person with no dependents and two careers. I have friends ranging from well-to-do to desperately poor, disabled, etc.

Conversely, "Alan Reynolds is a Senior Fellow at the Cato Institute and was formerly Director of Economic Research at the Hudson Institute. He served as Research Director with National Commission on Tax Reform and Economic Growth, an advisor to the National Commission on the Cost of Higher Education, and as a member of the OMB transition team in 1981."

His anecdotal evidence is wildly different from mine, I am sure. And research or no research, we tend to build our world view on what we see everyday.

I have friends ranging from well-to-do to desperately poor, disabled, etc. I'd make a small bet that he does not.

[Richard Pressl]

Mr. Reynolds obdurant stand against the weight of evidence supporting increasing income inequality, and your willingness to provide additional data to refute his arguments reminds me of the famous parable about never trying to teach a pig how to sing.

By plucking select data to partial support his position, Mr. Reynolds ignores the overwhelming bulk of evidence opposed to his central argument. IMHO - don't try to teach the pig how to sing - leave it instead to wallow in it's own milieu.It will be happier, and you will have more time to devote to more meaningful pursuits.

[pgl]

anne - the consumption inequality crowd claimed the NYTimes did not touch their argument. Which is why I tried to over at Angrybear.

[anne]

PGL, please post the cross link because I could find no argument through Mark's link other than what turned out to be the argument of Greg Mankiw. Obviously you too do not agree with the consumption as wealth and income group, so I must try to find your argument.

[Alan Reynolds]

Putting aside the op ed, which can't be more than a sample of what I have to say, we are supposedly having a civil dicussion of a college textbook available at the library at Yale or UCLA. Estimates of income distribution taken from individual tax returns are flawed because change in tax rates (1986 for salary, 1997 for capital gains) and tax rules (IRAs, reporting of tax-exempt interest) affect what is reporte and where it is reported on tax returns. I'm truly sorry you don't like that, but this is not an argument you can win. If it was, Piketty and Saez would say so would they not?

[maria]

"...this is not an argument you can win. If it was, Piketty and Saez would say so would they not?"

So says you. Better economists than you say differently.

[maria]

If I am not an expert in a field but have to chose between people who claim to be expert, I would certainly chose a distinguished University professor, or a group of them, from top flight universities over someone who has been employed for the most part by Institutes with known "attitudes" (or party lines, so to speak.) It's a question of impartiality and where the expert is coming from.

[joan]

On Oct 29 there was a dicussion here on why economics was considered inferior to "real" science. In response I posted the following
"economists seem to never resolve any disputes, but just have the same arguments over and over. Part of the reason is that economics is harder, in the sense that experimental evidence is more difficult to obtain. But many economist have agendas and so fill the literature with contrived studies to produce results that support their positions. Such studies are praised or condemed based on the agenda of the reviewer, not on the validity of the study. There seems to be no mechinism in economics that rewards truth seeking and punishes agenda promoting. This makes finding and agreeing on anything beyond basic theory very difficult and real progress almost impposible."

With 30 years of data from multiple government sources, if economists can not agree on a factual question such as the change in the income distribution, they might as well give up all pretence of being scientific and admit they are little more than political operatives with numbers.

[maria]

I did a bit of background research on Alan Reynolds and found that he has published at least two books, one on the Microsoft monopoly case and another on income distribution. The latter is published by Greenwood Press that publishes reference books for high schools and colleges and books on folklore, etc. I didn't find anything published by him by an academic press.

He is a member of the American Economic Association, but his listing gives only his address, phone number(s), and email. Most of the eminent economists listed there, on the other hand, have much more info given including their academic credentials, etc.

I finally checked on the Hudson Institute that employed him before the Cato. Hudson has on its list Robert Bork, Lewis Libby and Norman Podhoretz, among others. I would judge it to be a very right wingish outfit.

If this info is not correct, I invite others to correct it.

[evagrius]

joan;

A good point. If economists can't agree on the nature of what they're examining, then one might as well conclude that they are just opinionated.

I don't think it's true but editorials and articles such as the above don't help.

[anne]

http://angrybear.blogspot.com/2006/12/is-wealth-inequality-increasing.html

PGL, I have read this post over and do not know what is yours and what is not. This may be because I do not read Angry Bear and do not recognize the form of posting. Still, I do not find discussion of the question of consumption used for tracking wealth and income differences. I am lost.

Is this comment by PGL?

"OK, our friends on the left have one narrow statistic that says wealth inequality is soaring, but to be fair – this does not capture the distribution either."

Immediately I am turned away by such a condescending comment in regard to work from the Economic Policy Institute. I thought such a comment by Grag Mankiw initially.

No matter, wealth and income inequality is increasing as Piketty and Saez clearly show and as must be obvious to anyone paying real attention to investing and tax structure.

[maria]

Over the course of his career, Alan Reynolds has worked as a scholar, a columnist, a business strategist and a government advisor. Presently, he is a senior fellow at the Cato Institute, a Washington-based libertarian think tank. He previously served as director of economic research at the Hudson Institute, and as vice president and chief economist at both Polyconomics and at the First National Bank of Chicago.

