Intellectual Garbage Collection: The Unreliability of Alan Reynolds

A correspondent asks why she should presume that Alan Reynolds is wrong when he claims that statistics showing rising inequality are cynically and fraudulently manipulated--that, as Reynolds writes in the extremely bad and low-quality intellectual neighborhood that is the Wall Street Journal editorial page:

Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false.... The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic. The architects of these estimates, Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley...

The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on [Piketty and Saez's] seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other. The politically correct yet factually incorrect claim... fill[s] a psychological rather than logical need. Some economists [i.e., Thomas Piketty and Emmanuel Saez] seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems...

The first reason is that Alan Reynolds is playing intellectual three-card monte. He opens his op-ed by attacking Senator-elect Webb's belief that income inequality has risen steeply since 1980, but in the body of the op-ed--as he writes to economist Mark Thoma's Economist's View--"[I said that] there is no clear evidence of a sustained and significant increase in inequality since 1988.... I very carefully did not say there was no such evidence about 1981-87..." That is sufficient reason right there.

However, there are more reasons. We have experience with Alan Reynolds. The last time I noticed Alan Reynolds on inequality was last March, when he wrote:

The Top 10 Percent, Again: [T]he eternal ambition of Robin Hood economics is to steal money from those who earned it and "redistribute" it to those with more political clout. When in pursuit of such a worthy cause, it appears quite respectable to torture innocent statistics. Those deploying statistics in this campaign take special care to select their favorites. Washington Post columnist Steven Pearlstein.... "in 1979, the top 10 percent of households earned 33 percent of all pretax income. By 2003, their share had climbed to 44 percent. The shares of everyone else declined." Where did [Pearlstein's] numbers come from? They certainly didn't come from the Census Bureau.... Pearlstein's statistics obviously didn't come from the CBO... [which] estimates that in 1979 the top 10 percent of households earned 39.3 percent of all pretax income. By 2003, their share had dropped to 38.3 percent (or 33.7 percent after taxes).... It is easy to see why the CBO is not Pearlstein's favorite source of income statistics...

At the time Reynolds's claim that CBO showed no rise in household income inequality since 1979 surprised me, because I had read a report by the careful Isaac Shapiro and Joel Friedman of CBPP on the CBO study which said something very different:

New CBO Data Indicate Growth in Long-Term Income Inequality Continues, 1/29/06: CBO issues the most comprehensive data available on changes in incomes and taxes for different income groups.... The new CBO report highlights the degree to which income gains have become increasingly concentrated at the top of the income scale over the past two and a half decades.... The top one percent of the population received 12.2 percent of national after-tax income in 2003, up from its already-large 7.5 percent share in 1979...

Sure enough, Reynolds is wrong. CBO estimated that for all households the income of the top tenth in 2003 was 37.2%, compared to 30.5% in 1979. Reynolds's 39.3% and 38.3% came not from "Table 1: All Households", but instead from Table 3, "Elderly Households".

As Paul Krugman wrote at the time, defending Pearlstein:

: [F]or [Pearlstein's] pains, he was smeared by someone at the Cato Institute who needs help -- technical help. Hint to Alan Reynolds: check which table you're looking at before claiming that Congressional Budget Office data refute a statement you don't like...

Emmanuel Saez's office is seven doors north of mine on the west corridor of Evans Hall. He is an extremely thoughtful, intelligent, careful, and fair-minded economist, trying his very best to tell it straight. He deserves much better than to be smeared by people who are not careful--who get their tables mixed up--and are not fair-minded--i.e., "I very carefully did not say there was no such evidence about 1981-87."

---

UPDATE: More "Unreliability":

Back in 1992, in an article, "The Rich, the Right, and the Facts" for the American Prospect http://www.prospect.org/print/V3/11/krugman-p.html, Paul Krugman tangled with Alan Reynolds's earlier incarnation--the one in which he said that claims that the top 1% share of wealth and income had risen over 1983-1989 "can't really be taken seriously." Quite a difference from today, when Reynolds writes:

[I said that] there is no clear evidence of a sustained and significant increase in inequality since 1988.... I very carefully did not say there was no such evidence about 1981-87...

