Measuring Income Inequality

I have severely mixed feelings about Francis Menton’s post at City Journal. He starts off well enough, pointing out the seeming paradox that the 25 Congressional districts with the greatest levels of income inequality within them all elect Democratic congressmen and have for some time. I think that stands to reason. There’s particular appeal in redistributionist rhetoric in places where the problems are walking right down the street alongside you.

And it also stands to reason that the redistributionist rhetoric never quite seems to become more than rhetorical or, if it does, the effects are never quite what their advocates have assumed. That’s always the case. Good intentions are not enough. You’ve got to have things like a grounded understanding of human nature and human behavior and an eye firmly on results rather than just intentions or, worse, opinion polls.

Which is how I interpret this:

Could it be that progressive policies intended to reduce income inequality actually cause it to increase? Quite likely, yes. The reason has to do with the effect of these policies on the low end of the income distribution. The government doesn’t count the distribution of in-kind benefits as income—and means-tested handouts create incentives for recipients to keep their measured incomes low. Further, where higher minimum wages—another progressive agenda item—cause higher unemployment, we see even more zero-income earners. Having lots of low-earners or zero-earners doesn’t help reduce inequality. Meanwhile, at the high end of the income distribution, taking money from high earners through higher marginal tax rates is not counted in official statistics as a cut in income—which means that income inequality again doesn’t shrink.

I also agree with his point that income inequality should be calculated using after tax income that takes into account both taxes paid and benefits received, either in the form of transfer payments or any of the myriad forms of subsidies. You can’t calculate income inequality in New York City without accounting for the effects of rent control, just to take one example.

But what then? My intuition clearly differs from Mr. Menton’s. I gather that he either thinks there isn’t a problem or that there’s nothing that can or should be done about it in a sort “the poor we shall always have with us” sort of way.

My intuition is that the net result of all of this is a great increase in income inequality between the 90% of income earners and the top 90 to 99.9%-ers. I don’t think it’s an unavoidable accident that Chicago’s police officers, firefighters, teachers, etc. are the highest-paid in the country. Or that physicians becoming wealthy as a side effect of the enactment of Medicare was because they’re so smart and hard-working. I think that those are the rules of the game.

4 comments… add one
  • steve Link

    The math on this continues to bother me. From Corak’s chart at the link, we have seen a real, but not very large, I don’t think, shift in the share of total income by those in the 5%-1% group, from about 12% of total income to about 15% of total income. For those in the 10%-5% group it is a change from about 11% to 12%. For the top 1% it has increased from about 9%-20% during the time we are talking about. Yet in your accounting, it is the people in 10%-1% group that are skewing things. It almost seems as though you are trying to draw attention away from that group at the top.

    Steve

    http://milescorak.com/2012/03/04/over-90-of-the-income-gains-in-the-first-year-of-the-recovery-went-to-the-top-1/

  • Yet in your accounting, it is the people in 10%-1% group that are skewing things.

    Sure. For two reasons. First, the total amount of income is about the same. And second, my assessment is that we’re always going to have Bill Gateses, Warren Buffetts, Michael Jordans, etc. They’re going to be rich whatever the policy is. I think a lot more people in the 90-99.9% group are rent-seekers, depending on favorable policies for wealth beyond what they would otherwise earn. That builds in a constant demand for more rents.

    Arguendo, let’s take the opposite position. What policy do you advocate to keep Bill Gates and Michael Jordan from getting rich using their talents?

  • steve Link

    The total amount of income is about the same, spread over 9 times as many people. Reduce they salaries to what they were in 1980, our straiten point, and you return about 4%-5% of total income to the lower 90%. But we know that would really not happen. Most of that would go to the top 1%, so the bottom 90% don’t see it. Do the same with that top 1% and you return about 11% of total income. A significant difference.

    Who wants to take money away from Bill Gates or Michael Jordan? If someone actually makes money due to talent, providing a better product at a better price being the general rule, good for them. Go after the FIRE sector. They are the ones who have seen a huge growth in income, and what do we have to show for it. At least stop subsidizing the crony capitalists. Let’s look at what we paid that top 1% in 1980, and look at what we do now, and see what has changed. Why are we paying them so much more? Is our economy really so much better? Did they really provide that much value?

    Steve

  • Go after the FIRE sector.

    I agree with you. And what do we do? Prop up the companies and their salaries.

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