In 1996, Reynolds served as research director with the National Commission on Tax Reform and Economic Growth (the "Kemp Commission"). One of the original "supply side" economists, Reynolds worked with Alan Greenspan and Larry Kudlow on David Stockman's Office of Management and Budget transition team in 1981.

More recently, Reynolds has testified on tax policy before the House Ways and Means and Senate Finance Committees.

Reynolds did his undergraduate work in economics at UCLA and graduate studies at Cal State Sacramento. His economic research has been published by such organizations as the Organization for Economic Cooperation and Development, the Joint Economic Committee, and the Federal Reserve Banks of Atlanta and St. Louis.

A former columnist with Forbes and Reason, Reynolds has been a frequent contributor to such publications as The Wall Street Journal, American Spectator, National Review, Harvard Business Review, International Economy, Challenge, Washington Times and the New York Post.
*****************************************

That's the most I could find for Reynold's CV. It says he did "graduate studies" at Cal State Sacramento (a pretty mediocre place in my personal opinion) but doesn't indicate that he earned any graduate degree. So whether he has more than a BA, I can't determine.

[anne]

http://delong.typepad.com/sdj/2006/12/intellectual_ga.html

December 16, 2006

Intellectual Garbage Collection: The Unreliability of Alan Reynolds
By Brad DeLong

A correspondent asks why she should presume that Alan Reynolds is wrong when he claims that statistics showing rising inequality are cynically and fraudulently manipulated--that, as Reynolds writes in the extremely bad and low-quality intellectual neighborhood that is the Wall Street Journal editorial page:

Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false.... The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic. The architects of these estimates, Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley...

The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on [Piketty and Saez's] seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other. The politically correct yet factually incorrect claim... fill[s] a psychological rather than logical need. Some economists [i.e., Thomas Piketty and Emmanuel Saez] seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems...

The first reason is that Alan Reynolds is playing intellectual three-card monte....

[anne]

Brad DeLong, who is a startlingly close reader, proceeds to show the problem with the obfuscation of the wealth and income inequality showings that arch conservatives are determined we shall not be allowed to understand or accept. We have excellent work on which to rely. However, even without strict data analysis anyone who seriously invests and pays attention to tax structure knows wealth and income inequality has been increasing and will continue to increase. The effects of tax structure changes these last years are playing out now and the results are easily predictable, as easily predictable the median wage declines after 2001.

[slink]

delong :
" startlingly close reader"

anne ....please
he's a pint size
ivy seal of merit
meme oranger of a bully boy
with a flare for
thought compression expression

a useful plow for neo libs
looking to rip up the good earth

[slink]

but herr reynolds isn't worth
a dutch fart

[slink]

bravo maria

the guy prolly hates his slim fast
academic pedigree

but lets not bounce from pillar to post here

harvard hatched mankiw and feldstein
and a nastier pair
of private profiteers' wolverines
is un imaginable

[maria]

More on Reynolds' credentials: Sacramento State is listed in US News and World Report as 57th out of 61 schools in its category. Admissions are said to be "less selective." To give an idea of the category, #5 is Whitworth College (that I have never heard of) and #13 is Pacific Luteran University. Cal State Sacramento is sandwiched in between California Baptist #56 and Southern Nazarene (#58).

[anne]

Slink, I understand, but be willing to argue with Brad DeLong. There are those who can and should be argued with.

[maria]

slink:

But I don't think either Feldstein or Mankiw denies that inequality has risen, and risen a lot, do they?

[joan]

Mankew said in his blog when he posted the article.

"Even as an economic data geek (but not one who specializes in studying inequality), I have a hard time sorting out the competing claims in this literature."

He will not defend it, but being neutral denies that he knows inequality has increased.

[anne]

http://delong.typepad.com/sdj/2006/12/intellectual_ga.html

Intellectual Garbage Collection: The Unreliability of Alan Reynolds
Edited by Brad DeLong

http://www.prospect.org/print-friendly/print/V3/11/krugman-p.html

September 1, 1992

The Rich, the Right, and the Facts: Deconstructing the Income Distribution Debate
By Paul Krugman

Wealth is typically much more concentrated than income.... [B]ecause wealth is so concentrated, it is difficult to measure accurately from sample surveys: a random survey of a few hundred or even a few thousand people will contain only a handful of really wealthy people.

Nonetheless, researchers at the Federal Reserve Board have tried to use sophisticated sampling procedures to deal with this problem.... In March, 1992 they released a working paper that showed a sharp increase in the concentration of wealth even since 1983, with the share of the top 1 percent of families rising from 31 to 37 percent....

When the Federal Reserve wealth study came out, it was immediately attacked by Alan Reynolds in the Wall Street Journal.... Reynolds's main argument was that the study, based on a survey of 3,000 families, could not be reliable about the top 1 percent, since thirty families is too small a sample. This was an interesting reaction, since the Fed study carefully explains that they used a two-stage procedure... [with] over 400 families in the top 1 percent. In fact, the study is written in the form of a working paper on statistical methodology, and the issue of sample size is raised immediately. One can only conclude that Reynolds did not bother to read the study before attacking it....

