Recent results on inequality

by on September 22, 2009 at 7:06 am in Data Source | Permalink

This new paper is from Robert J. Gordon and it points to some very important results, rooftop results you might say:

The rise in American inequality has been exaggerated both in magnitude
and timing. Commentators lament the large gap between the growth rates
of real median household income and of private sector productivity.
This paper shows that a conceptually consistent measure of this growth
gap over 1979 to 2007 is only one-tenth of the conventional measure.
Further, the timing of the rise of inequality is often misunderstood.
By some measures inequality stopped growing after 2000 and by others
inequality has not grown since 1993. This cessation of inequality’s
secular rise in 2000 is evident from the growth of Census mean vs.
median income, and in the income share of the top one percent of the
income distribution. The income share of the 91st to 95th percentile
has not increased since 1983, and the income ratio of the 90th to 10th
percentile has barely increased since 1986. Further, despite a
transient decline in labor’s income share in 2000-06, by mid-2009
labor’s share had returned virtually to the same value as in 1983,
1991, and 2001.

Recent
contributions in the inequality literature have raised questions about
previous research on skill-biased technical change and the managerial
power of CEOs. Directly supporting our theme of prior exaggeration of
the rise of inequality is new research showing that price indexes for
the poor rise more slowly than for the rich, causing most empirical
measures of inequality to overstate the growth of real income of the
rich vs. the poor. Further, as much as two-thirds of the post-1980
increase in the college wage premium disappears when allowance is made
for the faster rise in the cost of living in cities where the college
educated congregate and for the lower quality of housing in those
cities. A continuing tendency for life expectancy to increase faster
among the rich than among the poor reflects the joint impact of
education on both economic and health outcomes, some of which are
driven by the behavioral choices of the less educated.

I don't yet see an ungated version.  If you go to pp.8-9, you'll see that since 2000 (not including the financial crisis), it is quite possible that inequality has been decreasing, not increasing.  That's exactly the period of time when complaints about inequality reached new heights.

babar September 22, 2009 at 7:56 am

> price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor

so people with money have the choice to get bargains by buying things the poor buy.
for example, ethnic food in poor neighborhoods.
the poor do not have the choice to buy what the rich buy.
sounds like this dynamic — increased choice for the rich, with the option of getting what the poor get, plus XYZ — should increase measurements of poverty, not decrease them.

jn September 22, 2009 at 8:17 am

But most rich can only stay rich by living in areas where cheap, good housing is not readily available at all. The real comparison is not rich vs poor. It’s dollar rich New Yorkers vs suburban middle class in Iowa or rural Tennessee. The latter income gap is exaggerated when you ignore cost of equivalent housing. Yes, the New Yorkers have access to a wide range of consumer and cultural products/services, but they cannot choose to have the $300,000 suburban 4 room house with decent public schools and reasonably keep their jobs. For most families, this is the major portion of their annual expenses.

Marton H September 22, 2009 at 8:55 am

This seems to be the ungated version:
http://faculty-web.at.northwestern.edu/economics/gordon/SFChallenge_Combined_090307.pdf

In there, I do not see a decline in inequality in the noughties either at the 50-10, the 90-10 or the 90-10 quantiles, however hard I squint.

Jack September 22, 2009 at 9:33 am

It’s not clear to me how to interpret these results in light of Emmanuel Saez’s research. Does it boil down to, Yes, Saez is right, but if you revise in terms of purchasing power then inequality is much lower?

Ken September 22, 2009 at 10:05 am

Jack wrote: “Does it boil down to, Yes, Saez is right, but if you revise in terms of purchasing power then inequality is much lower?”

I read it in the same way; “It doesn’t look as bad if we change the definition.” Sort of the way that the unemployment and inflation calculations have been adjusted over the years.

Jim B. September 22, 2009 at 10:47 am

“The lamentably slow growth in real median household income in 2000†
07 is not due to higher inequality…”
Forgive me if I am confused or just being overly skeptical of the result. The authors concede median went down from 2000-7. The mean went up. Maybe there wasn’t a formal increase in dispersion, but it seems like the distribution would have had to have become more positively skewed. That may be the wrong way of looking at it, but my guess here is that the conclusion isn’t “inequality decreased” but rather “we need to dig deeper.”

