I'm never going to win a Nobel Prize.  Maybe in literature.  I don't know why Joseph Stiglitz's new Vanity Fair piece on inequality is so off-base.  But it is.  And it's incredibly frustrating (1) to see someone so intelligent be thwarted by ideology and (2) to watch as his views are propagated on the basis of his name recognition.

What's a lonely uninvited-to-Davos blogger to do?  Blog.  Herewith, my fact check of the VF article.  Stiglitz writes (henceforth in italics),

The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year.  In terms of wealth rather than income, the top 1 percent control 40 percent.  Their lot in life has improved considerably.  Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

Stiglitz doesn't cite any of his figures (possibly a limitation of the outlet), but the Piketty & Saez estimate of the top one percent's income share in the most recent year (2008) was 18 percent, which is just a hair closer to "nearly a quarter" than it is to "just over a tenth".  Their data says that share was 9 percent in 1985, but that should be adjusted upwards to 13 percent.  Similarly,  CBO says the top one percent's share was 17 percent in 2007 for after-tax income, up from 11 percent in 1989.  Saez's estimate of the top one percent's share of wealth is 21 percent for 2000, 21 percent for 1990, and 22 percent for 1985.  Edward Wolff's is 35 percent for 2007, up from 34 in 1983 (which I doubt is statistically different from 35 in this case).  The top appears to have experienced income and wealth losses from 2007 to 2009 while the bottom experienced gains.  Taken together, the top one percent's income share rose from 11-13 percent twenty-five years ago to 17-18 percent according to the most recent data.  The top one percent's wealth share basically hasn't risen.


[UPDATE: See MIT economist Erik Brynjolfsson's comment below, which led me to add this paragraph.  Brynjolfsson raises an important point (though I wouldn't call it a mistake) in noting that Stiglitz may have been referring to the Piketty and Saez numbers that include realized capital gains in "income".  I chose the series excluding capital gains because the timing of when capital gains are realized has everything to do with tax law, the strength of the economy, and when people retire.  The P&S series including capital gains still doesn't account for all the unrealized gains accruing to people (most importantly, those accruing to people in their retirement accounts).  Capital gains realization is "lumpy" in a way that makes trends problematic.  

But I will concede that the level of the top's income share (including realized capital gains) is closer to 25 percent than the P&S numbers I cite above suggest.  Now whether their share of income including unrealized capital gains is closer to 25 percent or 17 or 18 percent is an open question.  And I still say the series excluding capital gains is the way to go for trend estimation.  But look, all this aside, the CBO series includes realized capital gains (but also considers taxes and other things the P&S series leaves out).  And it shows the same basic trend and level as my conclusion above.]


While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.  For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.

The 18 percent figure looks to be from Piketty and Saez (the change from 1998 to 2008).  The claim about median incomes falling is incorrect if one takes into account the value of employer- and government-provided health insurance.  (Majorities of workers with employer coverage say they prefer more generous coverage to higher wages, so it turns out employers aren't crazy in substituting ever-more-costly insurance for wages over time.)  The decline in earnings (not income) for men with just a high school diploma is probably less than 12 percent.  Based on some analyses I've been working on using the Current Population Survey, I find that men with a high school diploma but no four-year college degree saw a 12 percent decline in earnings over the roughly 33-year period from 1971-73 to 2003-2007, but that doesn't take into account the caveats I mention in this post.  And earnings among women with the same level of education  rose by over 50 percent, so that's inconvenient for Stiglitz.  


The change in household or family income among men with just a high school diploma was, I'd wager, positive even before factoring in the caveats.  And while I can't cite the paper yet, research I've seen using the PSID rejects the conclusion that wives have been forced to work more due to stagnant husband earnings—the biggest increases in work were among wives with the best-educated husbands, and while the hours of married men declined, those of single men did not (suggesting that the decline among married men was a reaction to increased work among their wives).  I'll update this post when I can cite the paper (though that won't be for a couple months anyway).  But think about it--did all these women increase their college-going simply in anticipation of marrying men with stagnant earnings, or did they prefer the fulfilling professional options that a college degree afforded them?  Or consider--is declining fertility, delayed marriage, and increased college-going among women in developed countries around the world all somehow related to rising American inequality?  You can get the basic trend on work by sex by marital status from Table 1 of this paper while you anxiously await my update.

All the growth in recent decades—and more—has gone to those at the top.

Nope, not if "the top" refers to "the top 1 percent" cited two sentences earlier.  According to the Piketty and Saez data, depending on whether one uses the share of nominal or real (inflation-adjusted) gains and whether one includes or excludes capital gains in "income", the share of income growth going to the top one percent from 1998 to 2008 was between 22 and 33 percent.  If you go back to 1988, the range is from 19 to 32 percent of gains since then.  And keep in mind that when you start from an unequal distribution, if everyone experiences the same rate of income growth, a disproportionate share of gains will go to the top.

In terms of income inequality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride.  Among our closest counterparts are Russia with its oligarchs and Iran.