The wealth dispute was a minor part of the distribution controversy, but it was revealing about the desperation, unscrupulousness, and sheer lack of competence of today's conservatives...

[anne]

Thank you, Joan:

http://gregmankiw.blogspot.com/2006/12/inequality-wars.html

December 14, 2006

Inequality Wars
By Greg Mankiw

Even as an economic data geek (but not one who specializes in studying inequality), I have a hard time sorting out the competing claims in this literature....

[Absolute nonsense, as usual, a geek who is only a geek on behalf of radical conservative deceptions....]

[anne]

For the economic data geek:

http://www.nytimes.com/2005/06/06/opinion/06herbert.html?ex=1275710400&en=c03b1056decb6b77&ei=5090&partner=rssuserland&emc=rss

June 6, 2005

The Mobility Myth
By BOB HERBERT

The gap between the rich and everybody else in this country is fast becoming an unbridgeable chasm. David Cay Johnston, in the latest installment of the New York Times series "Class Matters," wrote, "It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known."

Consider, for example, two separate eras in the lifetime of the baby-boom generation. For every additional dollar earned by the bottom 90 percent of the population between 1950 and 1970, those in the top 0.01 percent earned an additional $162. That gap has since skyrocketed. For every additional dollar earned by the bottom 90 percent between 1990 and 2002, Mr. Johnston wrote, each taxpayer in that top bracket brought in an extra $18,000.

It's like chasing a speedboat with a rowboat.

Put the myth of the American Dream aside. The bottom line is that it's becoming increasingly difficult for working Americans to move up in class. The rich are freezing nearly everybody else in place, and sprinting off with the nation's bounty.

Economic mobility in the United States - the extent to which individuals and families move from one social class to another - is no higher than in Britain or France, and lower than in some Scandinavian countries. Maybe we should be studying the Scandinavian dream.

As far as the Bush administration is concerned, the gap between the rich and the rest of us is not growing fast enough. An analysis by The Times showed the following:

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000."

The social dislocations resulting from this war that nobody mentions have been under way for some time. But the Bush economic policies have accelerated the consequences and intensified the pain....

[anne]

Again, for the economic data geek:

http://www.nytimes.com/2006/01/29/national/29rich.html?ex=1296190800&en=784822e4b0735ee5&ei=5090&partner=rssuserland&emc=rss

January 29, 2006

Corporate Wealth Share Rises for Top-Income Americans
By DAVID CAY JOHNSTON

In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent....

[anne]

Income and wealth concentration have increased for 25 years, and changes in tax structure since 2001 have been designed to accentuate wealth and income inequality so that as data is accumulated the concentrations will be found to have continued to increase. However, there is a class of analysts who exist solely to show that the rich are poor and the poor are rich and the middle class is richer than all. The point of such analysis is deception.

[Lafayette]

maria: the WSJournal (a reactionary Zionist-dominated, warmongering publication) have axes to grind

Thank you for reminding us that you are the ONLY impartial, unbiased contributor on this blog.

[Lafayette]

"Ultimately, consumption is a better measure of well-being than income, but I think it is harder to measure"

Here's another point of view, regarding well-being, on an international basis. It is not particularly germane to the subject, but it is interesting nonetheless.

Quality of Life (Score 1 to 10) and Ranking. From the Economist Intelligence Unit.

Country (Ireland): Score (8.35); Rank (-1-)
Australia: 7.8; -6-
Spain: 7.7; -10-
USA: 7.6; -13-
Canada: 7.6; -14-
New Zealand: 7.4; -15-
France: 7.1; 25
Britain: 6.9; -29-

Olé!

[Movie Guy]

I believe that income inequality has continued to increase since 1980. At the same time I haven't been particularly impressed with some of the data analysis and opinions to date, whether from the left or the right.

I do agree with the point raised by Reynolds regarding taxation changes, particularly the Chapter S or S Corporation shift. That's a valid point.

Milton Friedman agreed:

Letter from Milton Friedman to Alan Reynolds, July 2006:

"Dear Alan:

As the saying goes, 'It's a long time between drinks.' I recall with pleasure our correspondence in 1971 and have followed with satisfaction the career that developed after you decided to shift from accounting to economics, a wise shift. The paper you sent along is certainly both unique and important. The notion that there has been a substantial increase in inequality, especially at the upper levels, has become conventional wisdom. I am not a tax expert and yours is the first paper I have seen which explains why the tax figures are so misleading. I would not be surprised if accurate figures would show a substantial increase in inequality over the past 40 or 50 years. The deterioration of our educational system plus the large illegal immigration would seem to lead to that result. So also would the technological revolution. But whether that is so or not, you have certainly shown that it cannot be inferred from tax returns. ... Thanks for sending me your paper.