Nozick September 22, 2009 at 11:12 am

An interesting paper, yes, but studying “inequality” plays into the hands of redistributionists. Income is earned, not distributed.

Joey September 22, 2009 at 12:24 pm

Money and power are fairly fungible, and I don’t think an equal rights based democracy is healthy if there is a large segment of society that pays significantly little in taxes….

Eliezer Yudkowsky September 22, 2009 at 12:35 pm

Shouldn’t we all be dismissing out of hand any research on inequality that uses the Census data, and subtracting five reputation points off the researcher responsible?

Chuck September 22, 2009 at 12:51 pm

Joey, it seems that your thought trailed off.

If you pick it up again, consider that while it is true many people don’t pay much Federal Income tax, they pay lots of other taxes like SS, sales tax, property tax, etc.

In fact, as a pct of income, payroll taxes are probably the largest tax that low income earners pay. Why leave it out? Is it because you plan to pay back the SS trust fund? Or do you share the sentiment that there is no such thing and that all the SS tax revenue that has been spent on general revenue has been lost forever? If so, it seems to me that you should include the SS revenue in the ‘significantly little in taxes’ sentiment.

But in the bigger picture, can you color in for me how progressive taxation undermines equal rights based democracy? To me, the concepts seem unrelated.

D.G. Lesvic September 22, 2009 at 1:56 pm

Nozick wrote,

“An interesting paper, yes, but studying “inequality” plays into the hands of redistributionists. Income is earned, not distributed.”

Exactly right. You hit the nail right on the head.

The Right has nothing to gain and everything to lose from endless debate over the state of inequality. If it’s increasing, the Right will get the blame, and, if it’s decreasing, the Left will take the credit. And, by denying any greater inequality, the Right admits that there’s something wrong with it, and, therefore, with the market itself, for it depends upon it.

“No system of the social division of labor can do without a method that makes individuals responsible for their contributions to the joint effort. If this responsibility is not brought about by†¦inequality of wealth and income†¦it must be enforced by†¦direct compulsion†¦by the police.†

Ludwig von Mises

Our alternatives are either a Communist police state or at least some inequality. The question, then, how much?

The only thing that an economist can say about it is that the market, always tending toward equilibrium, always tends toward the inequalities that would bring it about, and that trying to reduce them will only increase them, that redistributive intervention, like any other, will be completely counterproductive, bringing about the exact opposite result of what was intended, not reducing but increasing income inequality and “social injustice.”

Robert Olson September 22, 2009 at 2:31 pm

“The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.”

Yes, as we know, the action is going on in the top 1%. And that top 1% has a lot of “labor” income, no?

Mike S September 22, 2009 at 2:51 pm

He must be correct considering:

http://www.nytimes.com/2007/03/29/business/29tax.html?_r=1

It is almost like he cast about for the numbers least likely to show inequality has grown…

Johnson_85 September 22, 2009 at 6:01 pm

“Money and power are fairly fungible, and I don’t think an equal rights based democracy is healthy if there is a small segment of society that is significantly disproportionately wealthy.”

You’re not really going to have equal money and power with any reasonably free market/capitalism based system (or, if history is any guide, any other political system), which is why it is so dangerous to have the gov’t determine winners and losers and redistribute wealth in general. People with power will always, in the grand scheme of things, redistribute money to themselves.

“If so, it seems to me that you should include the SS revenue in the ‘significantly little in taxes’ sentiment.”

Unfortunately, lots of people have no idea what they pay in taxes. It would be great if people were aware of all the taxes they pay and therefore actually cared about government spending. On the otherhand, SS does ensure that everybody helps share some of the burden of gov’t, and if people figured out that the SS “trust fund” is more or less crap and that SS goes to fund general gov’t obligations, we might end up with a situation where half the population truly pays zero income tax instead of having the ~14-15% minimum we have now.

