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 strongly critical of data series that do not support his views… Rather than do the hard work needed to measure the effect of particular data problems, he cherry-picks evidence to attack researchers whose results he finds displeasing. … Reading his analysis, one is struck by how much it resembles a lawyer’s brief rather than an even-handed weighing of evidence.

I made a similar point:

[T]here are potential measurement issues that work in both directions … and a fair presentation of the evidence would note both sides. But that is not what we have. Only those adjustments that favor the proposition that rising inequality is a myth are presented…

Reynolds’ reply shows how he reacts when presented with evidence that does not conform to the inequality story he has been trying to sell. In my reply to Reynolds’ lead essay, I noted research that finds data adjustments that work against Reynolds assertions on inequality. Reynolds’ response to that evidence? He says:

Citing a newspaper article, Thoma opines that treating R&D expenses as an investment would “dwarf the kinds of adjustments Reynolds discusses.”

He then goes on to dismiss the work. In doing so, Reynolds wants us to believe it is just a “newspaper article” that I am citing, nothing more than a “red herring,” as he calls it later, so we should not give it much credence. But this is an example of how he attempts to mislead readers.

Yes, I did link to an article in the New York Times: a well-reported article about the work of a team of economists at the Bureau of Economic Analysis, and “two prominent economists at the Federal Reserve.” The article does a nice job of summarizing their work. Behind the “newspaper article” is a body of academic research supporting the results I cited. But Reynolds doesn’t want you to know that. For example, in his reply he doesn’t cite or even mention any of the economists or their research, instead he says, “The article claims that …” as though the reporter is the one who had done the work and is making the claims.

He also mixes up the two studies in his rebuttal. Reynolds says:

The article claims that “when R&D is counted as profit, the employee compensation share of national income drops by more than one percentage point,” and says this would somehow shrink labor’s share from 65% in the sixties … to “less than 60 percent today.” But investment is not profit and one percentage point is not five.

The more than 1% figure is based upon the work of the Bureau, while the 5% figure is based upon the work of the economists at the Fed. Reynolds acts as though the reporter implies one causes the other when it’s very clear from the article that these are separate pieces of work. For example:

The Bureau of Economic Analysis … is on the case. So are two prominent economists at the Federal Reserve. … When R & D is counted as profit, the employee compensation share of national income drops by more than one percentage point. … Sumiye Okubo, an associate director of the [Bureau of Economic Analysis], … is directing the experimental project.

The two Fed economists — Carol A. Corrado and Daniel E. Sichel — along with an outside collaborator, Charles R. Hulten, a University of Maryland economist, go much further than Ms. Okubo and her team in arguing that the G.D.P. data should be revised. …

In a recent research paper, “Intangible Capital and Economic Growth,” they … say that this treatment should be extended to a host of other investments… If these …[adjustments] were incorporated into G.D.P. …, labor’s share of national income would decline from a fairly steady 65 percent in the 1950′s, 60′s and 70′s to less than 60 percent today. The long decline doesn’t show up in the standard G.D.P. accounts, which ascribe nearly 65 percent of national income to labor.

Nothing Reynolds says in his confused reply rebuts this work.

I do agree with Reynolds in the following sense. There is a big difference between peer-reviewed work in academic journals and newspaper articles — though, as illustrated above, accurate newspaper reports can be very helpful. And to take this a step further, there is an even bigger difference between the peer-reviewed academic work that forms the core of the inequality results cited by professional economists and work appearing on the opinion pages of newspapers. While good work does appear on those pages from time to time, there is nothing to ensure that the claims made in a typical opinion piece are backed by evidence that can withstand professional scrutiny.

That’s why I was surprised to see Reynolds, after implicitly dismissing the work of academic economists as a mere “newspaper article,” say in a different part of his reply that “I have written hundreds of articles since 1972 about income, or about wealth” in an attempt to bolster his own credentials. But how many of those appeared on the opinion pages of newspapers (and predominantly one or two newspapers at that), and how many are peer-reviewed articles appearing in top flight academic journals, or in any academic journal for that matter? When you read Alan Reynolds’ assertions, remember that they have not been subjected to the rigorous process required to get a paper published in a top academic journal, they have only passed through an editorial board at a newspaper. He’s right to suggest that we be wary of such work.

Here’s another example of a misleading presentation by Reynolds. In discussing his claim that the treatment of tax deferred income distorted the inequality statistics, I noted that the important point is that most Americans have so little capital income exactly how you count it is not an important issue.

What is Reynolds’ response to this? First, he makes a big deal out of the words used to describe the income – he didn’t like the use of the word capital income and wanted “corporate profits” to be used instead, even though the issue is the income of the top 1% of Americans. That’s fine, call it what you want; it doesn’t change the point.

Second, the statistics he cites are misleading. They are the total allocated to the top group in each year, not the amount of the mismeasurement he is asserting exists. That is, the 39% to 59% increase he cites says nothing by itself. That is simply the amount of corporate profits allocated to the top income group. That figure says nothing at all about whether the growth in capital income reflects the actual change in asset holdings for this group. Though he tries to make a case that it doesn’t reflect underlying asset holdings, when you look at this, you see there has been substantial growth in asset holdings for this group, and therefore the misallocation does not appear to be very large if it is there at all.

