There’s an interesting post by Robert Litan on the WSJ’s blog about a study that calls a few of the assumptions about income inequality in the United States into question:
How bad is it? Thomas Piketty, writing with economist Emmanuel Saez, has estimated that those in the bottom 90% of the income distribution received only 9% of the income gains between 1979 and 2007 (the year before the onset of the Great Recession).
But their estimate ignores government transfer payments, and it doesn’t take into account the aging of the population, among other things. When these adjustments are made, a much less pessimistic result emerges.
This is the finding of a wonky but remarkably detailed essay that deserves much more attention than it has received. Written by George Washington University research scholar Stephen Rose and published by the Information Technology & Innovation Foundation last month, the essay uses income data compiled by the Congressional Budget Office, which Mr. Rose argues is more accurate than the income data on which Mr. Piketty and Mr. Saez relied.
The better estimate, Mr. Rose suggests, is that the bottom 90% captured 42% to 47% of the income gains, depending on the definition of income and price deflator used. Yet Mr. Rose acknowledges that even his estimate indicates widening inequality. Furthermore, in Mr. Rose’s calculations, most of that gain is income gains by the “upper middle class,†or families in the 81st-to-90th percentile.
Also, see the bar chart at the top of the post. That’s what inspired the title of this post. What proportion of income growth should the highest quintile be capturing?
The bottom line seems to be:
- The topmost income quintile has a lot more income than the lower four.
- The topmost income quintile is capturing more of the increase in income than the bottom four are.
- When you adjust the results for age and consider total income rather than just wage income, the results aren’t as skewed as you may have been lead to believe.
Now, I happen to be one of the hardy few who believe that the change in income equality in the United States is a consequence of policy rather than occurring despite it and, as seems likely at first glance, would respond to a change in policy. I don’t think the changes that are necessary are that we need more unions or that we need higher taxes. I think we need to make some adjustments to our trade, immigration, healthcare, and education policies. All of those have constituencies that are benefiting mightily from our present lousy policies so the headwinds are substantial.
Hat tip: RealClearPolicy