J September 23, 2009 at 3:20 pm

A few points:

1.) Someone above said, effectively, that we shouldn’t study inequality because it plays into the hands of the left. What a brilliant, brilliant outlook. I’m on the left. So, should I advocate that we don’t study any topic that might produce results that might be discomfiting to people on the left? Or should religious conservatives advocate that we stop looking for fossils and evidence of anything that might contradict the Bible? What an anti-intellectual, asinine thought!

2.) I’m not sure what to make of his CPI, GDP-deflator, etc. arguments. They’re certainly interesting, but I’d like to see what others have to say about this issue. It’s certainly possible that he’s right that this makes a large difference in how we measure inequality.

3.) The whole argument that the bundle of goods the rich consume has inflated more than the bundle of goods the poor consume is laughably stupid. It assumes that their is some innate preference for the Big Mack among the poor and that they willingly choose it over filet mignon. No. It’s that the poor don’t have the choice what to buy. They have to buy the cheapest thing. Whereas the stock broker can gobble down either whenever he or she desires.

4.) The above critique applies (almost) the same to the geographical cost of living argument. Yes, certain items like housing, etc. vary substantially from place-to-place. Other things — particularly items at national chains, etc. — vary less. But how can we really compare living in NYC and Flint, MI, and say that someone making 40,0000 or so in Flint has the same lifestyle as someone living in NYC making 100,000 (or whatever the relevant numbers might be)? While the notion of cost of living is surely a technical form of measurement, it’s also really bound up with all kinds of qualitative evaluations of what one values in a place to live, etc. Once again, for this intervention to tell us that we’re overestimating inequality, we’ve got to assume — as with the bundle of goods measure — that choice is relatively immaterial to inequality. That’s a theoretical leap I’m not willing to make.

5.) To the argument that incomes are earned, not distributed: Can you please define what you mean by “earned”? What would you make of CEO income that’s relative untethered to things like profits, stock prices, etc.?

6.) Virtually all of these inflation, goods, etc. adjusted measures of inequality fail to consider a few things: A.) Wealth is usually more skewed than income. Which means that even though that person in NYC’s condo costs much more than the house of the person in Flint, if they own the condo, that’s a real, tangible asset they have. That money didn’t go down a hole. B.) Most studies show that social mobility has also been decreasing, and that the U.S. is now less mobile than even the U.K. C.) While it’s all fine and good to say that someone making 30,000 per year can have an iPhone just like someone making 200,000, the goods that we consider to be essential for mobility and a stake in the “American Dream” are things like good healthcare and good educations, both of which have seen costs skyrocket at a rate much, much higher than general consumer goods.

J September 23, 2009 at 8:46 pm

D.G.,

Sorry, I was quoting Nozick above:

“An interesting paper, yes, but studying “inequality” plays into the hands of redistributionists. Income is earned, not distributed.”

To your point, D.G., I understand where you’re coming from, but I don’t think it’s practical. All market relationships — even the market itself — is embedded in other social relationships and institutions. The fact that inequality looks very different in different countries tells us that there’s probably no natural level of inequality in a market. Even looking within the U.S., the notion of not interfering with the market is fine, but enforcing patents, and even contract are, effectively, forms of intervention that aren’t neutral. Even an intervention that (theoretically at least) doesn’t have anything to do with rent-seeking — like regulating medicine — still has the effect of rewarding some groups (doctors, drug companies, etc.) at the expense of others (patients, practitioners of non-traditional medicine). Simply put, I just don’t think that there’s any way to avoid some type of interference in markets, and that there’s no such thing as neutral interference. Therefore, inequality is always as much a moral/theoretical/social issue as much as it is an economic outcome.

Going beyond this, the notion of mobility and opportunity must be taken into account. While something like the inheritance tax may be objectionable, how is it rewarding hard work, intelligence, ingenuity, etc. if we let the children of talented people reap their parents rewards, particularly when doing so often gives them a margin for error and a head start that other children from less advantaged backgrounds who may actually be more talented, hardworking, etc. don’t have?

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