September 27, 2006
The left is using statistics on income inequality to anchor their arguments on the appalling state of our political system. A few of the many arguments go something like this: 1) Their is no inclusive political dialog; "the [insert group] are left out" and it is getting worse. Proof: Increasing income inequality. 2) Our elites are "more untethered" than every before. Proof: Increasing income inequality. 3) The current political "regime" in power is pro-elite and cares little about the poor. Proof: Increasing income inequality. And so on.
Do the statistics support the many versions of the argument? There are four complications. First, there is no good data on what we really want to measure, pure wealth. What we want is a calculation of total wealth and statistics on how total wealth is distributed. We don't have it. Income data is a poor substitute for pure wealth data. We use it because we have data on income from tax records. Income data includes salary, dividends, and gains from the sale of assets but does not include the value of held assets. (It may understate the position of those in the top bracket.) It also does not include illegal income (drugs or cash payments to undocumented workers) or shadow market income (trading assets and services). (It may understate the position of those in all brackets to varying degrees.) Most agree, however, that, given the data problems, the amount of wealth has 1) grown and 2) the distribution of the gains has not been even. A disproportionate amount of the gains is enjoyed by the those in the top brackets. Second, there is a debate on causes on the "uneven distribution." This is the blame game. Some theories include blaming a loss of jobs due to outsourcing (shown to be false), immigration, decline of unions, inadequate public policies for the working poor, the greed of executives and so on. Data mining explodes some of these. For example, middle class income has increased not decreased in the 90s, outsourcing has cost us only a small number of jobs, worker income as a percentage of the GDP is about the same as it has always been, and those who seem to have gained the least are not union workers but upper middle class white collar types who were never unionized. More important is data showing that the income gains are concentrated among those with high level skills (smart folks) and in only five counties (that feature the high tech types). Those who gained may have "earned it" and we should not worry so much. This argument leads to position three: there is statistical evidence that there is significant opportunity to move among the brackets. The membership in any one bracket is fluid to some extent. There is less social "lock in" that there has been in the past and, for that matter, in any large society in world history that is not based on warfare (taking stuff my force). There is .... opportunity. This leads to position four: The analogy that explains the wealth increase distribution is the modern hedge fund. One fellow, the manager, puts in a little and takes 20% of the gains while the passive investors put up 95% and take 80% of the gains. If the hedge works and everyone benefits, their in an increase in wealth inequality -- the manager makes huge amounts and the investors make plenty as well. The investors do not worry about the new unequal distribution of the new gains; their gains are sufficient to make them happy. Worrying about an equal distribution would kill the incentives that create the gains in the first place; the managers take huge risks and sweat bullets to get the fund to work. In other words, the economic system that makes everyone marginally better off over time may depend on rewarding some folks (who run the engine that drags the train) with disproportionte returns. If the analogy is correct we need to look at the position of those in the lower brackets. Are they better off even if they are in the lower bracket? This kind of analysis makes academics very uncomfortable and many will not do it. The analysis looks mercenary and cruel. If someone in the lowest bracket has a beat up but functional old car are they better off than those in the 80s who generally did not have any cars? Moreover, the purchasing power of the lower bracket is affected by ... well ... WalMart. Quality food and serviceable clothes may be cheaper (whether purchased or donated). This kind of analysis opens one to snipping by the left ("you are rich and don't know or understand"; "poor should have [health care, or...] and don't how can you say they are better off".... and so on) and there is no good answer. Those in the lower bracket will have less than we are comfortable with. At issue is, without the incentive struture that we have, would they have even less?
In any event, this debate is important. The income inequality claim fuels current political claims for dramatic social changes. The left believes the phenomena is a debate stopper. My point is that the argument on the data needs to be joined.
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Dale, It would sadden you if I failed to respond, so let me throw in a few thoughts. Your first complication does nothing to complicate the argument that income and wealth inequality have grown over the course of recent decades, measured by quintiles. Yes, income is a poor proxy for wealth, but one would expect wealth to be distributed even less equally than income. Unless the poorest fifth is somehow also the wealthiest, the complications of measurement do not seem to cast doubt on the general pattern. As for complication #2, it hardly seems uncontroverted that income gains went to the “smart folks.” The average income of college graduates, adjusted for inflation, is down since the 1970s. My guess is that a variety of factors are at work here, but, again, it seems tough to deny the pattern of public policy in recent years. Namely, the party currently in control is doing nothing to directly increase the income share of anyone but the very wealthy among us. Third, I don’t know the data on social mobility, but I’m under the impression that nothing predicts socioeconomic status more reliably than parental socioeconomic status, so, again, I’m not completely sure what the point here is. Finally, you make an interesting point that needs to be taken account of. The “left” to whom you ascribe various thoughts presumably prefers a world in which public policy did more to assure a living wage and secure social benefits - most notably, health care. Your point about the possible rising tide is that supply side public policy may actually produce enough wealth for everyone so that, even with increased inequality, working and middle class Americans enjoy a higher standard of living than they would with a more left-leaning policy because social democracy would lead to a decrease in overall wealth that would overwhelm the value to working and middle class Americans of universal health insurance, well-funded public schools, etc. and all the other benefits that they do not now have. I can only say it seems improbable to me, and no other industrial democracy seems to believe it.
Posted by: Peter Shane | Oct 16, 2006 10:12:58 AM