Inequality: Is it Real?

Alan Reynolds’ longer paper making the argument that inequality hasn’t increased in the United States is now available. I’ve had some time to look into this dispute since his initial op-ed came out, and nothing in the lengthier paper addresses any of my considerable concerns about his argument. Reynolds notes that the tax return data on which Thomas Piketty and Emmanuel Saez based their work have some flaws. He does not, however, address what has to be considered the overwhelmingly most important reason for preferring the Piketty-Saez approach to the use of Census Bureau figures — the Census doesn’t count high incomes. It does something known as “top coding” where people are asked to report their household income according to a series of thresholds (less than X, X-Y, Y-Z, Z-A, A-B, over B) and then everyone who reports as being at or higher than the top threshold is counting as if they were at the threshold. The explosion in income for the top one percent that Piketty and Saez report (and bigger explosion for the top 0.1 percent, top 0.01 percent. etc) doesn’t show up in the Census data because the Census doesn’t measure very high incomes.

At times, Reynolds seems to be misinterpreting or misrepresenting his own data. He makes a big deal about how there’s a large discontinuity in the tax data around the 1986 Tax Reform and that this can make changes look bigger than they really were. The conclusion he wants to reach, however, is that there’s been no trend toward inequality. If you look at his table on page five, however, you can see that both before and after the discontinuity, there’s a clear upward trend in the percentage of total income going to the top one percent.

I would recommend Pittkey and Saez’s rebuttal for more on this. To make a long story short, Reynolds has me very convinced that journalists have frequently oversimplified or slightly misrepresented the inequality situation in the past oftentimes by mentioning the Pittkey/Saez paper. I’m not at all convinced, however, that we haven’t seen a large increase in inequality. What’s more, it’s pretty clear that Reynolds and the venues in which he’s publishing (Cato, WSJ editorial page) would oppose policies aimed at curbing the growth in inequality even if they did believe (or, perhaps, acknowledge) it was happening, which offers relatively little reason to regard this as a good-faith effort to measure the level of inequality in America.

UPDATE: To get a good look at the slipperiness we’re dealing with here, check out the Cato Editor’s blurb (emphasis added):

There are frequent complaints that U.S. income inequality has increased in recent decades. Estimates of rising inequality that are widely cited in the media are often based on federal income tax return data. Those data appear to show that the share of U.S. income going to the top 1 percent has increased substantially since the 1970s. A new study by Cato scholar Alan Reynolds shows that these claims are wrong in both their premises and their conclusions. In “Has U.S. Income Inequality Really Increased?,” Reynolds concludes, “There is no clear evidence of a significant and sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth since the late 1980s.”

Even if you believe that there’s no “clear” evidence of a “significant and sustained” increase in inequality since the late 1980s this, rather clearly, wouldn’t rebut the assertion that “the share of U.S. income going to the top 1 percent has increased substantially since the 1970s.” People who would portray the two claims as contradictory are much more interested in convincing you that there’s no inequality problem than they are in finding out what’s happening with inequality.