Compared to nearly all of the major nations of western and central Europe, the U.S. does have higher inequality (but it may not be that far off from the U.K. or Canada).  The only numbers I could find for Russia and Iran are from the CIA World Factbook (the quality of which I can't speak to).  Out of 136 countries, the U.S. is ranked 40th worst.  Iran is ranked 43rd and Russia 52nd.  So that sounds bad, right?  Meh.  Hong Kong and Singapore rank worse than the U.S., and Indonesia, India, and Ethiopia rank much better than Russia.  Stiglitz will have to do better than this if he wants to argue that American inequality is a big deal.

First, growing inequality is the flip side of something else; shrinking opportunity....Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy.

OK, so now Stiglitz is trying to tell us why we should care about the inequality that he exaggerates.  But these are just assertions.  The best evidence suggests that opportunity for men to move from the bottom to the top over the course of a career hasn't changed much over the past 35 to 40 years, and it has unambiguously increased for women (see Figures 15A and 15B).  Across generations, the evidence is extremely thin, but it doesn't point to an unambiguous increase or decrease in opportunity over the past few decades.  As for inequality and efficiency, my dissertation advisor, Christopher Jencks, has found that there is little correlation between economic growth and inequality levels, which doesn't exactly help those who believe inequality promotes growth but is equally problematic for Stiglitz and others who believe that inequality is inefficient.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it's tempting to see our growing inequality as a quintessentially American achievement...

Here Stiglitz is conflating income inequality (growing) with wealth inequality (basically flat and at a historic low in the U.S.).  Whatevs.

America's inequality distorts out society in every conceivable way.  There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means.

So document it!  The share of families with any debt rose from 72 percent in 1989 to 77 percent in 2007, though note that the share with assets also grew.  Median net worth (assets minus debt) rose from $75,500 to $120,600.  In the wake of the housing bust, it fell, but it was still around $92,000 in 2009.  Among people with debt, median debt payments rose from 15.3 percent of family income in 1989 to 18.6 in 2007.  These are pretty small changes in indebtedness, and I'm not sure how Stiglitz could empirically link them to inequality.

Inequality massively distorts our foreign policy.

Ummm...going for the Peace Prize next?

[T]he chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe.

What little evidence there is suggests that upward mobility is lower in the U.S. only for men and only for those who start out poor.  [UPDATE: Just to clarify, I'm talking about only men who start out poor, not men plus all people who start out poor.  See the linked paper for details, but we're talking about 12 to 13 percent of the population, roughly.]

All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

Oh boy, the shift to political science by economist pundits is always fraught with danger.  The 2010 election is a single data point (and an off-year election, when voting rates are much lower).  I'll just quote from a fact sheet from a Tufts research center that studies civic engagement among youth:  "The 2008 election marked the third highest turnout rate among young people since the voting age was lowered to 18."  What any of this has to do with inequality is anybody's guess.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies that they inhabit....The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next?...As we gaze out at the popular fervor in the streets, one question to ask ourselves it this: When will it come to America?

My guess is never.  By the way, Joe, be honest--were you using a pseudonym here?


 
 
Hope you find the blog interesting.  Much like the Strokes, it will change your life (Correction: should be the Shins of course, who are not nearly as good as the Strokes.  Correction 2: this blog will not really change your life.).  And if you read The Empiricist Strikes Back more than the Times and just don't know, I have a piece in the current Room For Debate forum on Americans' views toward wealth inequality.  Enjoy!
 
 

Yet again and again [economists and other researchers not named Hacker or Pierson] have found themselves at dead ends or have missed crucial evidence.  After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.

All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics.
 
– Jacob Hacker and Paul Pierson, Winner Take All Politics


Here's a chart showing trends in the share of income received by the top one percent for all the modern industrialized nations for which data is available going back to the early twentieth century:

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The data is from a new website created by several of the leading scholars studying inequality with tax data.  The American trend, the thick black line, is from the much cited work of Thomas Piketty and Emmanuel Saez, which is part of this new database.

From 1910 to 1970, American inequality trends follow the broad international pattern, and inequality levels are in the middle of the pack.  That's basically still true from 1970 to 1986:
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It's rising a bit over the period, but only by a percentage point.  Note I'm keeping the scale of the charts the same for each one.  Here's the chart for 1988 to 2006:
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Uh-oh.  Now we look like our inequality levels are higher than everywhere else.  What happened?  1986 to 1988 happened, as is evident from the 1970-2006 trend:
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Wow, that's a four percentage point increase in two years—three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000.  Huh. There are two possibilities here.  One is that the data is right.  You can see where I'm going here.

It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase).  And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year.

Hmmm...which possibility is more likely?  Let's look at another chart showing the trends just for the northern hemisphere Anglophone countries, to which I'll add a new line:
Picture
OK, from about 1940 to 1986, these trends line up strikingly, then the U.S. trend goes AWOL.  However, let's instead assume the post-1986 U.S. trend is an artifact of the 1986 tax reform.  First, let's increase the top one percent share from 1986 to 1988 by the same rate that it increased in the U.K.  Then let's let the top share in the U.S. increase by the same rate that it actually did from 1988 to 2006, but from the new, lower 1988 level.  The result is the revised line above.  This makes the U.S. trend and level consistent with not just the U.K., but Canada. 