Here is Paul:

The Unofficial Paul Krugman Web Page: Wealth is typically much more concentrated than income.... [B]ecause wealth is so concentrated, it is difficult to measure accurately from sample surveys: a random survey of a few hundred or even a few thousand people will contain only a handful of really wealthy people.

Nonetheless, researchers at the Federal Reserve Board have tried to use sophisticated sampling procedures to deal with this problem.... In March, 1992 they released a working paper that showed a sharp increase in the concentration of wealth even since 1983, with the share of the top 1 percent of families rising from 31 to 37 percent....

When the Federal Reserve wealth study came out, it was immediately attacked by Alan Reynolds in the Wall Street Journal.... Reynolds's main argument was that the study, based on a survey of 3,000 families, could not be reliable about the top 1 percent, since thirty families is too small a sample. This was an interesting reaction, since the Fed study carefully explains that they used a two-stage procedure... [with] over 400 families in the top 1 percent. In fact, the study is written in the form of a working paper on statistical methodology, and the issue of sample size is raised immediately. One can only conclude that Reynolds did not bother to read the study before attacking it....

The wealth dispute was a minor part of the distribution controversy, but it was revealing about the desperation, unscrupulousness, and sheer lack of competence of today's conservatives...

---

And Paul is right. Here is Reynolds:

"Who Gained in the 1980s? Everybody" By Alan Reynolds. 1,344 words. 7 May 1992. The Wall Street Journal. PAGE A14. English (Copyright (c) 1992, Dow Jones & Co., Inc.): Jerry Brown was incensed that "the top 1% have more wealth than the bottom 90%."... The source of Gov. Brown's remark was a New York Times story, loosely based on a Federal Reserve survey. This front-page story claimed the wealthiest 1% had 37% of all net worth in 1989, up from 31% in 1983.... Estimates of the share of wealth owned by the top 1% can't really be taken seriously. After all, 1% means just 31 families among the 3,143 sampled. Some years ago, the late Warren Brookes uncovered that a similar Fed survey had been grossly distorted by an error involving a single individual. This time, perhaps the survey stumbled upon Donald Trump, Leona Helmsley or Mike Milken (in which case a newer survey might already look a bit different)...

Comments

[Henry Farrell]

If me memory is correct, Krugman has an excellent discussion of this kind of time-period cherry-picking in _Peddling Prosperity_.

[wcw]

There is really no getting around what the data say. I did a quick, simplistic chart of the census data. Cf http://www.bignose.org/blog/index.php?/archives/102-The-decline-of-the-middle-class.html

There's really no way to look at those data and contradict rising inequality. Not unless you're a pathetic shill, that is. Fits right in on the WSJ editorial page, then.

(The early '90s break in the data is when they upped the earnings limit to $999,999.)

[Joe S.]

I was in San Antonio the other week, and having nothing better to do with my time at the airport, looked at the local paper. I finally read a Richard Lowry column. No kidding, first time. My reaction at that time seems fully applicable to Mr. Reynolds:

You can only engage these arguments with a taser.

There is no point in rebuttal: they proffer too many lies in too little space. Only ridicule will do.

[Jon Fernquest]

"The politically correct yet factually incorrect claim... fill[s] a psychological rather than logical need."

This sounds like the climate change debate all over again. Another famous example of ***psychological distress** as a lead indicator: Marie Antoinette getting her head lopped off.

[anne]

http://gregmankiw.blogspot.com/2006/12/inequality-wars.html

December 14, 2006

Inequality Wars
By Greg Mankiw

Even as an economic data geek (but not one who specializes in studying inequality), I have a hard time sorting out the competing claims in this literature....

[Absolute nonsense....]