Best regards, Milton"

Treasured letters from Milton
By Alan Reynolds
Thursday, November 23, 2006

I also agree with Milton Friedman's other observations and opinions in his letter to Alan Reynolds. I very much agree.

[JamesG]

Well spotted MG. On the bright side, regardless of the numbers, at least there is general agreement even among conservatives that huge income inequality is a bad thing. For me, that's a nice shift from the trickle down theory.

[tthelen]

This year I am partly responsible for the inequality statistics because I sold my company. But I was part of the desperately poor 50 years ago. My son is not now or never has been desperately poor but you couldn't tell it from his tax return since he has chosen to "take some time of" and enjoy the world this year.

I have an investment in a hedge fund that has had terrific returns The manager of that fund made over $360 million dollars last year. You know what? I don't care. He has made me a lot of incremental wealth that I was unable to earn on my own and I am vastly better off for his efforts.

[bakho]

The attempt to confuse the public about the rising inequality is part of a larger issue, declining real wages. Under Clinton, the poorest workers made substantial gains in real wage. Under Bush they have not. Is this a reason for greater satisfaction with the Clinton economy than the Bush economy in spite of the fact that those at the top did at least as well under Clinton than they have under Bush?

[Ninjaplease]

Re: tthelen,

Well, I'm sure that with this Neo-Liberal audience, they don't care about your personal wealth accumulation since the "Death Tax" is going to come and take upwards of 35% of your wealth. Wealth that could be given to your son so that he may maintain his idle rich lifestyle and maintain a position as "America's Most Productive People."

At some point we're really going to have to find a way for the poor to die for us. Perhaps we can find a new market so that they can trade us their souls.

[Lafayette]

ninjaplease: "Well, I'm sure that with this Neo-Liberal audience"

Sticks and stones may break my bones,
but lables will never hurt us.

[Alan Reynolds]

If there is something wrong with the logic and evidence in my Wall Street Journal piece, neither Brad DeLong or anyone else has yet identified it. The only critique so far is the claim that Social Security checks and the like are not really income (?) so they don't need to be included in total income (as they are in personal income).
This is not an easy concept to sell, and Piketty and Saez certainly would not agree. They excluded transfers because they are poorly recorded on tax returns (even Social Security was not reported before 1984, and only a fraction is reported after that). The data in my piece did not subtract taxes, although that would be necessary to measure relative living standards.

[Lafayette]

"At some point we're really going to have to find a way for the poor to die for us."

They do already, in droves. Nobody notices.

Too busy drinking their caffé-latte.

[maria]

Ninja: "At some point we're really going to have to find a way for the poor to die for us."

Well Bush is doing his best to contribute with the war in Iraq. Apparently not enough have died yet, so he keeps them there on and on and on, expecting they might.

[maria]

Perhaps a better way to make the playing field more level would be a wealth tax, of the sort that has been used elsewhere. This would get around any problem with income tax data. Wealth is almost always more concentrated than income and taxing some of that might be a good idea. In short, a kind of inheritance tax every year. 10%, a tithe, would be fitting, I think. It may be time for that, since the inheritance tax has been defanged now and is due to expire. Perhaps Mr. Reynolds will wish to tell us that wealth has not become more concentrated in the last fifty years. Let's hear about it. LOL.

[maria]

Here's a little article on a wealth tax. I can't vouch for the author or the article. But I found it interesting.

http://bostonreview.net/BR21.1/wolff.html

[maria]

One might wish to exclude houses with a value below some threshold from the tax to avoid hurting those whose wealth is mainly in a modest sized house. But McMansions would be included.

[evagrius]

I believe even the very rich, if they've worked at all, receive Social Security income. ( Hence the oft-quoted joke of the rich using their SS check to pay country club dues).

So....unless they ( the rich), haven't paid into the system, adding Social Security income into the picture shouldn't be that much of a distortion.

[Ray G]

maria;
"Well Bush is doing his best to contribute with the war in Iraq. Apparently not enough have died yet, so he keeps them there on and on and on, expecting they might."

There is a well known report covering the economic status of military personnel, and the poor were under-represented, and the wealthy over-represented. The Heritage people did it, but no need to bury one's head in the sand by not reading simply because it's not a Left wing think tank. The paper is scrupulously footnoted, and backed up with links.

You're knee jerk reaction to thinking that anyone in the military must be poor and thus uneducated, shows clearly that you're not actually worried about "the poor" but you are simply citing the great unwashed in an attempt to reinforce your own collectivist views.

[Ray G]

From the initial lines of this thread:
"The post shows that most other conservative economists do not share his view on this topic."

That is a very broad statement, even allowing for a clear identification of "conservative" economists (assuming you are lumping together conservative, libertarian, et al, anyone to the Right of Galbraith) I think one would be hard pressed to accurately, honestly say "most" think this or that.

I'm not trying to split hairs necessarily, but for a topic filled with stats and debates about how to correctly interpret one group of data as compared to another, such vague and impossible to prove statements are very much out of place.