Of course, if the 1988 to 2006 top share levels are more accurate in the U.S. after 1988 than before 1986, then rather than lowering the post-1986 trend, we should raise the pre-1988 trend.  That would make U.S. levels uniformly higher than in the U.K. and Canada.  But of course, the measured U.K. and Canadian top share levels may also be artificially low due to tax avoidance.  And of course, the common trend over the three countries would remain.

So, to review, when the post-1986 U.S. trend is corrected, the U.S. experience with inequality over the past 100 years is broadly consistent with the rest of the modern world.  Here's the summary chart for 1910-2006, with the revised U.S. trend.
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Comparing levels is more difficult, but many recent cross-national comparisons related to inequality are about why trends differ.  What these five charts clarify is that explanations for the recent rise in American inequality that focus on uniquely American causes—such as greater political muscle-flexing among corporations and the mega-rich—are insufficient (and unnecessary).

Update: I've received several responses offline that it's going to far to say the experience of the U.S. is like that "everywhere else" and that it is really only like the other Anglophone countries.  To some extent, that's a fair criticism.  But of 15 countries shown here, only Germany, the Netherlands, and Switzerland haven't experienced an increase in inequality since 1980.  And the increases in Norway and Finland are as big or bigger than in the U.S., U.K., and Canada.  Sweden's increase is also nearly as great in relative terms (starting from a much lower level of course).  But even if this is a story about the U.S., U.K., and Canada or the Anglophone countries versus the rest of the world, that's still a problem for Hacker's and Pierson's U.S.-centric theory.
 
 
I thought the chart below that Tyler Cowen highlighted yesterday was fascinating, precisely because it begs Tyler's question, "What happened in 1980?"  Unfortunately, the discussion got immediately sidetracked.  The Incidental Economist guys argued that the chart was somehow wrong and there was no big jump in health care inflation in 1980.  But as Kevin Drum points out in a comment to the post, their trend basically looks just like in the chart they are criticizing.  Then Tyler posted an email excerpt from Austin Frakt of Incidental Economist that focused on why things flattened out in the late 1980s.
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Let's dial this conversation back.  The fascinating thing about the original chart is how the U.S. pulls away from all the other countries starting in 1980.  So, fine, maybe there's not a dramatic change in trajectory in the U.S. beginning in 1980, but American health care inflation departs from the relatively tight pack of countries that it was part of prior to 1980 in a dramatic way.  I'd love to hear the IE guys and other health care experts hypothesize why that is.

My main interest in the chart is related to my (on-going, but much delayed) research into inequality trends.  Richard Burkhauser and Kosali Simon have shown that the rising cost of health insurance basically explains the (small) increase in income inequality that occurred in the late 1990s and 2000s.*  The exceptionalism of the American health care inflation trend in the 1980s mirrors the sharp increase in measured income inequality in that decade.  Might the two be related somehow?  Perhaps accounting for health insurance would reduce the apparent rise in inequality.  Alternatively, perhaps the rise in income inequality might explain the American exceptionalism.  Inquiring minds want to know! (mine anyway...)


Sorry for the light posting, by the way--there is a very cute 7-month-old to blame.

*Disclosure: my employer funded the research they conducted, and I played a primary role in the decision, but rest assured that my employer wants a big distance between this blog and its own work!
 
 
My continually interrupted consideration of the new Jacob Hacker/Paul Pierson book Winner-Take-All Politics has led me to go back to the original inequality estimates of Emmanuel Saez and Thomas Piketty to understand better what they did.  And what they did involves making a lot of assumptions about the size of their baseline populations (from which the top 1 percent is identified) and about the size of total income in each year (to which the top 1 percent's income is compared in order to get the top 1 percent's share of income).

I get really nervous about these kinds of assumptions, so I went looking for some alternative data sources.  I remembered that the Federal Reserve Board's Survey of Consumer Finances explicitly samples very rich families separately from its primary survey efforts, drawing names of rich folk from IRS data and then tracking them down to interview them.  This data is not perfect either--the response rates among the very rich are very low, and comparable data only go back to 1988--but the SCF has a number of features that are preferable to the Piketty-Saez dataset.  For one, it provides direct estimates of the baseline population's size and of the population's total income.  No need for worrisome assumptions to compute the top-share estimates.  Second, a more comprehensive income measure may be used, including public transfer income, such as unemployment insurance benefits and worker's compensation, and retirement income from Social Security and drawn down from private pensions.


The Fed's main SCF analyst, Arthur Kennickell, put out a paper last year that provides top income shares for 1988 to 2006 (see Table 4).  I plotted those against part of the Piketty-Saez series that includes realized capital gains, and here's what I found:
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Awfully consistent....What this tells me is that the concern I expressed in my Hacker-mania post that the Piketty-Saez series inflates the top income groups is probably not that big a deal.  On the other hand, since the SCF data only go back to 1988, changes in the extent to which the P-S series inflate the top income groups may still create the exaggeration of the increase in inequality since the 1970s.  But certainly the SCF estimates should be viewed as making that less likely.

So do I now think the Piketty-Saez estimates are correct?  No--there is still the potentially very important issue of how people receive compensation and report their incomes on tax returns in response to changes in tax law.  And that issue still affects the SCF data too because it affects what gets reported to SCF surveyors when they ask about specific types of personal income.