[anne]

For the data geek:

http://www.nytimes.com/2006/01/29/national/29rich.html?ex=1296190800&en=784822e4b0735ee5&ei=5090&partner=rssuserland&emc=rss

January 29, 2006

Corporate Wealth Share Rises for Top-Income Americans
By DAVID CAY JOHNSTON

New government data indicate that the concentration of corporate wealth among the highest-income Americans grew significantly in 2003, as a trend that began in 1991 accelerated in the first year that President Bush and Congress cut taxes on capital.

In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent.

In 2003, incomes in the top 1 percent of households ranged from $237,000 to several billion dollars.

For every group below the top 1 percent, shares of corporate wealth have declined since 1991. These declines ranged from 12.7 percent for those on the 96th to 99th rungs on the income ladder to 57 percent for the poorest fifth of Americans, who made less than $16,300 and together owned 0.6 percent of corporate wealth in 2003, down from 1.4 percent in 1991....

[anne]

Income and wealth concentration have increased for 25 years, and changes in tax structure since 2001 have been designed to accentuate wealth and income inequality so that as data is accumulated the concentrations will be found to have continued to increase. However, there is a class of analysts who exist solely to show that the rich are poor and the poor are rich and the middle class is richer than all. The point of such analysis is deception.

[anne]

For the data geek:

http://www.nytimes.com/2005/06/06/opinion/06herbert.html?ex=1275710400&en=c03b1056decb6b77&ei=5090&partner=rssuserland&emc=rss

June 6, 2005

The Mobility Myth
By BOB HERBERT

The gap between the rich and everybody else in this country is fast becoming an unbridgeable chasm. David Cay Johnston, in the latest installment of the New York Times series "Class Matters," wrote, "It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known."

Consider, for example, two separate eras in the lifetime of the baby-boom generation. For every additional dollar earned by the bottom 90 percent of the population between 1950 and 1970, those in the top 0.01 percent earned an additional $162. That gap has since skyrocketed. For every additional dollar earned by the bottom 90 percent between 1990 and 2002, Mr. Johnston wrote, each taxpayer in that top bracket brought in an extra $18,000.

It's like chasing a speedboat with a rowboat.

Put the myth of the American Dream aside. The bottom line is that it's becoming increasingly difficult for working Americans to move up in class. The rich are freezing nearly everybody else in place, and sprinting off with the nation's bounty.

Economic mobility in the United States - the extent to which individuals and families move from one social class to another - is no higher than in Britain or France, and lower than in some Scandinavian countries. Maybe we should be studying the Scandinavian dream.

As far as the Bush administration is concerned, the gap between the rich and the rest of us is not growing fast enough. An analysis by The Times showed the following:

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000." ...

[Alan Reynods]

I certainly agree that "Emmanuel Saez . . .is an extremely thoughtful, intelligent, careful, and fair-minded economist, trying his very best to tell it straight." My objection is to what the media do with his data.

[Well that's certainly a big change of tune on your part! In your op-ed you wrote that "The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded." The only economists mentioned in the op-ed are Piketty and Saez.

You can't call somebody "ready and willing to supply whatever is demanded" by the "politically correct" on one day, say that he is "extremely thoughtful, intelligent, careful, and fair-minded economist, trying his very best to tell it straight" on the next, and expect not to be laughed at.]

As I emailed to him months ago, I'm not saying anything about the limitations of this data that he hasn't said himself. As for my mistake about CBO data, made in a hastily-written weekly column, I apologized for that on this blog. And this blog is listed as a reference for students at the back of my text. I'm not the one engaging in ad hominem arguments in this exchange. Can't anyone find fault with my data?

[Robert]

Poor Alan Reynolds. If he doesn't want to be laughed at, he should not write for the funny pages.

[Bruce Webb]

"The top 1% of tax returns accounted for 10.6% of personal income in 2004."

"Can't anyone find fault with my data?"

Well I don't know. Not all income is taxable, and certainly not in the year it is earned. I can spell "1031 Exchange", can you? There are entire industries devoted to keeping gains in equity sheltered from being counted as income, you just roll it over and only draw what you need and if you are smart find some way to expense it back.

