{"id":2864,"date":"2014-12-07T08:15:32","date_gmt":"2014-12-07T13:15:32","guid":{"rendered":"http:\/\/www.dougsbriefcase.com\/blog\/?p=2864"},"modified":"2014-12-07T08:13:39","modified_gmt":"2014-12-07T13:13:39","slug":"inequality-income-gap-narrowed","status":"publish","type":"post","link":"https:\/\/www.dougsbriefcase.com\/blog\/inequality-income-gap-narrowed\/","title":{"rendered":"Inequality: Has The Income Gap Narrowed?"},"content":{"rendered":"

<\/p>

\"Two<\/a>

Two icons of the Left \u2014 econ\u00ado\u00admist Thomas Piket\u00adty and Sen\u00ada\u00adtor Eliz\u00ada\u00adbeth War\u00adren (D\u2011MA<\/span>) \u2014 dis\u00adcussing ris\u00ading inequal\u00adi\u00adty dur\u00ading an event last June. But by some mea\u00adsures, inequal\u00adi\u00adty is shrink\u00ading, not ris\u00ading. [Cred\u00adit: Nation\u00adal Review]<\/p><\/div>\u201cThe game right now in Amer\u00adi\u00adca is rigged. It is rigged so that those at the top keep doing bet\u00adter and bet\u00adter, and every\u00adone else is under increas\u00ading pres\u00adsure, is under increas\u00ading eco\u00adnom\u00adic strain\u2026And that is the pro\u00adfound dan\u00adger that we see from great inequal\u00adi\u00adty.\u201d<\/em> Eliz\u00ada\u00adbeth War\u00adren<\/a> (D\u2011MA<\/span>)\n

Democ\u00adrats are still sting\u00ading from last month\u2019s epic defeat at the polls.  Some of them attribute that unhap\u00adpy out\u00adcome to ide\u00ado\u00adlog\u00adi\u00adcal tem\u00adper\u00adance.  The par\u00adty would do bet\u00adter, some argue, if their can\u00addi\u00addates took a more stri\u00addent tone, denounc\u00ading the rich, preach\u00ading that Wash\u00ading\u00adton gov\u00aderns in the ser\u00advice of Wall Street, and call\u00ading for more aggres\u00adsive redis\u00adtri\u00adb\u00adu\u00adtion of income and wealth to damp\u00aden ris\u00ading inequality.<\/p>\n

But a new study<\/a> pub\u00adlished in the South\u00adern Eco\u00adnom\u00adic Jour\u00adnal pulls at a crit\u00adi\u00adcal thread of that nar\u00adra\u00adtive.  It found that, at least accord\u00ading to one mea\u00adsure of income, the gap between rich and poor actu\u00adal\u00adly nar\u00adrowed between 1989 and 2007.<\/p>\n

The study\u2019s authors \u2013 Philip Armour and Richard V. Burkhauser of Cor\u00adnell Uni\u00adver\u00adsi\u00adty and Jeff Lar\u00adri\u00admore of the U.S. Fed\u00ader\u00adal Reserve Board \u2013 showed that mea\u00adsur\u00ading inequal\u00adi\u00adty is a tricky busi\u00adness, one that is high\u00adly depen\u00addent on how researchers define income.  The table below sum\u00adma\u00adrizes some of their findings.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n
Three Mea\u00adsures of Inequality<\/strong>\n

Average Inflation-Adjusted Growth in Income, 1989\u20132007<\/em><\/h2>\n<\/td>\n<\/tr>\n