Just as importantly (maybe more), is the fact that neither data series accounts for employer and employee contributions to benefits like health insurance, and neither accounts for unrealized capital gains that investors accrue or the returns accruing to pension benefits pre-retirement.  But I feel more confident that the assumptions Piketty and Saez make in measuring the quantity they claim to measure are solid (save that hugely important assumption that tax law changes don't meaningfully affect their series).
 
 
I will return to Hacker-mania soon (I hope), but allow me a brief side-trip on inequality.  Steve Waldman writes a long post attempting to refute Will Wilkinson's assertion that different price indices should be used for rich and poor:

"As the price difference between caviar and hot dogs expands, Rich will shift his consumption basket, foregoing some caviar for hot dogs. Doing so will make Rich strictly better off than he was in 2000: he could have maintained his old consumption basket, but the opportunity presented by cheap hot dogs gave him a better deal. Poor, on the other hand, will not shift any of his consumption towards caviar and opera, and he cannot shift away, since he was already consuming none of the now more expensive luxuries. Poor’s consumption basket will have gone nowhere over the aughts, while Rich’s will have improved. If we use multiple price indices to claim that the two groups’ “real incomes” stayed the same over the period, we will have missed this change. It is an error of elementary microeconomics."

This can be refuted thusly:
(1) What the Broda et al. research shows is that Rich tends not to forgo caviar for hot dogs in response to the price changes.  The size of substitution effects is an empirical question.
(2) You can't measure freedom with a price index.

That is all.
 
 

Today, the DC progressive/new media promotional machine launches Jacob Hacker and Paul Pierson's new inequality tract, Winner-Take-All Politics, with an event at the New America Foundation.  I don't want to tell you not to buy the book or that it is likely to be wrong—I've bought it myself, but only just started it.  What I do want to tell you is that since Hacker has been making grand statistics-based arguments—beginning with his and Pierson's Off Center, and continuing with his Great Risk Shift—his books have been provocatively and cogently argued, have told progressives exactly what they want to hear, and have been based on statistical evidence that I have found to be completely wrong.

First, in Off Center, Hacker and Pierson argued that Republican success in the aughts invalidated the "median voter hypothesis" that argues that the parties will tend to take policy positions oriented toward the preferences of moderate voters.  They claimed that in recent decades, the Republican caucus had moved steadily rightward (true) while the Democratic caucus had, if anything moved rightward too (ehhh...OK).  But because the ideological distribution of the electorate hadn't changed, that meant that Republicans had somehow pulled policy "off center", which Hacker and Pierson say was accomplished through various dirty tricks and hard-knuckled tactics.

What actually happened is that at the start of the 1970s, the Democratic Congress was "off center"—to the left of voters—and so the rightward shift of Congress and the Republicans reflected a move that produced a Congress more consistent with the views of voters.  In other words, the median voter hypothesis explains the changes rather well.

In The Great Risk Shift, Hacker argued that economic volatility had skyrocketed—more than doubling between 1974 and 2002 and nearly quadrupling between 1974 and 1994 alone.  Oops—these results turned out to hinge on an arcane methodological issue that Hacker should have caught.  When I uncovered this problem, Hacker was forced to revise his book for the paperback edition (no, you won't find documentation that my discovery was the reason behind the revision, but it's in my in-box archives).  When I produced my own estimates of income swings, I found that they had increased over time, but rather modestly, so that if a household's typical income swings were 15 to 16 percent of their income in the early 1970s, they were probably about 17 to 18 percent in the early 2000s.

I also found that, contrary to Hacker's assertions, the evidence on economic risk in other aspects of life also implied fairly modest changes in recent decades.

(Incidentally, I will present evidence in a month at a Census Bureau conference that Hacker's latest effort, an "economic security index" for the Rockefeller Foundation, is also botched.  Full details once I have the green light to circulate them after the conference.)

I hope to blog over the next two or three weeks on the new book as I get further into it, but today, let me just provide some commentary on two central claims about what has happened to inequality.

Claim #1:  The share of income going to the top 1 percent increased from 8 to 18 percent from 1974 to 2007—from 9 to 24 percent including capital gains.

A strong case can be made that the increase over time was just four percentage points or less, not 10 or 15.  In a post I did a year ago, I showed that much of this increase could be explained by two phenomena: (1) a steady rise in tax filing as "subchapter S" corporations (with income reported on individual tax returns) instead of "subchapter C" corporations (with income not included on individual tax returns and thus missing from the IRS data Thomas Piketty and Emmanuel Saez use, whose work Hacker and Pierson rely on); and (2) a jump from 1986 to 1988 in wealthy taxpayers shifting to income and stock options reported on individual tax returns from fringe benefits and stock options not reported on individual tax returns in response to the tax cuts of 1986.  These insights are not mine—they come from Cato's Alan Reynolds, who has been making the points for several years now.  By adjusting the trend line for these changes (using data from Saez), I showed that the change in the top's share of income probably rose only 4 percentage points rather than 10 from 1974 to 2006 (the increase from 1974 to 2008 would be similar—Saez just released his 2008 estimates).

