The Truth About Income Inequality

September 24, 2009
The Truth About Income Inequality
By Diana Furchtgott-Roth

Ask almost any Democratic politician the most important economic facts about income distribution in America, and you are almost certain to hear the following three points: (1) incomes have fallen substantially over the past ten years; (2) labor's share of income has fallen significantly behind the pace of new productivity and innovation; and (3) income distribution has worsened dramatically over the past generation and over the past decade in particular, with people at the top getting a bigger fraction of total personal income.

Many Democrats believe that these three points are the economic equivalent of the "gospel truth." When politicians see truth, legislation is not far away. Thus, members of Congress have proposed new taxes redistributing income from richer to poorer Americans, new middle-class entitlements such as a public health care program, and the Employee Free Choice Act, which attempts to increase unionization by effectively taking away secret ballots in union elections.

A new economic study reveals that each of the three points of the politicians' economic "gospel truth" is grossly exaggerated and perhaps entirely wrong.

Entitled "Misperceptions about the Magnitude and Timing of Changes in American Income Inequality," it is just published by the prestigious National Bureau of Economic Research, the same scholarly institution that pinpoints the start and end of recessions. (It is available for purchase from www.NBER.org.)

The author of the study is Professor Robert J. Gordon of Northwestern University. He is a meticulous empirical economist who received his Ph.D. from MIT over forty years ago. His specialty is the measurement of inflation, unemployment, and productivity growth, and he has written over 100 academic articles and authored or edited five books.

The paper is cogent and easily accessible to all readers, even those without a background in economics. Washington politicians with no understanding of economics and little time have no excuse for not reading it.

Professor Gordon shows that income, properly measured, has not fallen in America. Moreover, supposed gaps between income and private sector productivity growth are greatly exaggerated. Finally, measures of income inequality have changed little over the past few decades. To the extent income distribution worsened, it all happened before 2000.

The conventional view is that income growth has seriously lagged productivity, so that increases in productivity yield returns to shareholders and corporate management but not to workers. However, Professor Gordon finds that labor incomes are higher than previously measured.

First, most measures of income are constructed on the basis of households. Since the number of people per household has been declining over time due to increasing divorce, longer life expectancy, and later marriage, income per person has increased faster than income per household.

Second, the most common inflation measure used, the Consumer Price Index for Urban areas, is too high, so incomes calculated by the CPI-U are too low. When the GDP deflator, the same measure used to calculate productivity, is used, then incomes adjusted for inflation are higher than would be the case otherwise for the bottom 90% of the income distribution.

Third, productivity measures generally cover only the nonfarm business sector, which represented just 76% of GDP in 2007. Less-productive sectors of the economy, such as government and households, are excluded. When these are included, total productivity is lower.

When these adjustments are made, the gap between income and productivity is far lower.

According to Professor Gordon, "Longer-term moving averages show no decline in labor's income share over the last four decades following a marked increase in the previous three decades going back to 1938. We also focus on measures of top pay, including CEOs, and these show no further increase of income shares between 2000 and 2006/7, prior to the 2007-08 stock market collapse that caused sharp declines in the top income shares."

The one group that has continued to expand income shares, according to Professor Gordon, is not the top one percent, but those in the 96th to 99th percentiles. The income share for this group increased from 10% in 1967 to 13% in 2006.

While Professor Gordon doesn’t say so, it’s possible that some of this increase was due to the Tax Reform Act of 1986. It lowered top individual income tax rates from 50% to 28%. That change led some, possibly many, small businesses to report business earnings as personal rather than corporate income.


Professor Gordon's analyses are compelling and realistic. The past decade has not been the greatest economic period in American history, but it has not been so much worse than previous periods. He examines changes in American demography (including changing household size, longer life-expectancy, more education, and migration to cities), he evaluates different price indexes, he graphs data, and he explains it all in easily-understood terms.

What should we make of Professor Gordon's research? First, the American economy is far more robust and resilient than often viewed. Over long periods of time, it survives the ebb and flow of growth and recession-and governmental policies, the good and the bad-largely intact.

