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 evidence for substantial increases in income inequality since 1989 are relegated to the status of contrarian ideologues unwilling to sign onto Mr. Gore’s “Inconvenient Truth.” But isn’t this a bit much, even for a true believer?
Rather than raise the rhetorical level it might have been more interesting for Thoma to acknowledge the new evidence I provided in Figure 6. It demonstrates how changes in top coding and censoring both in the public use and in the internal Current Population Survey (CPS) data significantly inflate inequality trends, especially in the 1990s. That is, they are much higher relative to trends based on that same data which has been consistently top coded; in each year, each income source is top coded at the same point in its distribution.
This standard practice in the labor earnings and income inequality literature shows that, at least as far as the CPS data are concerned, there has been little increase in income inequality in the bottom 99 percent of the income distribution since 1989 as measured by standard Gini coefficients. And much of that increase is likely due to changes in US Census data collection processes that show up in the 1993 internal CPS data and in the 1996 public use CPS data.
But the news is even better: unlike the business cycle of the 1980s, where a small but significant share of the income distribution got worse (see Figure 2) over the 1990s business cycle (1989-2000), the entire distribution moved to the right. A person at every point in the distribution in 2000 was better off in real terms than his counterpart at that point in the distribution in 1989.
That is something that did not happen in Germany or Japan, two countries with much bigger and more progressive income tax systems and a willingness to interfere with markets to reduce income inequality greater than that in the United States. Despite their progressive efforts, income inequality increased more in both these countries over their 1990s business cycles than in the United States. This fact should at least give Thoma, and others who are so ready to make things better though redistributive policy, reason to pause and to consider whether their proposed changes would really do more good than harm.
As for Reynolds and Burtless, I continue to suspect that there is fundamentally little difference between my findings and their findings with respect to the bottom 99 percent of the income distribution. And I continue to suspect that our differences with respect to the way inequality within that population changed over the last 25 years is less than our conversation to date would suggest. But it will require a painstaking comparison of footnotes to be sure. But that should not be surprising: this kind of detailed work is what careful research done on imperfect data sets requires.
Burtless puts great emphasis on a break point between 1979-1994 (the start of the strong economic expansion) and 1994-2004 in his discussion. But my reading of Figure 6 (see especially the consistently top coded internal Gini values which I believe are the most appropriate to consider) suggests that inequality rose dramatically from 1979-1983 and much less thereafter. This is not a trivial observation. 1979-1983 was a difficult time in the United States. It began with a couple of years of double-digit inflation and ended with the most serious recession since the Great Depression.
In my view this was the price our economy paid for a decade of failed Keynesian policies and stagflation. However, this dark period of macroeconomic outcomes also marked the end of federal government macro policies based on Keynes’s economic principles. The Reagan Administration put into place a series of macroeconomic policies practiced by all subsequent presidents, both Republican and Democrat: the Federal Reserve Board Chairmen they have appointed have focused primarily on an inflation target, and the federal government has increasingly allowed free markets to work their magic.
What has happened to income inequality since then? My reading of Figure 6 is that there was little change in income inequality from 1983 to 1992. There is then a major spike in the data in 1992-1993, which to some degree is caused by changes in US Census data collection procedures. From 1993 to 2004 there is no change in consistently top coded internal CPS data. Hence for the bottom 99 percent of the income distribution — except for the largely unexplained spike in 1992-1993 — there has been remarkably little increase in income inequality.
One can certainly argue that there has been no decreases in income inequality either. Hence, since 1983 the United States has had a substantially higher, but relatively constant, level of inequality than we experienced in previous decades. But during the past 20 years (at least for the bottom 99 percent of us) people at all points on the income distribution have experienced increases in economic well-being with little additional increase in income inequality.
So what’s all the shouting about? In my view it is about what the CPS and especially consistently top-coded CPS data can not directly tell us. What about that other 1 percent? Here Reynolds and Burtless strongly disagree. Reynolds argues that even including that 1 percent in the mix there has been no great increase in income inequality since 1988 and Burtless offers counter proof based on other data sets. I am not yet sure who is right between them, but I am very sure that Thoma is wrong. It is still reasonable to be skeptical of both arguments.