Are these adjustments warranted?  Well, doing so ends up producing estimates that match the trend found by Richard Burkhauser and his colleagues using the Current Population Survey.  The adjusted estimates also raise doubts about the claim that the top income share has not been higher since 1928 (since they put the top share when capital gains are excluded lower than every year between 1928 and 1941).

Furthermore, while I have not seen any research examining the question, I am pretty sure that these levels—and the increase over time—would be lower with ideal data.  Piketty and Saez identify the top 1 percent in their data by estimating the number of single adults and married households in the population and using that as their baseline.  From there, they simply look at the richest people in the tax returns until they have a group equal to one percent of this baseline.  But as Steve Rose notes in his new book, Rebound, their baseline is almost 30 percent higher than the number of households in the U.S., primarily due to multiple tax returns in households with roommates, non-married romantic partners, and adult and teenage children.  Inflating the overall baseline by nearly 30 percent means inflating the number of people in the top one percent by 30 percent too, which would not be problematic except that we can presume that essentially all of the inflation in the IRS data occurs in the bottom 90 percent.

Let's talk concrete numbers to give a sense of why this is an issue.  In 2007, Piketty and Saez use 150 million "tax units" as their baseline population, meaning that to look at the top one percent, they need to focus on the 1.5 million richest tax returns in the IRS data.  Rather than look at households, as Rose does, let's just distinguish families and unrelated individuals from each other and look at them (a more conservative approach than looking at households, since there are fewer households). The Current Population Survey indicates that there were just 134 million of these, ten percent fewer than the number of tax units.  So the top one percent of families/unrelated individuals included 1.3 million people rather than 1.5 million.  To know what share of income the "top one percent" received, one should look at the 1.3 million richest tax returns, not the 1.5 million richest.  By looking at the richest 1.5 million, the "true" top one percent is exaggerated by about 15 percent.

To back into the more meaningful figure, we can assign incomes to 200,000 people and subtract them out from the aggregate received by the top 1.5 million.  A rough way to do this is to give them the average income received by people in the top five percent of income, which in 2007 was $364,000 according to the IRS data (in 2008 inflation-adjusted dollars).

One other adjustment should be made—because those 16 million additional tax returns in the IRS data represent people with relatively low incomes (think teenagers and college kids), the aggregate amount of income in the bottom 90 percent is lower than in the CPS.  The difference should be added to what the IRS shows as total aggregate income (the denominator when computing income shares).  

Making these adjustments, the top one percent received 15.5 percent of income in 2007 rather than the 18.3 percent indicated by the Piketty/Saez results.  And that doesn't include the adjustments I outlined above due to tax law changes.  For 1974, the figures are 7.0 versus 8.1 percent.  For the change over time, I show a change of 8.5 percentage points rather than 10.2.  Combine this adjustment with the analysis I conducted around the effect of tax law changes, and the increase in the top share since 1974 gets awfully small—probably less than a four-point rise over 35 years.

Claim #2: The nation has moved steadily from "Broadland"—typified by the expansion of the 1960s, when most of the income gains went to the bottom 90 percent—to "Richistan", where over half the gains go to the top one percent.

These numbers are actually pretty solid and robust to shortcomings of the IRS data.  However, focusing on changes in the income share is actually a pretty uninformative way of looking at things.  Consider the last expansion, from 2002 to 2007.  Something like 60 percent of the income gains went to the top one percent.  It's only slightly an oversimplification to say that what happened was that Greenspan and Bernanke juiced the economy by keeping interest rates low, which had the unfortunate side effect of sparking all sorts of crazy in the financial sector (including pay increases almost surely out of line with the value these geniuses added to the economy).  This is Raghuram Rajan talking, but I think he's completely right.  When businesses failed to invest, the result was a weak recovery, small income gains for most Americans, and enormous gains to a bunch of 12-year-olds on Wall St.

For the median family/unrelated individual in the bottom 90 percent, the increase in income according to the CPS was from $37,000 in 2002 to only $38,000 in 2007.  Of course, health insurance costs were rising rapidly during this period, so the increase in total compensation was greater.  But still, warm beer.

Consider the counterfactual, however.  What if the Fed hadn't goosed the economy?  Or what if Congress had taxed the income of financial "wizards" until the gains to the top were much smaller?  Either might have mitigated the share of gains that went to the top.  But neither would have helped the bottom 90 percent much, and without the monetary stimulus (and the tax stimulus from the Bush Administration), the expansion of 2002 to 2007 might instead have been the expansion of 2004 to 2007, with a prolonged recession dragging into the mid-2000s.  Of course, the bursting of the bubble in 2008 would not have happened either in that case, but it's not at all clear (to me) that the bottom 90 percent would be in a better place in this counterfactual scenario, despite having successfully limited gains to the top.

On the other hand, had the expansion been broad and robust, producing solid gains for the bottom 90 percent and the twelve-year-old Wall Streeters still received 60 percent of the gains, I don't know that there would be reason to be equally frustrated as many are today.  Hacker and Pierson's story is about us versus them, but it seems to me that they don't persuasively defend this view.  If we can have a bigger pie, but only if we let the rich have a bigger piece of it, then the whole question gets a lot more complicated.  Research by my former advisor, Christopher Jencks, indicates that higher inequality doesn't seem to increase a country's growth, but nor does it hurt it.  I'm with Dalton Conley—we should care less about inequality and more about living standards at the bottom.