I had a business lunch with an ex-coworker last week and insisted on picking up the tab. When he objected I pointed out he was beating me out of a free lunch, if I paid for his I could expense mine, if not I had to pay for my own lunch. In the end I lost the receipts and had to pay. But then again Tony is a friend and it was just teriyaki.

But seriously anyone who is trying to track wealth inequality by looking at bottom lines on tax returns needs to take a little visit to Reality Land. All kinds of consumption and all kinds of capital accumulation occur every day that are not exposed to taxation.

If I give $250 to the Symphony and only get free admission, steak and shrimp, and unlimited champagne am I really making a tax deductable contribution? Well yes and (correct me if I am wrong) from the first dollar and not the net.

If I was a billionaire I could dine out every day and get a discount at the top marginal rate for every bit of crab and steak I ate. Just have that meal at the Museum of Modern Art and you can take 30% right off the top.

[ken melvin]

The wealthy write off their yachts as second homes. If they charter them out part time, they can expense them. Of course, the poor can do this too.

[Larry]

Mr. Reynolds attribution of the distributional changes to the effects of the 1986 tax law and other errors of interpretation is certainly plausible. Is anyone going to make the argument that it is false?

Neither Prof. DeLong nor these comments do so. DeLong cites an old error by Reynolds, but doesn't attack this latest work.

[It was... six years ago that Piketty and Saez considered how to interpret the effects of the 1986 tax law. As Reynolds knows--but doesn't tell his readers--they discussed their interpretation at some length in their 2003 paper. One of the most annoying thing about Reynolds's piece is that he implies, by his silence, that Piketty and Saez have not thought about this issue. There are many other annoying things as well.]

[Alan Reynolds]

For 35 years I have usually averaged one article per week on economic issues. It would be surprising (to me!) if I had never made a mistake in one or two of those. By contrast, the WSJ piece evolved from a fairly technical paper I presented at the Western Economics Association this summer, which is currently being refined, repaired and condensed for probable publication. If there is anything seriously wrong with the arguments or evidence in the highly abbreviated Wall Street Journal piece I would really like to know what it is. If not, I can't imagine what much of the preceding fulmination is all about.

[wcw]

Here are some problems I find in ten seconds of inspection:

- Reynolds, "claim that income inequality has widened dramatically..founded entirely on [Piketty and Saez's]"

Videlicet the census quintile data, which I reproduce at my link above. That chart took me five minutes with the census data and has nothing to do with P&S's work.

Strike one.

- Reynolds, "there is no clear evidence of a sustained and significant increase in inequality since 1988"

Simple inspection of the census quintile data put paid to this bloviation as well.

Strike two.

And of course, my favorite, Reynolds's use of Table 3, "Elderly Households".

Strike three. You're out.

If that "probable publication" takes place in Econometrica, I shall be shocked.

[Bruce Webb]

"If not, I can't imagine what much of the preceding fulmination is all about."

Well confusing taxable income with income inequality would be a start.

"The top 1% of tax returns accounted for 10.6% of personal income in 2004"

Simply waving tax avoidance away doesn't make it disappear.

[piotr]

Can academics do something about mental polution spread by unscrupulous think tanks?

The main occupation of "scholars" from AEI, CATO, Heritage etc. is mangling numbers to fit preconceived conclusions, when they deign to use numbers at all.

I was thinking about some rating system. But perhaps sterner measures could be used as well. Here Alan Reynolds more or less accused other economists, by name, to be liars or cretins, while using false numbers. Is it libel? A strained interpretation is one thing, but if one combines

(a) accusations of ill will or utter incompetence

(b) manipulation and or falsification (as "reading the wrong table")

(c) publishing it in millions of copies

it looks like a libel to me. If it was not falsification but a mistake, A. R. should say so, put it in writing in the same place he published the mistake, and the case is dropped.

[piotr]

Dear Alan,

it is really nice that you (a) read Brad's blog, (b) post a reply.

