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Saturday, December 16, 2006

Reynolds' Rap on Inequality

Recently, some have sought to attack the idea that inequality is on the rise in the U.S. A prominent recent example is this editorial by Alan Reynolds in the Wall Street Journal. Another more subtle inference that inequality is less of a problem than we've heard is this post at Free Exchange noting that the poor have more leisure time to watch TV than they used to:

Income inequality may be increasing, but income is not the only measure of welfare. Those at the lower end of the income spectrum have growing amounts of time on their hands. ... How do Americans spend their new free time? Overwhelmingly, staring at the idiot box.

At least the rise in income inequality is acknowledged.

It would be easy to rebut the idea that Reynolds and others are promoting that inequality has not been rising with arguments from economists from the left (e.g. see here for one among many). But perhaps it would have more impact if the proponents of the "no increase in inequality" idea heard it from members of their own team. Let's start with someone whose economic and conservative credentials cannot be questioned, Martin Feldstein:

There has no doubt been a relatively greater increase in higher incomes in recent years in the United States and in some other countries.

Next, Former Chairman of the CEA under Bush, Glenn Hubbard:

[W]e have an issue with emerging inequality in the country.

Fed Chair Ben Bernanke:

I agree with you, Congressman, that rising inequality is a concern in the American economy. ... [G]iven that we agree that inequality is a problem -- and I agree that it is trends in the economy that cause it ..., the question is: What do we do about it? What federal policies would it make sense -- if we all agree that inequality is increasing beyond what is healthy, what should we do about it?

Treasury Secretary Paulson:

But we still have challenges, and amid this country's strong economic expansion, many Americans simply aren't feeling the benefits. Many aren't seeing significant increases in their take-home pay. ...

Current Chairman of the CEA, Ed Lazear:

There is little doubt that there has been a 25-year trend of a growing gap, sometimes called income inequality, between the wages of the skilled and the unskilled. ... [T]hat trend shows no obvious signs of abating in the near future... [T]he general picture cannot be disputed. The difference between the earnings of individuals at the top and earnings of individuals at the bottom has grown.

So far, these are all conservatives connected in some way to the administration, but this could go on and on. Thus, when Alan Reynolds says:

I survey a wide range of official and academic statistics, finding no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth.

I will just echo Lazear, Bernanke, and others and say the general picture cannot be disputed, rising inequality is a concern in the American economy.

The inequality results are derived from a wide variety of studies, not a single paper or a single data source. In fact, at least three different groups have estimated the drastic rise in top 1% share of income: Piketty-Saez, the CBO, and the IRS "consistent income". Thus, while Reynolds tries to pick at the minutiae in a particular study by Piketty and Saez, unsuccessfully in my opinion (e.g. he uses Census data in rebuttal, but there are well-known reasons why Census data don't show as much change in inequality, top-coding mainly), the inequality findings are robust across various approaches to estimating the size of the problem.

Update: Alan Reynolds, in comments, responds:

I suppose one might take comfort in the fact that many famous folk have been mislead by faulty statistics. I don't rely on anyone's opinions or beliefs to prove any stats in my college textbook; I show the data, explain it and provide URLs so the reader can check me.  Unless one is prepared to overlook several fatal flaws in the Piketty-Saez estimates (and others in the CBO estimates), there is no clear evidence of a sustained and significant increase in inequality since 1988 by any other measure.  I very carefully did not say there was no such evidence about 1981-87.  1981 was the low point for the top 5 percent's share because stocks, bonds and small business were all in terrible shape.  Indeed, if it makes sense to define equality as a falling share of income (and taxes!) reported by the top 1%, the top 1 percent's share has fallen in every recession since 1920. Unfortunately, recessions hurt the poor too.

Update: Follow-up post here.

    Posted by on Saturday, December 16, 2006 at 12:15 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (3)  Comments (64)


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