[anne]

Well, simply understanding what it is to build an investment portfolio and effective tax structure any reasonable economist will understand that income and wealth will diverge though some or many economists may think divergence is the price of robust growth while others will actively disagree. Better?

[Movie Guy]

Ray G,

Hope you stick around this blog. Should be worthwhile and entertaining.

Read your blog. Agree with your opinions regarding SecDEF Rumsfeld and Col Boyd (OODA Loop theory). Far too many individuals, neo-liberal or not, haven't understand or credited his efforts in reshaping the structure and manning of DoD, military and civilian.

Rumsfeld's home hotline phone should stop ringing in about two hours as this is his last official day. We'll find out soon if SecDEF Gates is up to the task.

I haven't fully determined why Gates wanted the cabinet position, but he has for some time. He's up against a two year clock, so unless he intending to run as a VP candidate he is headed back to Texas A&M in Jan 09. He had better make the two years count and hit the ground hard and fast.

War Eagle!

[evagrius]

Ray G;

"There is a well known report covering the economic status of military personnel, and the poor were under-represented, and the wealthy over-represented. The Heritage people did it, but no need to bury one's head in the sand by not reading simply because it's not a Left wing think tank. The paper is scrupulously footnoted, and backed up with links."

I'm curious about this. "Military personnel" can be many things; a "staff officer" in the catacombs of the Pentagon, an officer safely ensconced in the Green Zone, an eager-beaver lieutenant hoping to get noticed, a staff sergeant who's long in the tooth, or a "buck" private on a combat patrol. All these are military personnel but which ones are over-represented by "poor" enlistees and which ones are over-represented by "rich" enlistees?

Your comment reminds me of much of the history of the Byzantine empire where the aristocracy was, of course, heavily represented in the upper echelons of the military forces and the actual, real fighting was done by, you guessed it, poor peasants who saw the military as the best way, ( and it was), to gain social and economic security.

[Mike]

This from above:

"More on Reynolds' credentials: Sacramento State is listed in US News and World Report as 57th out of 61 schools in its category. Admissions are said to be "less selective." To give an idea of the category, #5 is Whitworth College (that I have never heard of) and #13 is Pacific Luteran University. Cal State Sacramento is sandwiched in between California Baptist #56 and Southern Nazarene (#58)."

I don't care much for any think tanks, but when you spend time ranting on about how good a school is that your intellectual opponents went to, that smugness borders on being repulsive. The discussion here is otherwise insightful, despite that sanctimoniousness of some of the commentors (you might qualify this comment as such, I do appreciate the irony).

I am a skeptic on the usefulness of any aggregate data. Yes, I understand that we "need" to look at it - but I just don't think it tells a story that we all want it to tell. We all agree that too much inequality (how much) is bad - but we can never agree on how much that is, nor how to properly measure it. All we can usefully do is make sure the rule of law protects the less well off as much as it does the well off, and to ensure that everyone has equal opportunity out there (and is thus not a victim of corporatism, inflation, protective regulation and so forth).

[anne]

http://economistsview.typepad.com/economistsview/2006/12/reynolds_rap_on.html

"The post shows that most other conservative economists do not share [Alan Reynolds'] view on this topic."

Precisely what the post shows, even though most other concervative economists may not care much or at all that income and wealth are diverging.

[Mr. Econotarian]

Regarding economic mobility, we have about 20 million people in the US who are making much more now since immigrating to the US than they did in their home countries. That's upward mobility right there.

I'm not surprised that "income inequality" has increased. You would suspect greater returns to higher skilled workers from improvements in technology, and there has also been an increase in the number of lower skilled workers as well due to immigration (both legal and illegal). Yet there still are "poverty traps" in the US as well.

If an individual acquired market-desired skills, they will be paid well. The question is why are so many Americans are refusing to acquire marketable skills, while others are obtaining them and doing very well.

As the percentage of Americans who have attended college continues to rise, it certainly does not appear to be simply a problem of access to higher education. Anyone in the US who has a "B+" average in high school can obtain loans to go to college. As long as you major in something that will result in a positive return on the initial loaned capital, you will be OK.

A second major cause of US income inequality is single-parent households, a cultural issue that I'm not sure tax policy can change (although one could argue the EITC encourages it, but one is loathe to abolish the poverty-fighting aspects of the EITC).

[Alan Reynolds]

The last word on this topic, from Brad DeLong's website:

Posted by: Jared Bernstein | December 17, 2006 at 06:50 PM
We can take it from all this dredging up of old material that Prof DeLong is unable to refute Reynolds' article.

[anne]

http://delong.typepad.com/sdj/2006/12/intellectual_ga.html

"We can take it from all this dredging up of old material that Prof DeLong is unable to refute Reynolds' article."

Actually, this comment is not by Jared Bernstein but by "A."