 <\/strong><\/td>\n(1)<\/td>\n(2)<\/td>\n(3)<\/td>\n<\/tr>\n
What does it measure?<\/strong><\/td>\nCash mar\u00adket income<\/td>\nPost-tax and trans\u00adfer income, adjust\u00aded for house\u00adhold size<\/td>\nCol\u00adumn (2) + accrued cap\u00adi\u00adtal gains (includes housing)<\/td>\n<\/tr>\n
Who used the measure?<\/strong><\/td>\nPiket\u00adty<\/td>\nNumer\u00adous researchers<\/td>\nArmour, et al.<\/td>\n<\/tr>\n
Bot\u00adtom quintile<\/strong><\/td>\n-32.9<\/td>\n9.9<\/td>\n13.7<\/td>\n<\/tr>\n
Sec\u00adond quintile<\/strong><\/td>\n0.8<\/td>\n10.8<\/td>\n9.0<\/td>\n<\/tr>\n
Mid\u00addle quintile<\/strong><\/td>\n2.3<\/td>\n12.6<\/td>\n6.6<\/td>\n<\/tr>\n
Fourth quin\u00adtile<\/strong><\/td>\n8.0<\/td>\n14.4<\/td>\n6.1<\/td>\n<\/tr>\n
Top quin\u00adtile<\/strong><\/td>\n12.9<\/td>\n15.1<\/td>\n0.7<\/td>\n<\/tr>\n
Top 5 percent<\/strong><\/td>\n9.9<\/td>\n12.7<\/td>\n-2.7<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The first col\u00adumn presents the sort of data that Sen\u00ada\u00adtor War\u00adren most typ\u00adi\u00adcal\u00adly cites.  It is based on the method\u00adol\u00ado\u00adgy used by world-renowned French econ\u00ado\u00admist Thomas Piket\u00adty<\/a>.  It mea\u00adsures \u201ccash mar\u00adket income\u201d \u2013 essen\u00adtial\u00adly mon\u00adey that house\u00adholds receive through labor or invest\u00adment.  By this mea\u00adsure, which looks at pre-tax earn\u00adings, things dark\u00adened between 1989 and 2007 for house\u00adholds in the low\u00adest quin\u00adtile (i.e., the low\u00adest 20 per\u00adcent of earn\u00aders).  Their aver\u00adage, infla\u00adtion-adjust\u00aded earn\u00adings dropped by near\u00adly one-third (32.9 per\u00adcent).  And while those in the mid\u00addle quin\u00adtile bare\u00adly kept their heads above water (a 2.3 per\u00adcent real income increase), those at the top did just fine, increas\u00ading their income by 12.9 per\u00adcent.  The rich got rich\u00ader, the poor got poor\u00ader and the mid\u00addle class stagnated.<\/p>\n

This pic\u00adture, how\u00adev\u00ader, is not entire\u00adly accu\u00adrate<\/a>.  Because it mea\u00adsures only pre-tax income, the Pick\u00adet\u00adty method\u00adol\u00ado\u00adgy over\u00adlooks the redis\u00adtrib\u00adu\u00adtive effects of a pro\u00adgres\u00adsive tax regime and the trans\u00adfer ben\u00ade\u00adfits these tax\u00ades (and gov\u00adern\u00adment bor\u00adrow\u00ading) finance: Social Secu\u00adri\u00adty, Medicare, Med\u00adic\u00adaid, and more than 100 wel\u00adfare pro\u00adgrams.  By ignor\u00ading the tax\u00ades the rich pay and the ben\u00ade\u00adfits that poor and mid\u00addle income house\u00adholds receive, the Piket\u00adty method omits some rather crit\u00adi\u00adcal data.<\/p>\n

It is also fails to take into account social changes.  Peo\u00adple are hav\u00ading few\u00ader chil\u00addren and liv\u00ading arrange\u00adments are much dif\u00adfer\u00adent than in pre\u00advi\u00adous gen\u00ader\u00ada\u00adtions.  Two work\u00ading adults liv\u00ading togeth\u00ader and shar\u00ading expens\u00ades are count\u00aded as two sep\u00ada\u00adrate house\u00adholds in the data sets Piket\u00adty uses, but are in fact a sin\u00adgle unit.  An accu\u00adrate method\u00adol\u00ado\u00adgy must account for such changes in house\u00adhold composition.<\/p>\n