However, this is not a reply: "If there is anything seriously wrong with the arguments or evidence in the highly abbreviated Wall Street Journal piece I would really like to know what it is. If not, I can't imagine what much of the preceding fulmination is all about."

Brad and others here were rather specific, and in a scientific dialogue rebuttals have to be similarly specific. And if there is something "wrong, but not seriously wrong", that has to explained too.

Otherwise, I think that we see a rather frequent genre in which people alternate between two claims: (a) phenomenon A does not happen, and (b) there is nothing wrong in phenomenon A. Sometimes claim (c) is added to the rotation: it would be dereliction of duty not to foster phenomenon A (then onwards to (a)).

[howard]

frankly, alan, i said it on the prof's first thread and i'll say it here: anyone who produces material for the dishonest editorial pages of the wsj is in no position to lecture others on their "psychological needs." that is an argument a right-wing propagandist makes, not a serious analyst.

you're not new, as you note, to the world of producing your thoughts on economics for the inspection of others; as a result, we didn't really need the reinforcement of your little tic to determine to which category you belong, but it's certainly extra evidence that it is your psychological need to wish away income inequality that is on display here....

[Alan Reynolds]

I begin to see that the anger is all about wisecracks in my last paragraph, which are thought to imply that Piketty and Saez were dishonest. That was definitely not my intent.

[Yes, it was your intent. You wrote that "The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded." The only economists you mention in the op-ed are Piketty and Saez.]

It is the journalists who misuse and misunderstand these figures who are at fault(the Senator was parphrasing The Economist). Piketty and Saez have explained most of the shortcomings of their data series

[Yep.]

, although sometimes only in footnotes. I noted that Saez has said the 1986-88 surge in top percentile shares reflected taxable income elasticity, and I put numbers on two obvous problems -- excluding transfer payments and the AGI Gap from the denominator and failing to adjust for income shifting in the numerator. The data still have value for historical and cross-country research, but not for comparing income distribution under different tax regimes.

[bumbler]

No one except scientifically proven telepaths (no one) are in a position to lecture about hidden "psychological needs".

[wood turtle]

As I understand this, there are two estimates of wealth being discussed here. One is income, and one is net worth.

In regards to income, I don't see how there is much to be disputed, or where someone is the "architect of estimates". Don't the figures come directly from the IRS, so no sampling is necessary because the numbers come from the entire population?

In regards to net worth, it would be worthwhile to know the sample size and method of data collection. This must be a less reliable source, since it must be based on estimation rather than the whole population.

[Alex]

I believe Alan Reynolds is way off regarding the inequality debate, as his incompetence over the year attests itself. However, there are a few questions which I would like to get an answer to;

1) Why did income, both pre-tax and post tax, jump so much from 1985-1987? I really can't find the reason. I have checked the Wall Street bonus charts of the NY Comptroller, as the Bull Market that peaked in 1987 could have had something to do with it. Turns out that wasn't the cause, so what was?

2) Income inequality in the 20th century only came down during the years of the second world war, and then stayed there during the fifties, all the way through until maybe the mid-late seventies. Why was this. I can tell you first off that it wasn't taxes that did it. In the late thirties, marginal tax rates were above 80%, and the inheritance tax was already 77% at its peak. Corporate taxes were not big until the fifties. Besides, in the second world war, people in general had their income taxed. So clearly it wasn't taxes that did the redistributing. Can anyone think of some ideas? The ones that come to my mind are price controls, which limit the amount people can be paid, and the demand for labor from the war, with those gains being enforced by unionization of around thirty percent.

3) How was it that inequality declined during the sixties, as the stock market was roaring and the top marginal tax rate fell from 90% to 70%. Shouldn't there have been some concentration of income? This should be looked into.

That is all I've got for now.

[Neil Bates]

Not only statistics are being gamed by those antiHoodians. The gripes against "Robin-Hood Economics" are as flawed in terms of the logical framing of the issues about income and redistribution. First, the conservatives always refer to taking from "those who earned it" as if it was obvious that income was reliably directly due to productivity of some sort. But for example, CEOs usually have their income decided by a board. As I've pointed out before, the deciders here are not picking goods in a market because they aren't sacrificing their own money in trade off against being able to buy other things. The board is just picking a figure that others will be paying (the shareholders and real employees, basically.)

