February, 2007

Errors about CBO Errors

The Wall Street Journal article I wrote with David Henderson, critiquing the way the Congressional Budget Office (CBO) allocates corporate profits, must have been unclear in some respects because the main points have been misunderstood by Thoma and perhaps also Burtless.
In the National Income accounts, a distinction is made between the capital income of […]

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Additional Reflections

It appears from Mark Thoma’s last posting that he is inching his way into the consensus of Reynolds, Burtless, and Burkhauser, which says that it is hard to find much of an increase in household size adjusted income among the bottom 98 or 99 percent of the United States population since the 1980s using standard […]

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How Should Changes in Inequality Be Measured and Assessed?

I am pleased to see that Alan Reynolds is finally taking a closer look at some of the evidence that works against his claim that inequality has been stagnant in recent decades, though he predictably dismisses it. I will not convince him the evidence is valid, and he most certainly has not convinced me […]

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Mean vs. Median Income

I opened the discussion by presenting evidence suggesting little change since 1986-88 in the inequality in disposable income or consumption “among the U.S. population as a whole” (as opposed to, say, the 99.99th percentile doing better than the 99th percentile). One unique piece of that evidence — comparing growth of median income by quintile and […]

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Red Herrings Can Be Interesting

In the context of a discussion about the distribution of income and consumption, Mark Thoma brought up a new issue of questionable relevance – namely, the reported share of national income going to employee compensation under a hypothetical change in accounting conventions. I criticized his reference to a newspaper article because all other participants in […]

Read: Red Herrings Can Be Interesting

Sometimes You Do Need to Be a Weatherman to Know Which Way the Wind Is Blowing

It strikes me that there is often an inverse relationship between the heights of an essayist’s rhetorical flourishes and the depth of the scientific evidence they marshal to support it. I give Mark Thoma high marks for raising the rhetorical stakes in this debate to the point where those who remain more skeptical of the […]

Read: Sometimes You Do Need to Be a Weatherman to Know Which Way the Wind Is Blowing

It’s Time to Ask the Next Question

I had hoped to move on to new issues, but that will have to wait as I want to respond to some of what Alan Reynolds says in his reply essay.
In his reply, Reynolds provides a very good example of what Gary Burtless points to when he says:
The problem is, he is […]

Read: It’s Time to Ask the Next Question

Inequality Trends: The Facts and Why They Matter

Alan Reynolds wants to disprove the widely accepted view that American income inequality widened after 1988. In his attempt to make this case he offers some evidence that is relevant, much more that is irrelevant, and still more that cannot be evaluated without careful and open-minded analysis of the data. Unlike many of the analysts he criticizes, including economists in the Congressional Budget Office and Professors Thomas Piketty and Emmanuel Saez, he has never actually done any of the hard analysis that would allow us to assess the importance of claimed shortcomings in the data. I leave it for other readers to decide whether Reynolds has the temperament to treat good researchers’ analysis and results with an open mind, especially when their findings conflict with his fond hope that income inequality stopped rising almost two decades ago.

Read: Inequality Trends: The Facts and Why They Matter

Why Change the Subject?

Gary Burtless rightly emphasizes that “economists’ favorite indicator of inequality is the Gini coefficient,” but “the Bureau’s standard measure of income excludes in-kind benefits and capital gains, and it ignores the effects of income and payroll taxes.” That is why I presented a chart of 25 years of Gini coefficients[pdf] for the Census Bureau’s measure of “disposable income” — which adds transfer payments and taxable capital gains, but subtracts income and payroll taxes.

Suppose that instead of providing data for 25 years, I had mentioned only two years as Burtless, Bernanke, Piketty and Saez and other keep doing. I could then say the Gini coefficient for disposable income fell from 0.41 in 1986 to 0.40 in 2004, proving inequality has fallen for more than 20 years. Or I could say the Gini coefficient rose from .39 in 1985 to .40 in 2004, proving inequality has increased. We cannot find out what happened when by showing data for only two years and then drawing an imaginary line between them.

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Inequality in What?

Dirk Krueger and Fabrizio Perri suggest that we shift our attention away from inequality in current incomes. “[I]f one is ultimately interested in the distribution of well-being across U.S. households,” they write, “the object of study ought to be the joint distribution of lifetime consumption and leisure across them.” Unfortunately, good data on lifetime consumption are not available. However, citing Milton Friedman and Franco Modigliani, Krueger and Perri contend that “if households can borrow and lend on financial markets, then there is a strong link between the lifetime resources of a household (sometimes also called its permanent income) and its current consumption.” And the trends in current consumption data show that “the increase in income inequality in the U.S. has been much more pronounced than the corresponding increase in consumption inequality.”

Read: Inequality in What?

Measuring Economic Well-Being: What, How and Why

Invoking Kurosawa and Derrida, Richard Burkhauser dives into the contested complexities of the Current Population Survey data on household income. His conclusion: “Over the 1990s business cycle the entire distribution moved to the right with little or no change in income inequality. Since 1989 household income inequality has risen very little and much less than in the previous decade. This is very good news that matters.” Burkhauser admits that the CPS data are not well suited to tracking trends for the top 1 percent of earners. “But does this really matter?” he asks. “Our economy is not a zero sum game. My gain does not mean your loss or vice-versa. I know of no evidence that increases in the incomes of the top 1 percent of our population are the root cause of the challenges faced by those at the other end of the distribution.”

Read: Measuring Economic Well-Being: What, How and Why

“Yes, Virginia, Income Inequality is Still Rising”

In his response to Alan Reynolds, Mark Thoma invites us to “step back” and survey the wider picture of data and expert opinion on income inequality. The verdict? Fed Chairman Ben Bernanke, and the consensus generally, has got this one right. “The preponderance of evidence and of professional opinion,” writes Thoma, “clearly indicates that inequality has been rising since [at least] 1988.” Like Burtless, Thoma finds little in Reynolds’ analysis to agree with, describing his main points as “either too inconsequential to change the inequality picture,” suffering from “an incomplete presentation of the evidence, or rebutted by other work.” Thoma then goes a step further, pointing to new evidence suggesting that income inequality might be even greater than currently estimated.

Read: “Yes, Virginia, Income Inequality is Still Rising”

Ben Bernanke is Right

Gary Burtless agrees that analysts of the American income distribution should “take seriously some of Reynolds’s criticisms of the data on income disparities.” “Reynolds points to some serious problems,” Burtless concedes, “and in many cases fair-minded experts will agree with him.” Nevertheless, Burtless dissents sharply from Reynolds’s larger claim that inequality apparently stopped increasing in the late 1980s. “Income inequality was higher at the end of the 1980s than it was in the beginning of that decade,” he states, “and it was higher in 2005 than it was in 1989.” According to Burtless, Reynolds can reach his unorthodox conclusion only by manipulating the evidence. “The problem is,” Burtless charges, “he is harshly critical of data series that do not support his views, while he is usually silent about equal or more serious problems with data sets that show little change in inequality.”

Read: Ben Bernanke is Right