The sec\u00adond col\u00adumn, which relies to a large extent on Cen\u00adsus Bureau data, adjusts both for house\u00adhold com\u00adpo\u00adsi\u00adtion and the effects of tax\u00ades and trans\u00adfer ben\u00ade\u00adfits.  This changes the pic\u00adture dra\u00admat\u00adi\u00adcal\u00adly for the low\u00adest quin\u00adtile, whose medi\u00adan income, after account\u00ading for tax\u00ades, ben\u00ade\u00adfits and house\u00adhold com\u00adpo\u00adsi\u00adtion, grew by 9.9 per\u00adcent instead of shrink\u00ading by 32.9 per\u00adcent.  The remain\u00ading quin\u00adtiles also fared bet\u00adter under this def\u00adi\u00adn\u00adi\u00adtion of income.  Still, inequal\u00adi\u00adty grew, with the aver\u00adage earn\u00adings of the top quin\u00adtile increas\u00ading by 15.1 percent.<\/p>\n

The third col\u00adumn rep\u00adre\u00adsents the method\u00adol\u00ado\u00adgy employed by the authors to com\u00adpute income inequal\u00adi\u00adty.  In addi\u00adtion to the Cen\u00adsus Bureau data, they look at the Fed\u00ader\u00adal Reserve\u2019s Sur\u00advey of Con\u00adsumer Finances, which pro\u00advides data on house\u00adhold assets held in both tax\u00adable (e.g., bank accounts, mutu\u00adal funds) and non-tax\u00adable (e.g., IRAs, 401(k)s) accounts.  They also fac\u00adtor in data from the House Price Index pub\u00adlished by the Fed\u00ader\u00adal Hous\u00ading Finance Agency.  They use these data to impute \u201caccrued cap\u00adi\u00adtal gains\u201d to households.<\/p>\n

Col\u00adumn (3) shows the rather star\u00adtling results of includ\u00ading these addi\u00adtion\u00adal bits of infor\u00adma\u00adtion.  The big win\u00adners since 1989 have been peo\u00adple in the bot\u00adtom quin\u00adtile, whose aver\u00adage incomes rose by 13.7 per\u00adcent between 1989 and 2007.  The biggest losers were those Sen\u00ada\u00adtor War\u00adren loves to hate: peo\u00adple in the top quin\u00adtile, whose incomes grew by less than 1 per\u00adcent over that peri\u00adod, and the top 5 per\u00adcent, who expe\u00adri\u00adenced a 2.7 per\u00adcent reduc\u00adtion in their net income.<\/p>\n

The authors\u2019 method\u00adol\u00ado\u00adgy is not with\u00adout con\u00adtro\u00adver\u00adsy.  The Sur\u00advey of Con\u00adsumer Finances sam\u00adples only 5,000 house\u00adholds every three years.  It is thus much less com\u00adpre\u00adhen\u00adsive than either IRS<\/span> or Cen\u00adsus Bureau data.  More\u00adover, the survey\u2019s method\u00adol\u00ado\u00adgy changed so much that the authors chose not to use data col\u00adlect\u00aded before 1989.<\/p>\n

Crit\u00adics also object to the idea of imput\u00ading income based on accrued cap\u00adi\u00adtal gains.  The fact that your house is appre\u00adci\u00adat\u00ading in val\u00adue or your IRA<\/span> did well this year doesn\u2019t nec\u00ades\u00adsar\u00adi\u00adly give you more income.  On the oth\u00ader hand, mea\u00adsur\u00ading only tax\u00adable, real\u00adized cap\u00adi\u00adtal gains also has lim\u00adi\u00adta\u00adtions.  The gov\u00adern\u00adment, for exam\u00adple, doesn\u2019t tax cap\u00adi\u00adtal gains on the sale of a res\u00adi\u00addence unless that gain exceeds $500,000.  The aver\u00adage price of a home owned by a fam\u00adi\u00adly in the mid\u00addle quin\u00adtile rose by near\u00adly $66,000 between 1989 and 2007.  A home\u00adown\u00ader who real\u00adized that amount paid no tax\u00ades on the sale of the home.  In mea\u00adsur\u00ading house\u00adhold income, that $66,000 arguably should be account\u00aded for.  The authors account for it by imput\u00ading that cap\u00adi\u00adtal gain to home\u00adown\u00aders as aver\u00adage hous\u00ading prices change over time.<\/p>\n