[anne]

Here is what Jared Bernstein actually wrote:

http://delong.typepad.com/sdj/2006/12/intellectual_ga.html

December 16, 2006

Intellectual Garbage Collection: The Unreliability of Alan Reynolds

The problem with Reynolds' critique is that he latches on to a few correct points about the limitations of the IRS SOI [Statistics of Income] data, then he:

--ignores the work others have done to correct these problems;

--way overstates the bias from these problems;

--ignores other data that do not suffer from these problems;

--having ignored all the inconvenient evidence to the contrary, misleading concludes there's no inequality problem.

He's not nuts. Some changes in inequality as measured by the IRS SOI data (the main source for Pik&Saez) are induced by income shifting due to tax changes. But while that can explain a spike in one year to the next, it doesn't explain longer trends in income concentration found in that and every other data set we have.

Also, analysts at IRS have worked hard to try to deal with some of these shortcomings. Take a look at this paper--the figures and tables clearly show an increase in inequality since 1988 income measures that correct for some of the inconsistencies.

http://www.irs.gov/pub/irs-soi/06asapetska.pdf

I won't belabor the CBO points others have made, other than to say that these data go the furthest towards addresses all the concerns raised by Reynolds. Sorry if these tables don't align correctly--I just pasted them in from excel.

They show real household income changes, since 1988. 2000 was an economic peak and the year before the bursting financial bubble took a big bite out of high incomes (large capital losses), so you see more inequality if you stop there. But I've include the latest CBO year too--02-03--to show that the old pattern is returning.

Pretax 1988-2000 1988-2003 2002-03

Bottom fifth 15.6% 9.6% -1.3%
Mid fifth 11.2% 7.5% -0.4%
Top fifth 35.3% 19.0% 2.3%
Top 1% 68.4% 25.1% 5.9%

Posttax 1988-2000 1988-2003 2002-03

Bottom fifth 17.7% 13.7% -1.4%
Mid fifth 12.9% 13.1% 0.7%
Top fifth 30.9% 20.0% 3.9%
Top 1% 60.4% 22.1% 8.2%

Source: CBO

You simply can't write about this stuff in good faith and leave all this information out, unless you're trying to push an agenda that's dependent on misleading.

BTW, a very interesting LA Times/Bloomberg poll came up with a fascinating number this week: 74. That's the percent of respondents who believe the income gap is a serious problem (36 percent think it's somewhat serious; 38 percent think it's very serious).

It's also a very big number. With polling data, once you hit this range, you're into a rarefied level of agreement.

Given that this is a new question, there's no way to make historical comparisons, as in "74 percent, up from a much lower percentage." So I don't want to make too much out of it. But presumably, these respondents are not reacting to nuances in data sets.

They're calling it like they see it.

- Jared Bernstein

[anne]

http://economistsview.typepad.com/economistsview/2006/12/followup_on_inc.html#c26689382

"Second, the questionnaire is “top-coded”: if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999. Since a lot of income growth in the last few decades has taken place among people with multimillion-dollar incomes, the Census data miss an important part of the story. In particular, what you won’t learn from Census data is the extent to which rising inequality is a story, not about the top 20 or even the top five percent of the population, but about the top one and the top 0.1 percent."

Whoever wrote this [Alan Reynolds] is absolutely wrong on how the Census handles topcoding information. If you are working with aggregate data such as the total amount of income above the topcoded amount, then the Census does report the aggregate amount as accurately as they can.

The Census questionaire is NOT topcoded and neither is the data in the CPS. Topcoding is a construct for confidentiality but does not lessen the aggregate amount of reported income.

- Herderman

[Movie Guy]

The attacks on Alan Reynolds have proven to be a mixture of fact and fiction, a fair portion of which have thus far targeted personal background matters and older public communications from Reynolds. Many of the attacks have had little to do with a careful review of the text and data cited in his recent op-ed piece in the Wall Street Journal. Perhaps some of the posters and readers didn't read the op-ed. We have posters on this blog who have said that they don't read the WSJ. Some are rather defiant about the WSJ. Whatever.

What I find interesting is the length to which some posters have gone in their attempts to discredit Alan Reynolds. Take, for example, this supposed fact posted on two of the three income inequality main posts on Economist's View which supposedly challenge Alan Reynolds' latest op-ed piece:

anne - Dec 18, 2006 11:31:03 AM- EV - Follow-Up on Inequality II, Dec 17, 2006:

Countered by Herderman:

http://economistsview.typepad.com/economistsview/2006/12/followup_on_rey.html

Alan Reynolds:

"The Census data are the key source for assessing how most Americans are doing. However, they do a poor job of tracking incomes at the very top, for two reasons. First, because Census data are based on a limited sample, not the whole population, they're unreliable in tracking the income of small groups – and the really rich are a small group, who just happen to bulk large in the economy. Second, the questionnaire is "top-coded": if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999. Since a lot of income growth in the last few decades has taken place among people with multimillion-dollar incomes, the Census data miss an important part of the story."

anne - Dec 18, 2006 11:27:59 AM - Follow-Up on Inequality, Dec 16, 2006

http://economistsview.typepad.com/economistsview/2006/12/followup_on_inc.html#c26689382

"Second, the questionnaire is “top-coded”: if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999. Since a lot of income growth in the last few decades has taken place among people with multimillion-dollar incomes, the Census data miss an important part of the story. In particular, what you won’t learn from Census data is the extent to which rising inequality is a story, not about the top 20 or even the top five percent of the population, but about the top one and the top 0.1 percent."