More soon....
 
 
(Cross-posted at ProgressiveFix and Frum Forum)




Everyone’s approvingly linking to this Edward Luce piece on “the crisis of middle-class America”.I want to set myself on fire.



Seriously, it’s discouraging to see so many people who should know better (because they’ve argued these points with me before) promoting this article.I can’t think of another piece in the doomsday genre—and there are many—that gets it so consistently wrong.  I'll stipulate that none of the criticisms below are intended to minimize the struggles that many people are facing.  But it's important to get this stuff right.  Let me dive in, with Luce’s words in italics and my responses following:

Yet somehow things don’t feel so good any more. Last year the bank tried to repossess the Freemans’ home even though they were only three months in arrears. 

The share of mortgages either in foreclosure or 3 or more months delinquent is
11.4 percent, which, because 30 percent of homeowners have paid off their mortgage, translates into 8 percent of homes.So the Freemans’ situation is typical of about one in twelve homeowners, or just over 5 percent of households (since one-third rent).*Their son, Andy, was recently knocked off his mother’s health insurance and only painfully reinstated for a large fee. 

Luce is arguing that there’s a new crisis facing the current generation.About 30 percent of those age 18 to 24 were uninsured in 2008 when the National Health Interview Survey contacted them.I don’t have trends for that age group, but the share of Americans under age 65 without health insurance coverage was
14.7 percent in 2008, up from….14.5 percent in 1984.

And, much like the boarded-up houses that signal America’s epidemic of foreclosures, the drug dealings and shootings that were once remote from their neighbourhood are edging ever closer, a block at a time. 

Well, the violent crime rate in 2008 was
19.3 per 1,000 people age 12 and up, down from 27.4 in 2000 and 45.2 in 1985. 

Once upon a time this was called the American Dream. Nowadays it might be called America’s Fitful Reverie. Indeed, Mark spends large monthly sums renting a machine to treat his sleep apnea, which gives him insomnia. “If we lost our jobs, we would have about three weeks of savings to draw on before we hit the bone,” says Mark, who is sitting on his patio keeping an eye on the street and swigging from a bottle of Miller Lite. “We work day and night and try to save for our retirement. But we are never more than a pay check or two from the streets.”

The key question is, again, Is this worse than in the past?The risk of a large drop in household income has risen modestly, but people experiencing a drop end up much better off than in the past.For example, the risk of a 25 percent drop in income over 2 years has risen from 7 percent among married couples in the late 1960s to 14 percent in the mid-2000s (based on my computations from Panel Study of Income Dynamics data).But if you look at the average income of married-couple families after their 25 percent drop, it rose from $40,000 to $63,000 (in constant 2009 dollars).

Solid Democratic voters, the Freemans are evidently phlegmatic in their outlook. The visitor’s gaze is drawn to their fridge door, which is festooned with humorous magnets. One says: “I am sorry I missed Church, I was busy practicing witchcraft and becoming a lesbian.” Another says: “I would tell you to go to Hell but I work there and I don’t want to see you every day.” A third, “Jesus loves you but I think you’re an asshole.” Mark chuckles: “Laughter is the best medicine.”

Hmmm….just a typical American household…..

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300. 

Adjusting for household size and using the PCE deflator to adjust for inflation, median household income in the Current Population Survey rose from $29,800 in 1973 to $40,500 in 2008 (in 2009 dollars, again based on my compuatations).Factoring in employer and government noncash benefits would show even more impressive growth.
In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. 

This is entirely a function of changes in the population composition (more Latinos) and in the share of employee compensation going to health insurance and retirement plans.

Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility. 

Nope.The
evidence is ambiguous, but the best studies imply that intergenerational economic mobility hasn’t changed that much in the past few decades.Intra-generational earnings mobility has increased since the 1950s, though it has declined among men.

Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.

Tim Smeeding’s research based on the Luxembourg Income Study shows that in general Americans have higher incomes than their European counterparts as long as they are in the top 80 to 90 percent of the income distribution.Below that, incomes are more comparable across countries, and the living standards of Americans look less impressive.The US has comparable intergenerational earnings mobility to Europe, according to
Markus Jantti’s research, except among men (but not women) who start out at the bottom.In terms of occupational mobility, David Grusky’s research shows we're as good or better as anywhere else, but this doesn't translate into earnings mobility because we let people get rich or poor to a greater extent than other countries do.Jantti and Anders Bjorklund have estimated that Sweden would have the same mobility as the U.S. if the return to skill was as high there as it is here.Finally, employer benefits further complicate how "bad" we look.

Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning crisis of American capitalism. It is one thing to suffer grinding income stagnation. It is another to realise that you have a diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the ­American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators. 

The rise in income inequality is mostly about the
top 5% of the top 1% pulling away from everyone else, and existing estimates overstate inequality and its growth by ignoring employer and government noncash benefits and possibly by ignoring different rates of inflation in different parts of the income distribution.

