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 Gini measures and consistently top coded data from both the public use and internal restricted access Current Population Survey. And, though he doesn’t say so, it also appears he is inching his way toward the view that the gains from economic growth were more equally distributed over the last major business cycle (1989-2000) than the previous one (1979-1989) within this population.

Thoma has posted some very valuable references to the more technical economics literature, which uses alternative measures of income inequality and struggles to extract the most information about the entire distribution from imperfect data by making certain assumptions about the shape of the entire distribution given limited data at the top. He especially notes the problem that outliers at the top of the distribution cause in such efforts. Hence it appears he now recognizes that you sometimes need to be a weatherman (or at least need to carefully listen to several of them) to know which way the wind is blowing.

But instead of then agreeing that the literature on how exactly to capture this very high end of the distribution (the top 1 or 2 percent) is still developing — as is the literature on how exactly to use such measures to tell us about what has happened to income in this very high income population over the last thirty years — he concludes with a most amazing non-sequitur: “When researchers go through these exercises carefully and weigh the evidence objectively they conclude, with few exceptions, that inequality has been rising in recent years.”

A careful reading of the most recent article Thoma provides us makes no such claim:
“Robust stochastic dominance: A semi-parametric approach,” by Frank A. Cowell & Maria-Pia Victoria-Feser, Journal of Economic Inequality, April 2007. Rather, the article is a cautionary tale of the difficulties of making such judgments, and the sensitivity of such finding to outliers at the top of the distribution. While the paper uses British data, similar problems are likely to be found using the CPS and, I suspect, the other data sets we have discussed over the course of our conversation. That is why much of the income inequality literature using the CPS has used “trimming” or consistent top coding to avoid the problem of outliers and instead talks about the bottom 98-99 percent of the income distribution. Pinning down what has happened to the top 1 or 2 percent of the income distribution is the hard work that remains to be done before we can state definitively what has been happening there and how it impacts overall income distribution.

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