Second, horror stories about worsening income distribution in America are largely scare tactics. New policies and laws in Washington should rise or fall on the merit of the underlying facts and ideas, not on the fear that American society is spiraling hopelessly into extremes of income distribution.

That realization alone should reduce the volume of proposed legislation in Congress.


Diana Furchtgott-Roth is a contributing editor of RealClearMarkets and an adjunct fellow at the Manhattan Institute.

http://www.ncpa.org/sub/dpd/index.php?Article_ID=18476

Why Income Inequality Matters
Posted by Josh Rothman December 15, 2010 10:50 AM

Everybody knows that in America income inequality is on the rise. What's less obvious is why it's rising, or what that rising inequality really means for ordinary people. In a lively and readable essay at The American Interest, the economist Tyler Cowen explains why inequality is rising, and why it matters. The bottom line: income inequality isn't so bad in itself - but it's a symptom of deeper problems in the way our economy works.


Cowen starts by asking: is rising income inequality so bad in itself? The answer is, surprisingly, no - incomes in America are becoming more unequal, but that inequality doesn't matter as much as you might think. It's certainly true that in 1974, the richest 1 percent of Americans made about 8 percent of the nation's pretax income, while in 2007 they made 18 percent. That's a huge jump in income inequality. But, at the same time, "the inequality of personal well-being is sharply down over the past hundred years and perhaps over the past twenty years as well." An average American today has more in common with Bill Gates (good education and medical care, a house, tasty food, the internet, and so on) than an average American in 1900 had in common with, say, Andrew Carnegie. The income gap might be rising, but the happiness gap is narrowing.

The problem, Cowen thinks, isn't that the rich are getting richer - it's how they're getting richer. Who are those top 1 percent? The answer, perhaps unsurprisingly, is that the top earners are almost all financiers. (In 2004, Cowen writes, "the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500.") As Cowen puts it, "the financial sector has learned how to game the American (and UK-based) system of state capitalism."

Those are fightin' words, but Cowen thinks that's the best way to understand inequality. How are financiers gaming the system? The short answer is that they make money in good times, and then get bailed out in bad times, passing the losses (and lost income) on to the rest of us. (In Cowen's words, "there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve.") Get bailed out enough, and the money will inevitably flow to the financiers: "financial crisis begets income inequality." But there are more subtle factors at work, too. The finance industry has itself become faster and more competitive over time, so that income inequality within finance has grown. And the same higher living standards that make income inequality tenable for average people also insulate financiers from risk. "Smart people have greater reach than ever before," Cowen concludes, "and nothing really can go so wrong for them."

What, you might ask, is to be done? Apparently, nothing. Ultimately, the system needs to be less cushy for financiers. Right now, though, we need them to take risks and invest their money in the sluggish economy. This is a problem we haven't figured out how to solve. Maybe, Cowen concludes, income inequality and the boom-bust-and-bailout cycle which drives it is "simply the price of modern society. Income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems."

http://www.boston.com/bostonglobe/id...come_ineq.html

By Linda McQuaig and Neil Brooks

Billionaires are on the rise. While workers’ wages have stagnated over the past 30 years, the rich have gotten richer, and the very rich have gotten wildly richer.

We’re no longer amazed to hear that Tiger Woods is making US$100-million a year, or that Oprah Winfrey ranks among the billionaires. Thirty years ago, CEOs of large corporations were content to make 20 or 30 times the average income; now they feel hard done by if they only make 200 to 300 times as much. Things are even more out of whack in the financial world. In 2009, the 25 highest-paid hedge fund managers earned an average over US$1-billion each — about 24,000 times the average income.

These anecdotal reports of rising inequality have been confirmed in countless empirical studies. Perhaps the most widely cited have been a series of studies led by University of California economist Emmanuel Saez and Thomas Piketty of the Paris School of Economics. Using income tax data, the Saez-Piketty studies show that the share of market income captured by the top 1% in the United States rose dramatically from 8.9% in 1978 to a staggering 23.5% in 2007. But even that understates the windfall at the very top. Those in the top 0.01%, for instance, increased their share more than sevenfold, from 0.86% in 1978 to 6.04% in 2007. This is the largest share of national income this very top group has received since the introduction of the U.S. income tax in 1913.