Unsurprisingly, a growing majority of Americans have been telling pollsters that they expect their children to be worse off than they are. 

Totally wrong.The key here is to only look at polling questions that ask people about their own kids, not kids in general.Here are the relevant survey results I could find:

General Social Survey (1994)—45% said their children’s standard of living will be better (vs. 20% worse)
General Social Survey (1996)—47%
General Social Survey (1998)—55%
General Social Survey (2000)—59%
General Social Survey (2002)—61% said their children’s standard of living will be better (vs. 10% worse)
General Social Survey (2004)—53%
General Social Survey (2006)—57%
General Social Survey (2008)—53%
Economic Mobility Project (2009)—62% said their children’s standard of living will be better (vs. 10% worse)(unlike GSS and PRC, asked only of those with kids under 18)
Pew Research Center (2010)—45% said their children’s standard of living will be better (vs. 26% worse)
 
BusinessWeek (1989)—59% said their children will have a better life than they had (and 25% said about as good)
BusinessWeek (1992)—34% said their children will have a better life than they had (and 33% said about as good)
BusinessWeek (1995)—46% said their children will have a better life than they have had (and 27% said about as good)
BusinessWeek (1996)—50% expected their children would have a better life than they have had (and 26% said about as good)
Harris Poll (2002)—41% expected children will have a better life than they have had (and 29% said about as good)
 
Harris Poll (1997)—48% felt good about their children’s future
Harris Poll (1998)—65% felt good about their children’s future (17% N.A.)
Harris Poll (1999)—60% felt good about their children’s future (15% N.A.)
Harris Poll (2000)—63% felt good about their children’s future (17% N.A.)
Harris Poll (2001)—56% felt good about their children’s future
Harris Poll (2002)—59% felt good about their children’s future
Harris Poll (2003)—59% felt good about their children’s future
Harris Poll (2004)—63% felt good about their children’s future
 
Pew Research Center (1997)—51% said their children will be better off than them when they grow up
Pew Research Center (1999)—67% said their children will be better off than them when they grow up
 
Bendixen & Schroth (1989)—68% said their children will be better off than they are
Princeton Religion Research Center (1997)—62% of men said their sons will have a better chance of succeeding than they did; 85% of women said their daughters will have a better chance
Angus Reid Group (1998)—78% said children will be better off than them
Washington Post/Kaiser Family Foundation/Harvard (2000)—46% said they were confident that life for their children will be better than it has been for them
Economic Mobility Project (2009)—43% said it would be easier for their children to move up the income ladder
Economic Mobility Project (2009)—45% said it would be easier for their children to attain the American Dream

Also, polls consistently show that Americans say they have higher living standards than their parents.

And although the golden years were driven by the rise of mass higher education, you did not need to have graduated from high school to make ends meet. Like her husband, Connie Freeman was raised in a “working-class” home in the Iron Range of northern Minnesota near the Canadian border. Her father, who left school aged 14 following the Great Depression of the 1930s, worked in the iron mines all his life. Towards the end of his working life he was earning $15 an hour – more than $40 in today’s prices. 

Thirty years later, Connie, who is far better qualified than her father, having graduated from high school and done one year of further education, makes $17 an hour. 

It’s not valid to compare her pay mid-career to her father’s at the end of his career—and also, how much work experience does she have relative to him?Did she take time off to raise kids?

The pace of life has also changed: “We used to sit around the dinner table every evening when I was growing up,” says Connie, who speaks with prolonged vowels of the Midwest. “Nowadays that’s sooooo rare.” 

Time-use surveys show that while parents spend more time working (because of mothers) than in the past, they do not spend less time with children.They spend less time doing things by themselves.

Then there are those, such as Paul Krugman, The New York Times columnist and Nobel prize winner, who blame it on politics, notably the conservative backlash which began when Ronald Reagan came to power in 1980, and which sped up the decline of unions and reversed the most progressive features of the US tax system. 

Fewer than a tenth of American private sector workers now belong to a union. People in Europe and Canada are subjected to the same forces of globalisation and technology. But they belong to unions in larger numbers and their healthcare is publicly funded. 

Though unionization has declined markedly in most of these countries, and their healthcare policies are increasingly becoming too costly.Also, most of the decline in unionization in the U.S. occurred
before Reagan took office.

More than half of household bankruptcies in the US are caused by a serious illness or accident. 

This is
bad Elizabeth Warren research—she counts a bankruptcy as being “caused” by illness or accident if one was reported, but the household could have been in serious debt before these occurred.At any rate, bankruptcies are exceedingly rare (under 1 percent of households—see Figure 13).

Pride of place in Shareen Miller’s home goes to a grainy photograph of her chatting with Barack Obama at a White House ceremony last year to inaugurate a new law that mandates equal pay for women. 

As an organiser for Virginia’s 8,000 personal care assistants – people who look after the old and disabled in their own homes – Shareen, 42, was invited along with several dozen others to witness the signing. 

Ah…another representative household…..

More and more young Americans are put off by the thought of long-term debt.

Evidence???