Sim\u00adi\u00adlar\u00adly, house\u00adholds in the bot\u00adtom quin\u00adtile had an aver\u00adage of near\u00adly $43,000 in total equi\u00adty invest\u00adment assets in 2007, accord\u00ading to the Fed\u00ader\u00adal Reserve data.  While imput\u00ading them accrued cap\u00adi\u00adtal gains may seem an imper\u00adfect way of valu\u00ading these sav\u00adings, it is arguably bet\u00adter than ignor\u00ading them entirely.<\/p>\n

The Con\u00adgres\u00adsion\u00adal Bud\u00adget Office, in an analy\u00adsis<\/a> pub\u00adlished last month, pro\u00advides a fourth way to com\u00adpare income across quin\u00adtiles.  Like the authors, they take into account tax\u00ades and trans\u00adfer pay\u00adments.  Unlike the authors, they treat only tax\u00adable cap\u00adi\u00adtal gains as income, ignor\u00ading many assets that house\u00adholds own.  The chart below (click to enlarge<\/em>) shows the Gini Index between 1979 and 2011 that CBO<\/span> com\u00adput\u00aded based on its method\u00adol\u00ado\u00adgy.  The Gini Index is a com\u00admon\u00adly used mea\u00adsure of income inequal\u00adi\u00adty that varies between 0 and 1.  A soci\u00adety in which everyone\u2019s income was equal would get a score of 0; one in which one per\u00adson gets all the income and the rest get noth\u00ading would get a score of 1.<\/p>\n

\"GINI<\/a><\/p>\n

So has inequal\u00adi\u00adty increased in the U.S.?  As for\u00admer Sen\u00ada\u00adtor Phil Gramm and econ\u00ado\u00admist Mike Solon not\u00aded in a recent Wall Street Jour\u00adnal<\/a> piece, the answer to that ques\u00adtion depends very much on which year you choose to begin your analy\u00adsis.  If you choose 1979 as the base year, the CBO<\/span> data would show a 22 per\u00adcent increase in the Gini coef\u00adfi\u00adcient (.358 to .436).  But if you were to select 1985, the change would be just 6 per\u00adcent (.410 to .436).<\/p>\n

Nei\u00adther rep\u00adre\u00adsents a com\u00adplete pic\u00adture.  The Gini coef\u00adfi\u00adcient has expe\u00adri\u00adenced three big run-ups since 1979: dur\u00ading the cen\u00adtral bank\u2019s 1980s war against infla\u00adtion, the dot\u00adcom bub\u00adble of the mid to late 1990s and the hous\u00ading bub\u00adble that burst in 2007.  All three spikes in the Gini index coin\u00adcid\u00aded with ambi\u00adtious cen\u00adtral bank inter\u00adven\u00adtions.  In the after\u00admath, the index trend\u00aded down\u00adward.  The most abrupt decline occurred when hous\u00ading and equi\u00adty prices plum\u00admet\u00aded after 2007.  The Gini index fell by near\u00adly nine per\u00adcent between 2007 and 2009.  Since then, it has drift\u00aded upward.<\/p>\n

Where it has head\u00aded since 2011 is dif\u00adfi\u00adcult to say.  The Fed\u00ader\u00adal Reserve has pur\u00adsued extra\u00ador\u00addi\u00adnary mon\u00ade\u00adtary pol\u00adi\u00adcy since 2009 and there has been a con\u00adcomi\u00adtant rise in equi\u00adty prices.  Both would sug\u00adgest that the Gini index would have tracked high\u00ader over the past three years.<\/p>\n

