Income Inequality: Misrepresenting the Evidence
John Hood is accusing the Center on Budget and Policy Priorities of “pounding the redistribution drum, again”. Figure 1 from the CBPP discussion diagrams the updated version of the data series on U.S. income inequality provided by Thomas Piketty and Emmanuel Saez (original publication being “Income Inequality in the United States: 1913-1998,” Quarterly Journal of Economics, February 2003). The CBPP discussion states:
The Piketty and Saez data offer the first real snapshot of income trends among those at the pinnacle of the income spectrum in 2004. The data show that income gains between 2003 and 2004 were particularly large for those at the very top of the income spectrum, resulting in a nearly unprecedented one-year increase in income concentration.
Hood tries to suggest that Greg Mankiw disagreed with this statement when he said:
After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000.
It turns out that there was a temporary dip in the share of income captured by the very rich followed by a subsequent jump from 2003 to 2004 that offset this dip. For a nice summary of the debate, see Mark Thoma who adds:
The little dip at the end is what the fuss is all about. But even if Greg’s claim holds up to the types of qualifications Brad talks about, and there are good reasons to worry about using 2000 as a base year, the upward trend in income inequality since the 1970s is undeniable. And in any case, as the last graph shows, real income for the bottom 99% of the distribution has been flat since the early 1970s despite large gains in productivity.
Given that the long-run trend in this data is stacked against the bogus argument Hood is trying to put forth, he decides to continue with:
Seriously, these analyses based on income reported to the Internal Revenue Service are fruits from a poisoned tree. Surely there is no need to explain why various individuals, rich and not-so-rich, may not fully report their true economic condition to the taxman.
Never mind the fact that the National Revenue crowd has used this same IRS data when they could spin it to suit their purposes – which of course means Hood next has to change the metric entirely:
Other evidence persuasively suggests that measuring household consumption, not income, is the best way to gauge living standards and eliminate biases related to tax sheltering, the underground economy, temporary gains or losses, and other issues.
What evidence? Some spin from Robert Rector and Rea Hederman of the Heritage Foundation and Alan Reynolds with the latter stating:
The broadest measure of living standards is what consumers spend. Real consumption per person rose from $14,816 in 1980 (in 2000 dollars) to $25,816 in 2004 – an unprecedented gain of 74.2 percent.
To which Hood claims:
measuring household consumption, not income, is the best way to gauge living standards and eliminate biases related to tax sheltering, the underground economy, temporary gains or losses, and other issues.
But notice that Mr. Reynolds was talking about the mean level of consumption per household and not the distribution of consumption across the spectrum from what Paris Hilton consumes versus what the fellow receiving the minimum wage consumes. And even that comparison can be misleading as I’m sure that the very rich will have plenty of savings to live off of during retirement – whereas the family living paycheck to paycheck will have very little outside their Social Security benefits – which of course, the National Review crowd would take away so as to fund those tax cuts for the wealthy.