But the main thing to notice is how Reynolds uses misleading statistics in an attempt to support his case. Saying, as he does, that “The CBO added 39% of corporate profits to top 1% incomes in 1989 and 59% in 2004, thus fabricating a wholly artificial increase in the top 1 percent’s share” implies that all of the increase represents a misallocation when that’s not the case at all. It is the change from 39% to 59% relative to the change in asset holding across groups that matters, but those numbers are not given. If they were, they would be small.

Now let me turn, quickly, to a few more of Reynolds’ responses. In my reply to Reynolds’ lead essay, I noted that not all Gini coefficient results are consistent with his assertions and I pointed to some work that supports different conclusions. He says:

Amazingly, [Thoma] refers only to a Gini coefficient for wealth — as if income doesn’t matter. After ignoring all income statistics, he accuses me of “an incomplete presentation of the evidence” and “attempts to cloud the issue.”

The point was that contrary evidence exists on both the wealth and income inequality issues, both of which are discussed in his essay, and that he does not tell us about contrary findings. This provided an example of such evidence, it was not an attempt to provide a systematic survey of all work in the area. Exactly how adding additional information about research on inequality clouds the issue, except to the extent that it clouds the issue because it doesn’t agree with the conclusion he wants to sell, is not clear.

Another point concerns Bernanke’s speech on inequality. Reynolds’ objection is that Bernanke did not use the measure of inequality he wants him to use (the one that supports his conclusion), but instead uses another measure, which shows growing inequality. Of course, in Reynolds’ eyes, the data Bernanke used is “bad data” that is “no substitute for good data.” But we know that the finding of rising inequality is quite robust across inequality measures, so this is not much of a refutation. And on Reynolds’ “good data” — the data that support his conclusion — it’s useful to recall what Gary Burtless said about some of the data Reynolds uses:

The problem is [Reynolds] is usually silent about equal or more serious problems with data sets that show little change in inequality. … What Reynolds doesn’t mention is that the quality of the consumption data has deteriorated badly since the mid-1980s. … So far as I know, no statistical series that tries to approximate total income has suffered such a terrible decline in quality as the data from the consumption survey. You’ll look long and in vain for any mention of this problem in Reynolds’s paper.

If you only look at evidence on one side of the issue, cherry pick results, start in specific years (and insist everyone else follow suit), use the “right” measures of income or wealth, ignore data problems that work against your results, and so on, and so on, you might be able to argue, if everything falls in your favor, that inequality is no worse since 1988. But that does not fairly characterize the overall evidence.

This debate reminds me of the debate over global warming, though using the word “debate” implies there is more disagreement than there really is. There are three questions in the global warming debate. The first question is whether global warming exists. The second question is, if it does exist, what is causing it. The third question is what to do about it. In order to avoid the consequences involved with the third step, doing something about it, there are many who try to cloud the issue and keep the first question alive and kicking for as long as possible, or claim the cause is from natural forces that we can do nothing about.

The inequality debate appears to be unfolding similarly with those who would like to avoid policies to address inequality, policies such as more progressive taxation, hoping to keep the first question open as long as possible or claiming that the rise in inequality is the inevitable result of natural market forces and we should not interfere.

There is a role for skeptics, but there is also a time to accept that the preponderance of evidence points in one direction and to begin to think about and implement corrective measures. I believe an important question is how we respond to inequality – will it be through progressive taxation, minimum wage legislation, changes in the structure of health care, investments in education and retraining programs, wage insurance and so on, or will we do nothing?

The question of what to do is linked to the causes of rising inequality. Has inequality been rising because of tax policy, the decline in unions, the rising skill premium, global competition and changing technology, a falling minimum wage in real terms, or for other reasons? How much does each factor contribute? Is the income of those who have experienced the largest gains based upon economic fundamentals, i.e. does their pay reflect their contribution to production, or does the pay of, say, CEOs depend upon market failures that allow departures from competitive market outcomes?

There are lots and lots of important questions to be answered involving both equity and efficiency (many of which do not require rising inequality since 1988, just its existence) and, as I said in my first essay, it will be too bad if attempts to cloud the issue divert us from discussing how best to respond to income and wealth inequality.

Also from This Issue

Lead Essay

  • Income Distribution Heresies by Alan Reynolds

    A headline in today’s Wall Street Journal reads “Fed Chief Warns of Widening Inequality.” Bernanke worries that inequality erodes tolerance of the “dynamism” that lays the golden eggs of “economic progress.” But is inequality widening at all? Cato Institute senior fellow Alan Reynolds has his doubts. Following up his own controversial Wall Street Journal op-ed, a Cato Institute policy forum, and a new Cato policy paper, Reynolds in this month’s lead essay digs yet deeper into the mysteries of the official numbers and comes up with … not much: “If there were any [good] data showing a significant and sustained increase in the inequality of disposable income, consumption, wages, or wealth since 1988,” Reynolds concludes, “I suspect someone would have shared it with us by now.”

Response Essays

  • Ben Bernanke is Right by Gary Burtless

    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.”

  • Yes, Virginia, Income Inequality is Still Rising” by Mark A. Thoma

    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.

  • Measuring Economic Well-Being: What, How and Why by Richard Burkhauser

    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.”

  • Inequality in What? by Dirk Krueger and Fabrizio Perri

    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.”

The Conversation