Also, the money supply is artifically manipulated by the Fed and creates new money by monetizing debt. Such new money has to be allocated by the system in a way that is not from market exchanges, of course. It also dilutes the purchase power that would be had by a hard currency, etc. In such a case, many end up with more money than they could get in a natural hard-currency/free-market direct exchange system.

[derrida derider]

From this side of the world, Mr Reynolds, a full, public and unreserved apology to Messrs Piketty and Saez is called for. No hogwash about "my remarks were misconstrued" please.

On the issue, I reckon you really are trying to defend the indefensible. You'd be on firmer ground if you argued either that the increased inequality was a Good Thing or that it was beyond anyone's control (the second is, IMO, quite plausible and an interesting story to boot), rather than claiming it hasn't happened.

But first things first - that apology, please. Then we can get back to the issues.

[Jim S]

The WSJ OpEd page is nothing but a mouthpiece for the RNC and AEI types. That's all they've been for years now. They never print the truth about anything and haven't since they were co-opted. Since Mr. Reynolds column appears on those pages nothing else needs to be said.

[Jared Bernstein]

The problem with Reynold's critique is that he latches on to a few correct points about the limitations of the IRS SOI data, then he:
--ignores the work others have done to correct these problems;
--way overstates the bias from these problems;
--ignores other data that do not suffer from these problems;
--having ignored all the inconvenient evidence to the contrary, misleading concludes there's no inequality problem.

He's not nuts. Some changes in inequality as measured by the IRS SOI data (the main source for Pik&Saez) are induced by income shifting due to tax changes. But while that can explain a spike in one year to the next, it doesn't explain longer trends in income concentration found in that and every other data set we have.

Also, analysts at IRS have worked hard to try to deal with some of these shortcomings. Take a look at this paper--the figures and tables clearly show an increase in inequality since 1988 income measures that correct for some of the inconsistencies.

http://www.irs.gov/pub/irs-soi/06asapetska.pdf

I won't belabor the CBO points others have made, other than to say that these data go the furthest towards addresses all the concerns raised by Reynolds. Sorry if these tables don't align correctly--I just pasted them in from excel.

They show real household income changes, since 1988. 2000 was an economic peak and the year before the bursting financial bubble took a big bite out of high incomes (large capital losses), so you see more inequality if you stop there. But I've include the latest CBO year too--02-03--to show that the old pattern is returning.

Pretax 1988-2000 1988-2003 2002-03
Bottom fifth 15.6% 9.6% -1.3%
Mid fifth 11.2% 7.5% -0.4%
Top fifth 35.3% 19.0% 2.3%
Top 1% 68.4% 25.1% 5.9%


Posttax 1988-2000 1988-2003 2002-03
Bottom fifth 17.7% 13.7% -1.4%
Mid fifth 12.9% 13.1% 0.7%
Top fifth 30.9% 20.0% 3.9%
Top 1% 60.4% 22.1% 8.2%

Source: CBO

You simply can't write about this stuff in good faith and leave all this information out, unless you're trying to push an agenda that's dependent on misleading.

BTW, a very interesting LA Times/Bloomberg poll came up with a fascinating number this week: 74. That’s the percent of respondents who believe the income gap is a serious problem (36 percent think it’s somewhat serious; 38 percent think it’s very serious).

It’s also a very big number. With polling data, once you hit this range, you’re into a rarefied level of agreement.

Given that this is a new question, there’s no way to make historical comparisons, as in “74 percent, up from a much lower percentage.” So I don't want to make too much out of it. But presumably, these respondents are not reacting to nuances in data sets.

They're calling it like they see it.

[a]

We can take it from all this dredging up of old material that Prof DeLong is unable to refute Reynolds' article.