Eco\u00adnom\u00adic growth, how\u00adev\u00ader, has been tepid and gov\u00adern\u00adment has been fis\u00adcal\u00adly hyper\u00adac\u00adtive.  Obamacare\u2019s new tax\u00ades on the rich took effect in 2013, and Con\u00adgress also vot\u00aded to raise the top rate in Jan\u00adu\u00adary of that year. Those tax\u00ades will adverse\u00adly affect high income house\u00adholds.  The new health law will extend an esti\u00admat\u00aded $1.8 tril\u00adlion<\/a> in income-relat\u00aded health insur\u00adance sub\u00adsi\u00addies between 2014 and 2023, most of which will ben\u00ade\u00adfit those in the bot\u00adtom quin\u00adtile.  Mid\u00addle income house\u00adholds are tak\u00ading a hit, since a good por\u00adtion of Oba\u00admacare\u2019s new spend\u00ading is off\u00adset by reduc\u00ading the val\u00adue of Medicare ben\u00ade\u00adfits to seniors.  The new law\u2019s thick\u00adet of reg\u00adu\u00adla\u00adtions also has erod\u00aded employ\u00ader-spon\u00adsored health ben\u00ade\u00adfits that most mid\u00addle income house\u00adholds enjoy.  That ero\u00adsion will con\u00adtin\u00adue at least until 2018, when the gov\u00adern\u00adment will impose a 40 per\u00adcent excise tax<\/a> on cov\u00ader\u00adage that it deems to be over\u00adly gen\u00ader\u00adous.  How this all will play out is any\u00adone\u2019s guess.<\/p>\n

Inequal\u00adi\u00adty, in short, is very dif\u00adfi\u00adcult to pre\u00addict and quan\u00adti\u00adfy.  It is high\u00adly depen\u00addent on what econ\u00ado\u00admists mea\u00adsure<\/a> and how they mea\u00adsure it.  No per\u00adfect index exists and var\u00adi\u00adous method\u00adolo\u00adgies pro\u00adduce wild\u00adly dif\u00adfer\u00adent results.  It is a sub\u00adject whose nature, caus\u00ades and reme\u00addies demand more study<\/a>.<\/p>\n

Instead, it will fuel more dem\u00ada\u00adgoguery.  The Left will pro\u00admote its dis\u00adtort\u00aded nar\u00adra\u00adtive to incite racial and \u201cclass\u201d resent\u00adments and direct that ani\u00admos\u00adi\u00adty against Repub\u00adli\u00adcans.  They also will use it to advance tired and inef\u00adfec\u00adtive pol\u00adi\u00adcy bro\u00admides, like increas\u00ading the min\u00adi\u00admum wage, reward\u00ading stu\u00addents for not mak\u00ading time\u00adly pay\u00adments on their col\u00adlege loans<\/a>,<\/span> and con\u00adfis\u00adcat\u00ading more of the wealth<\/a> and income of suc\u00adcess\u00adful indi\u00advid\u00adu\u00adals and businesses.<\/p>\n

Aggres\u00adsive redis\u00adtri\u00adb\u00adu\u00adtion\u00adist schemes, which rely heav\u00adi\u00adly on the polit\u00adi\u00adcal sys\u00adtem to allo\u00adcate the fruits of pri\u00advate sec\u00adtor out\u00adput, have failed to arrest inequal\u00adi\u00adty in Europe, as Piketty\u2019s own data attest.  But that won\u2019t stop his dis\u00adci\u00adples from join\u00ading him in call\u00ading on gov\u00adern\u00adment to dou\u00adble down on those ill-con\u00adceived policies.<\/p>\n

The eco\u00adnom\u00adics of envy, as Gramm and Solon not\u00aded, don\u2019t work.  Democ\u00adrats are fer\u00advent\u00adly hop\u00ading that the pol\u00adi\u00adtics of envy will.<\/p>\n","protected":false},"excerpt":{"rendered":"

\u201c<\/span>The game right now in Amer\u00adi\u00adca is rigged. It is rigged so that those at the top keep doing bet\u00adter and bet\u00adter, and every\u00adone else is under increas\u00ading pres\u00adsure, is under increas\u00ading eco\u00adnom\u00adic strain\u2026And that is the pro\u00adfound dan\u00adger that \u2026 Con\u00adtin\u00adue read\u00ading \u2192<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":2871,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","wp_typography_post_enhancements_disabled":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"nfd_image_url":"","nfd_onboarding_generated":"","footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[18,17,371,480,739],"tags":[70,209,868,84,1016,1015,1014,1013,905],"class_list":["post-2864","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","category-entitlements","category-federal-reserve-economy","category-government-spending-2","category-inequality-2","tag-census-bureau","tag-congressional-budget-office","tag-elizabeth-warren","tag-federal-reserve","tag-mike-solon","tag-phil-gramm","tag-philip-armour","tag-southern-economic-journal","tag-thomas-piketty"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t