Had enough?  I have speculated that to the extent economic insecurity has increased, it reflects the impact of a negativistic media (amplified by gloom-and-doom liberalism).

Picture
Pieces like Luce’s—and the blog posts it generates—affect consumer sentiment.Ben Bernanke and Tim Geithner aren’t the only people who can inadvertently talk down the economy.



*Originally said "just under 3 percent", which was incorrect.  -srw
 
 


(Cross-Posted at www.progressivefix.com--I'm behind in getting these up on my blog...)
Mike Konczal’s inequality post as a guest blogger for Ezra is getting a bit of attention in the blogosphere. Konczal jumps off of an interesting post by Jamelle Bouie to argue that contrary to those who argue that “inequality isn’t so bad,” the unhealthy nature of the cheaper food that is purchased by the poor negates the fact that the poor face a lower inflation rate. Since he suggests I (and Will Wilkinson) think that “inequality isn’t so bad,” I wanted to correct a misconception that Konczal has about theargument of economist Christian Broda that he is responding to. Broda’s actual argument really doesn’t have anything to do with how healthy the things purchased by the poor are.

Here’s Konczal:

One argument that has become popular recently is that the increase in income inequality isn’t quite as bad because both the rich and the poor have different ‘inflation’ rates — the prices at which goods increase for the rich have been increasing much faster than the prices at which goods have been increasing for the poor. So even though the poor or median person hasn’t had any wage growth, he has much more purchasing power because of this effect.



This isn’t quite the argument that has become popular recently. What fans of the Broda research argue (i.e., what Broda and his colleagues argue) is that the 
apparent increase in income inequality may overstate the actual increase in inequality because the poor appear to have a lower inflation rate than the rich. If true, then it’s not that “the poor or median person hasn’t had any wage growth,” it’s that they have had wage growth because of their lower inflation rate — and the wage growth has been big enough that it has kept the ratio of rich-to-poor incomes roughly constant.

Think of it this way. Broda and his colleagues find that the prices of what the poor buy (that is, “price” when the satisfaction derived, or utility, is held constant) have risen less than the prices of what the rich buy. That’s because when prices of related goods change, the poor are more likely to switch to cheaper goods, all the while maintaining their overall level of satisfaction with their purchases. If it becomes cheaper to maintain a constant level of satisfaction, then one’s wages have effectively grown. So poor consumers may switch from Green Giant frozen veggies to generics when the latter go on sale, or they might buy their frozen veggies at the chain a couple of neighborhoods over rather than the local grocery store when the latter’s prices go up. Rich consumers, on the other hand, may be relatively unlikely to stop buying Whole Foods vegetables when the plebian chain’s prices are cut. They may not switch to generics as those products become cheaper relative to those on offer at the farmer’s market.

It’s not that we should be excited about how great the generic frozen veggies bought by the poor are compared with the Whole Foods produce. It’s that we should be excited that the poor are either more willing or more able to economize to maintain a constant lifestyle than the rich are, and so inflation eats into their quality of life to a lesser extent than it does among the rich, holding in check other forces that would increase inequality.

Now, Broda’s research is based on purchases of a limited number of commodities and over a limited number of years, but if his findings extend to other goods and services and to earlier periods (which he believes they do), then the implication is that inequality between the poor and the well-off — 
though not necessarily the richest of the rich — has not grown. We can still worry about the quality of the food purchased by the poor and their health outcomes, but that’s a story about poverty and deprivation, not about inequality or growth in inequality.

 
 


(Cross-Posted at www.progressivefix.com--I'm behind getting these up on my blog...)
James Kwak, coauthor of the new financial crisis book 
13 Bankers, recently sought to explain his thesis “in 4 pictures.” And impressive pictures they are. But I’ve been particularly struck by one of them — this chart, from a paper by economists Thomas Philippon and Ariell Reshef, showing the close correspondence between deregulation trends on the one hand and the ratio of financial sector wages to private sector wages on the other. My reaction to the chart was essentially, Huh. Those trend lines look like the basic income inequality trend line.

But to my knowledge, no one has really made this point since the chart has circulated widely. Certainly no one has tried to illustrate it.

Maybe people just lack my whiz-bang PowerPoint and Excel skills, or maybe I’ve actually had an Original Thought. But take a look at the chart I created, which overlays a trend line showing the share of income received by the top one percent (the black line) on top of the Philippon-Reshef chart. The trend line comes from the widely cited work of economists 
Thomas Piketty and Emmanuel Saez, who used IRS data to look at the incomes of the very rich:



Picture

I’ve argued before that I think the Piketty-Saez top-share trend line overstates the recent rise in income inequality, but I don’t see much reason to doubt the basic U-shape of the trend since the Great Depression. For all of the consensus around the basic inequality trend, there’s surprisingly little agreement or understanding as to why it looks the way it does (a major theme of Paul Krugman’s Conscience of a Liberal). Could it really be as simple as the extent of financial regulation? Every analyst bone in my body says this is too easy, but…but….

Of course, saying it’s all financial regulation trends isn’t necessarily inconsistent with Krugman-esque arguments that it’s all about changes in cultural acceptance of inequality.  Maybe financial regulation flows from public attitudes about inequality.

Anyway, interesting — no?