[Alan Reynolds]

How much is one expected to cover in an op ed? The CBO and Strudler-Petska estimates are covered in considerable detail in my book, and in the forthcoming cato.org Policy Analysis which I mentioned. Income shifting is just as much a problem for the CBO data as it is for Piketty-Saez. The CBO includes transfers, but also realized capital gains. Because realized capital gains are sensitive to the tax on such gains, I shows that this makes the CBO estimates of top percentile shares jump in 1986 (a sell-off to avoid the higher tax in 1987), then sag until the tax was lowered in 1997. There are lots more problems and nobody else has done any work to fix them.
And by the way, thanks Jared.

[Cranky Observer]

> If income inequality is based on talent
> inequality for valued skills, then there
> no problem.
>
> I believe that by-in-large those with higher
> incomes are those who have superior talent
> in highly valued skills. For example, the
worked for (net worth of $50 million) had
> developed a key manufacturing process and
> founded a company to build the products.

First of all, there is an enormous difference between starting your own business and receiving a salary. Based on my eyeballing of the Wall Street Journal and finanical reports over the last 20 years, I would guesstimate that the vast majority of wealth transfer is happening via salary and similar financial instruments (I include rigged IPOs per Michael Lewis this week).

I greatly dislike Bill Gates, his software, and his business practices, but I do not begrudge him his wealth because he took his chance like everyone else, paying himself 200k/year during most of his tenure and earning the balance of his 40B by holding stock (not options).

But as I have mentioned before, I used to work for an organization that did lots of great, productive works between 1890 and 1990 while paying the President (later CEO) about 10x what the average technogeek (of all eras) took home (12x the average hourly laborer). Say 600k vs 60k in today's dollars. And there was no shortage of people competing for the President's job.

You want more incentive? OK, pay the CEO 6M. I don't think too many at that company would complain. But I see no justification in the world for what today's actual CEO salary is: 40M. The company has laid off all its best workers, destroyed its heritage, and has achieved no better financial return for its 666x [1] pay differential. What is the societal gain in this?

Cranky

[1] Yowsa! Those are the actual figures (40,000,000 / 60,000); I had no idea what the ratio was until I ran it!

[howard]

rx314: all CEOs are not above average, but they are all paid as if they were above average.

[Henry]

Brad - I think there's a typo above. When you say "Paul Krugman tangled with Alan Reynolds's earlier incarnation--the one in which he said that claims that the top 1% share of wealth and income had risen over 1993-1999 "can't really be taken seriously." I presume from context you mean "had risen over 1983-1999.

[Henry]

Or, to correct my own typo "had risen over 1983-1989"

[anne]

Thank you, Henry.

[piotr]

As I wrote above, there are two separate issues, if not three:

1) does the income (and wealth) concentration increase

2) if it does, is it a good thing

3) if it is not, should we have policies to decrease it

rx314 thinks that "high income earners are innocent till proven guilty" -- this is a "static statement".

If high incomes are assumed to have utility as incentive for high talent, work ethic etc., one may wonder if increased income concentration is caused by a higher concentration of such traits. And what about the population with stagnant income -- which comprises all quintiles except the highest one. Is it swamped by some rising tide of mediocrity?

In any case, to consider any explanations and justification, we need to agree about what is happening.

[chris edwards]

A few comments on Alan Reynolds and income inequality:

- Alan's full paper will be released by Cato in the second week in January.

- Please join Alan, Diana Furchtgott-Roth, and Gary Burtless for a discussion of income inequality at Cato on January 11.
http://www.cato.org/event.php?eventid=3441

- I believe Alan has uncovered some very interesting information on the use of tax return data to illustrate income trends over time. Examples include: the rising amount of small business income reported on individual tax returns, the effect of the 401(k) explosion, and the effects of the two types of stock options on reported income.

- I'm no expert on income data, but I know enough to see that there are huge data problems here. You simply can't look at a raw Census table and make a hard conclusion about income trends without thinking about what is included in "income."

- I think it's still an open question whether income inequality has increased or decreased in recent decades.