Whoever wrote this [Alan Reynolds] is absolutely wrong on how the Census handles topcoding information. If you are working with aggregate data such as the total amount of income above the topcoded amount, then the Census does report the aggregate amount as accurately as they can.
The Census questionaire is NOT topcoded and neither is the data in the CPS. Topcoding is a construct for confidentiality but does not lessen the aggregate amount of reported income.

- Herderman

Alan Reynolds did not write the above words quoted and attributed by anne to Alan Reynolds.

Paul Krugman wrote the words challenged by comment poster Herderman that anne is attempting to further discredit Alan Reynolds with in her two supposed "factual" posts.

Paul wrote those words in his NYTimes Money Talks piece titled 'On Tracking Inequality. Here's the link: On Tracking Inequality, by Paul Krugman, Money Talks, NYTimes

Mark Thoma cited the Krugman piece in this September main post: EV - Krugman: On Tracking Inequality, September 19, 2006

Mark Thoma again cited the Krugman piece, referring to the September main post, in the second of his three new income inequality main posts, EV - Follow-Up on Inequality, December 16, 2006, which challenges Alan Reynolds, saying:

"Much of his rebuttal uses Census data. But there is a problem here: (Mark refers to his September 19, 2006 main post which includes an excerpt from Paul Krugman original NYTimes Money Talks piece, On Tracking Inequality and he pulls part of the Krugman text forward.)

Let's review the original NYTimes Money Talks text excerpt, accompanied by Mark's polite lead in from September 19, 2006:

Mark Thoma: "Paul Krugman tries to clear up some confusion over measuring inequality, and institutes a new practice - posting links to the data sources in his columns. He hopes other commentators will do the same thing and save us all a lot of time chasing down sources behind arguments:"

On Tracking Inequality, by Paul Krugman, Money Talks: "Now that rising income inequality has become a big political issue, people are throwing around a lot of numbers. Some of these numbers are reliable, other aren’t. But how are readers to tell the difference?"

"Well, one thing that might help is knowing where the standard sources are."

"The first point of call is data from the Census. Census numbers are based on the Current Population Survey, a questionnaire filled out by a sample of Americans, then extrapolated to the nation as a whole. For historical comparisons, go to Historical Income Tables."

"Data there are gathered under several categories: households (people living together), families (they have to be related), and individuals. (Formal definitions) As of now, only the household data have been updated to 2005, which is why I recently turned to Table H-13 – Educational Attainment of Householder – to show that most Americans with a college education have lost ground in recent years."

"The Census data are the key source for assessing how most Americans are doing. However, they do a poor job of tracking incomes at the very top, for two reasons. First, because Census data are based on a limited sample, not the whole population, they’re unreliable in tracking the income of small groups – and the really rich are a small group, who just happen to bulk large in the economy. Second, the questionnaire is “top-coded”: if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999. Since a lot of income growth in the last few decades has taken place among people with multimillion-dollar incomes, the Census data miss an important part of the story. In particular, what you won’t learn from Census data is the extent to which rising inequality is a story, not about the top 20 or even the top five percent of the population, but about the top one and the top 0.1 percent."

"Fortunately, there’s another source of information: income tax returns, which aren’t top-coded. Tax return data are especially useful if you want to look at long-term trends going back before 1947, which is when the Current Population Survey data begin; high-income Americans have been paying income taxes since 1913. The I.R.S. does its own analyses of these data, and the Congressional Budget Office produces reports based on a merge of Census and I.R.S. data, but the most convenient and comprehensive analyses come from Thomas Piketty, at the Ecole Normal Superior in Paris, and Emmanuel Saez at UC Berkeley. Their latest data set is at Prof. Saez’s Berkeley home page (Excel file.)"

"There are other sources, too – which I’ll explain when I use them. You see, I’ve decided to institute a new policy. On inequality, and in fact on many matters economic, it’s all too common to have numbers – some from unknown sources – flying in all directions. The issues are hard enough without clarity about where numbers come from. So from now on I’m going to post sources for the numbers in each column on TimesSelect, with links where possible (it usually is.) Basically, this is the same thing I do when filing my columns; I always provide sources and links to my copy editors. But now I guess my explanations will have to be grammatical! Anyway, I hope that other economic commentators will follow the same practice, which is easy in this Internet age, and will save all of us a lot of confusion."

So, no, Alan Reynolds is not the target of comment poster Herderman as stated by anne not once but twice for effect on two separate main post threads.

Paul Krugman is the individual that Herderman is challenging, regardless of what anne may state.

In truth, anne is attacking Paul Krugman and Mark Thoma (for citing this portion of Krugman's work) but laying the blame and error on Alan Reynolds.

