Jared Bernstein Writes in on Alan Reynolds

Hoisted from comments:

Grasping Reality with Every Limb: Brad DeLong's Semi-Daily Journal: Intellectual Garbage Collection: The Unreliability of Alan Reynolds: 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, misleadingly 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  2002-2003
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  2002-2003
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.

Comments

[David Lloyd-Jones]

It seems to me the main difference between the American left and right is in their view of whether Smithian/Darwinian reality applies. The left assumes that the laws of economics and of real life are in general effect, and it is our aim to do our best, sometimes in their face. One builds a welfare state in the face of the market as one builds buildings against gravity.

The American right, by contrast, do not believe that the market, nor the laws of science, apply but it would be nice if they, or their own imagined version of them could be somehow made to take effect. This means that cheating and lying are idealistic acts: they are steps toward bringing the war of all against all, the devoutly imagined and wished for Smith/Aynrand reality, into existence.

Thus everybody's in the same place, a place made very much uglier by the fantasies of the right, but we are headed in opposite directions.

Apropos all of which, I rather like a remark Bertrand Russell made as a youngster, suggesting a merely possible morality: "Since we live in a world of meaningless confusion, therefore let us behave ourselves with humour and decency." I think of it as the motto to bear in mind during the rush for the lifeboats.

[john c. halasz]

rx314:

Re the "Lake Wobegon effect": in another reported survey, 19% of Americans thought that they were in the top 1% of income distribution.

By the way, you should look into the growth in the share of income of the top .1%.

[Tim Bartik]

rx314:

For the sake of argument, let's accept your supposition that changes in income distribution have to do with changes in the valuation of talents. Suppose I have some talent, due to genetics, family background, hard work, or whatever. At some past time, this talent gives me one wage. At some future time, due to no action of my own, but merely the workings of economic changes, this talent gives me a much higher wage. Why exactly is this higher wage morally deserved by me? I can see why this higher wage might be economically efficient, but it's not at all clear that it's morally deserved. And this point is even stronger if the talent is largely not due to my own work, but rather some aspects of my background.

[anne]

"Is the Income Distribution correlated with the distribution of valuable talents in the market?"

Duh, well, no.

"Are changes over time in the Income distribution just reflecting the changes in the distribution of the valuable talents and/or their relative values in the market?"

Duh, well, no again. Any other talent reflecting questions?

[anne]

By the way, in 2003, the top 1% of households controlled 57.5% of the shares of American corporations. No doubt it's all in the talent.

[anne]

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....

[dale]

"The Lake Wobegon effect certainly helps politicians like John Edwards in their class warfare rhetoric..."

Actually, just the opposite is true, I believe. The LW effect hinders efforts to get people to see their place in the hierarchy. When folks identify with elites instead of ordinary citizens they may be less likely to respond to Edward's truth telling about the two Americas.

[John M 307]

"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."

Hey, if you're trying to push an agenda that's dependent on misleading, that's not writing in good faith.

[spencer]

The entire supply-side, right-wing economic philosophy is that increased inequality is good because it leads to more savings and investments that will make everyone better off.

So why are they now trying to claim that this increase in inequality -- that is suppose to make everyone better off -- that they have been arguing in favor of for years is not happening?

Could it be that the supposed benefits of the growing wealth concentration are not being realized but rather then admit this they try to deny that it is happening?

Isn't this just another example of ideologs trying to have it both ways?

[CN]

Anoher very common right-wing fantasy is that those in the top .1% (or the top 10%, for that metter) have earned the wealth they possess. While this might be true in some cases, a very large percentage of this is actually inherited wealth, and those in possession of it have done nothing to earn it.

[Jared Bernstein]

Reams of research has tried to identify the factors that drive changes in the distribution of econonmic outcomes. It's interesting and worth talking about, but the point of my post was to show that Reynolds' claims re no increase in inequality since the latter 80s are wrong.

I will say this re the research on causes: it solidly contradicts the notion that what's going on here is pure mertiocracy.

Instead, here are some factors that have been found to be causally linked to the increase in inequality:

Declining union power
Low minimum wages
Large, growth trade imbalances
Low-wage immigration
The absense of full employment in the labor market.

Higher returns to skill are part of the story, but no one thinks they're the whole story. (And the factors on the list also show up as higher skill returns--eg, low min wages and fewer unions boost the college wage premium over less skilled workers, but are not really about higher skill returns in the meritocratic sense.)

[Bradford DeLong]

According to Charles Murray--somebody likely to put every thumb on the scale to maximize the impact of IQ--a one standard deviation increase in IQ carries with it an 0.31 standard deviation increase in income, meaning that if everybody had the same IQ we would shrink the variance of income by about 9%, and shrink the standard deviation of income by about 4%. See http://www.mega.nu:8080/ampp/murray_income_iq.pdf.

This is without accounting for the influence of education on income. If you think there are three factors: parents' social class, IQ, and years-and-quality of education, you would find a fraction considerably lower than 9%, IIRC...

[JonF]

Re: they are steps toward bringing the war of all against all, the devoutly imagined and wished for Smith/Aynrand reality, into existence.

It's very unfair to lump Adam Smith in with the Social Darwinists, let alone with Ayn Rand. Smith was suspicious of the power of corporate moguls of his day (he correctly saw that they rigged markets often through corrupting government officers) and he was strongly in favor or social welfare provisions for the poor, though given the structure of 18th century society he believed this would be best delivered through the Church.

[Robert]

"I am genuinely interested in such studies that show a divergence of Income Distribution from merits based on individual talents and skills..."

No, you are not. The theory of skill-biased technical change is mistaken, no merit accrues to having talents and skills rewarded by the market, and even perfect correlation between income and some non-existent univariate measure of skills cannot say anything about the extent of income distribution.

Furthermore, to say other perspectives (click on my name) state, "You and the works of your life belong to the state" is to willfully refuse to look at the question.

[tedb]

RX314:
We regret to inform you that the recent upgrade of your operating system was missing the moral-reasoning component. Please return to our customer-support page and press the "UPGRADE" button to receive this critical software. We are sorry for any inconvenience or embarrassment.
Sincerely,
The engineering staff

[anne]

No; Charles Murray book is designed precisely and meanly and wrongly to confirm racial prejudice. I would be ashamed to have such a book "where people can see it," or where I could see it.

[ideogenetic]

RX314:

If income follows talent, then why would an engineer in India be more desirable than a U.S. engineer? U.S. engineers are better paid, therefore "more talented" in your estimation.

I think you overlook the role of society in creating wealth. If Bill Gates lived on an island, how wealthy would he become selling operating systems to coconuts?

[anne]

There we have the answer, Charles Murray has told us that wealth and income inequality are talent derived, and all talentless people just had better watch out. [Nothing to do here though with nature or nurture or any other "n" word.] Got it.