Chris

[anne]

http://economistsview.typepad.com/economistsview/2006/12/poverty_rates_i.html

December 26, 2006

Poverty Rates in Recent Years
Edited by Mark Thoma

In a recent commentary in the Washington Times, Alan Reynolds says:

No economist who hopes to avoid professional ridicule would try to deny that consumption is a better measure of long-term living standards than the most widely cited income distribution figures, which do not even add transfer payments or subtract taxes.

It's clear why the administration's defenders are pushing this point....

[anne]

http://www.nytimes.com/2006/12/12/opinion/12tue2.html?ex=1323579600&en=f5dd4ceb951b887a&ei=5090&partner=rssuserland&emc=rss

December 12, 2006

Consumption Gap

Conservative economists often argue that wage stagnation and income inequality are not as big a threat to Americans' standard of living as they've been made out to be. In their view, how much one buys — rather than how much one makes — is a better measure of economic well-being.

In a recent article in The National Review, researchers at the American Enterprise Institute asserted just that, saying that when you look at how much the middle class is consuming, they're "even doing better than the upper crust."

Why make a fuss over other grim economic statistics if everyone manages to keep buying things?

Here's why. The assertion — that the middle class has out-consumed the "upper crust" during the Bush years — is false, the result of rosy assumptions that turned out to be wrong.

Researchers at two other think tanks, the Center on Budget and Policy Priorities and the Economic Policy Institute, reworked the figures, including newly available spending data for 2005. There is no dispute among the various researchers over the new findings. Over all, consumption is growing. But the growth is unbalanced, consistent with the wide disparity in wages and income that has characterized the Bush years.

Consumer spending by low-income households is way down since 2001. Over the same period, spending by high-income Americans has been robust, supported, in part, by generous tax cuts. In 2005, the top 20 percent of households made 39 percent of all consumer expenditures, the highest share since the government started keeping track in 1984....

[anne]

Notice the interesting similarity of construction:

Alan Reynolds -

"No economist who hopes to avoid professional ridicule would try to deny that consumption is a better measure of long-term living standards than the most widely cited income distribution figures, which do not even add transfer payments or subtract taxes."

http://maxspeak.org/mt/archives/002703.html

Greg Mankiw -

"Here is a question that I would ask any politician: If you could set your ideal policy to help the poor, wouldn't you prefer to expand the EITC [earned income tax credit] and abolish the minimum wage? Any politician that fails to answer "yes" is either misinformed or engaging in demagoguery."

Ah, yes....

[anne]

Somehow there is an answer as to why if only income tax data show 1% of household owned 57.5% of American corporate shares in 2003, there is really less wealth and income concentration than this shows if only we can get the data right. The tax structure increasingly favors share holding in taxable accounts is supposedly not an an indicator that wealth and income concentration will increase from 2003.

Oh well.

[anne]

"No economist who hopes to avoid professional ridicule would...."

Then again we come on the claim for consumption and we are shown that while a rich person would spend $40,000 a year, a poor person would spend $40,000 / 6.5 or $6154. The portion of income used for consumption supposedly being constant across income levels. So, obviously the poor are rich having after rent and utilities of $500 a month, say, $154 left to spend for a year. But, there are always Food Stamps, so the poor really are rich. Oh well.

"No economist who hopes to avoid professional ridicule would...."

[anne]

The complaints of the consumption crowd are that programs such as free school lunches on food stamps increase the well being of lower income households but the increase in well being is not properly accounted for by sconomists worried about income inequality. So, a person may have a higher income than easily recorded. Similar rationales extend to health care, for emergency care should always be available for those who are in need though lacking insurance. We could then argue that a person who has no health care insurance really has implicit insurance since care is fortunately available.

Nonetheless, there is pronounced and increasing wealth and income inequality and increasing inequality is threatening the political-economic heritage we would prefer to think we are always aproaching. Those who play with data on well-being are nonetheless arguing that increasing inequality is a problem but they deny there is increasing inequality.

Tra la, tra la.