No, Phoebe Moses (Annie Oakley of western fame) wouldn't have missed, but EV's anne certainly did...by a country mile. Or...a New York neo-liberal mile.

So much for credibility in the ongoing argument over the details of Alan Reynolds' WSJ op-ed piece.

[evagrius]

Has anyone looked at the U.S. Census data? I mean, really looked?

It's quite easy to find the Census data for a particular area, ( a specific locale, a specific city, a specific metropolitan area). It's easy to obtain the income data for those areas. Guess what? The income limit is limited. It will only show areas with an average income ranging from $0 to around $200K a year. It will not show incomes above that.

[Alan Reynolds]

Time for another look at the top of this page:

1. “The Census data he [Alan Reynolds] uses in rebuttal is a sample too. . . . Tax-returns are used because it provides a homogeneous series over time, Census data do not.”

I simply divided by personal income – from BEA not Census -- rather than income less transfer payments reported on individual tax returns. Personal income is far more homogenous over time than adjusted gross income, which changes with changes in the tax law.

2. “It's not at all clear to me that we should be using after-tax and after-transfer income. . . . Because capital gains are volatile and mainly reflect swings in the stock market, some experts prefer the Census Bureau data. That showed the richest families' share of total income in 2004 equaled its previous high and rose to a new high in 2005.”

I did not use after-tax income. But if transfer payments are not income then what are they? And why does the IRS tax them as income? The old EPI comment linked in this context is dealt with in my Chapter 2 of my book, but it is entirely irrelevant to what I wrote back then and to my Journal article. Jared Bernstein at EPI has not argued that my critique of Piketty-Saez is wrong, but instead alludes to an alternative series from CBO which I also critique at length in the book and in a cato.org paper due out soon

There is a break in the Census series in 1993 which makes previous data incomparable (the EPI is clear about that). Aside from that statistical glitch, the share of pretax, pretransfer income going to the top 5% of households has been essentially flat since 1988. "Equalled its previous high" is not proof of an upward trend. Actually, the top 5 percent's share was 22.2% in 2005 and 22.4% in 2001. For families, the share was 21.1% in 2005 -- the same as in 2000. Census has 14 other income series which count taxable capital gains (and therefore gyrate with changes in the market and the tax on gains) but also add transfers and subtract capital gains. The show less inequality, of course, and the latest 2002-2004 Gini coefficients based on broad income are no higher than they were in the late 1980s.

4.“The [Census] questionnaire is “top-coded”: if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999. Since a lot of income growth in the last few decades has taken place among people with multimillion-dollar incomes, the Census data miss an important part of the story.”

Ironically, two blog posters attributed this quote to me, though another noted that it actually came verbatim from a Paul Krugman column last September. It is entirely wrong, which must be why the remark was attributed to me. The public use data are censored for privacy but incomes well above $1 million are definitely included in the income share attributed to the top quintile and top 5%. Mr. Krugman’s related comment about the Census sample being “limited” was just strange. The tax return data comes from a sample of more than 100,000 returns, but that too is certainly a limited number. All samples are limited.

Other comments showing that Piketty and Saez are aware of the limitations of their data are scarcely an answer to my op ed or book. After all, I quoted Saez several times in the Journal article and cited his research on the elasticity of taxable income. I once emailed to Mr. Saez that "I'm not saying anything you haven't said yourself." I simply illustrated some of the problems with statistics (which nobody has challenged), to show these are not minor details.

[Steve]

My first visit to this so-called economics blog is a big disappointment. I expected (based on the blog's title) to see a mostly-objective economics discussion; instead, I see it predominated by the oldest political tactic in the book: http://en.wikipedia.org/wiki/Ad_hominem -- a tactic that tells me a lot more about the attacker than the person being attacked.

I've noticed that when blogs like this allow partisan politics to predominate, entropy increases rapidly; this post is an excellent illustration, and should be an embarrassment to the owner of this blog.

That's my two cents. Please proceed with your partisan shouting match and back-patting; I'm going elsewhere, thank you.

[Mark Thoma]

I don't think Steve found what he was looking for.

[Steve]

"I don't think Steve found what he was looking for."

You're right; my appetite for unsupervised grammar-school mentality cacophony was more than satisfied decades ago. I definitely won't deny you the pleasure of indulging in it and presiding over it, however. After all, it's your blog. Knock yourself out.

[Mark Thoma]

Thanks for adding your discordant note to the cacophony.

But appreciate your perspective and hope you'll return to elevate the discussion once again. And if you'd like to actually address a post, that would be welcome as well. Lots of things here, from fairly technical analytical pieces to partisan snipping in comments.

Try the exchange rate post, e.g., are you a type A or type B? If you can add to the transfer problem discussion that would be welcome. Or perhaps the one from Varian on money in Iraq? He occasionally answers comments to the posts with his articles, so that might be to your liking.

Also, if you scroll down a bit, there are three FRB pieces - the one on data releases is informative and Evan Koenig does good work, but you may like the other two as well. I don't think they've received much comment though, just a few so far.