There has been no serious academic dispute over these findings. The American Economic Association awarded Emmanuel Saez the John Bates Clark Medal, given to “that American economist under the age of 40 who is adjudged to have made a significant contribution to economic thought and knowledge,” largely for his work on income distribution.

This data is the basis of our recently released book, The Trouble with Billionaires, which documents the negative consequences of the rise of extreme inequality in Canada, the United States and Britain.

So we were surprised to discover Terence Corcoran’s article in the Post purporting to expose the “myth” of rising inequality (Sept. 16).

Corcoran asserts that “the economic literature is full of debate, most of it in rejection of the basic premise that inequality has been dramatically on the rise.” While there is some dispute over the size of the increase in income inequality among the bottom 90%, there’s been no dispute that inequality has risen, and risen particularly dramatically at the very top.

Corcoran supports his case by referring to a working paper by Northwestern University economist Robert Gordon entitled “Has the Rise in American Inequality Been Exaggerated?” The paper suggests that some analysts may have overstated the increase in inequality, and notes that it has not been a “steady, *ongoing process.”

But Gordon doesn’t take issue at all with the finding that there’s been a dramatic increase in income share going to the top earners, as noted by Saez and Piketty. In the very first sentence of the paper Corcoran cites, Gordon states: “The evidence is incontrovertible that income inequality has increased in the United States since the 1960s.” In fact, Gordon has documented this trend in his own studies, speculated about its causes, and even shown serious concern about its consequences. As he wrote in a published version of his working paper:

There is a simple solution to growing inequality at the top.… Let the top 1% earn its millions, but then let the government substantially boost the taxation of those rewards, not just in the form of much higher (not just 39%, how about 50%?) top-bracket tax rates, but also a reversal of all the reductions in tax rates on dividends and capital gains of the past 30 years.

So not only does Gordon clearly acknowledge the rise in inequality, he considers it a significant problem that should be addressed through major tax increases at the upper end — a position we heartily endorse. Gordon even goes on to say that “the policy proposals of the Obama administration are, at least so far, meek in contrast to the more radical needed increases in top-income tax rates.”

Corcoran also refers to a critique of the Saaez-Piketty studies by Alan Reynolds of the libertarian Cato Institute. A key assertion by Reynolds is that Saez and Piketty use pretax numbers, and that, once taxes and transfers are added in, there’s been no increase in inequality. This suggests that government redistribution is adequately compensating for increasing market inequality, effectively cancelling its impact. Sadly, however, this simply is not true.

Virtually every study on after-tax income in the United States shows there is little redistribution done by government, and that rising inequality is clearly evident in after-tax income, as well as in pretax income. For example, the Congressional Budget Office reports that from 1979 to 2006, the average after-tax income of the lowest fifth of tax-filers increased only 11%, while for the top 1%, it increased 256%. So much for redistribution.

Similarly, the 2008 OECD report “Growing Unequal?” notes that: “Redistribution of income by government plays a relatively minor role in the United States. Only in Korea is the effect smaller…. The effectiveness of taxes and transfers in reducing inequality has fallen still further in the past 10 years.”

There’s room for serious debate around the issue of extreme inequality. For instance, some commentators justify today’s huge pay packages at the top on the grounds that enormous incentives are necessary to encourage top performances. But this does little to explain why Alex Rodriguez, today’s top-earning baseball player, earns 30 times more (in inflation-adjusted dollars) than Hank Aaron, the top-earning player in the early 1970s, whose performance on the field was as good or better (without the benefit of steroids).

Even more dramatic examples of the disconnect between today’s pay packages and performance are found throughout the world of business and finance. Let’s not forget that Merrill Lynch paid its “top people” some US$4-billion in bonuses in 2009 — right after that same group of overachievers had steered the company to a US$27-billion loss, and in the process helped trigger the global economic meltdown.

Many commentators will object that higher taxes on the rich would lead to stunted economic growth. But as Gordon himself notes, “rapid economic growth from 1947 to 1973 took place in an era of top-bracket tax rates ranging from 78% to 90%. High top-bracket tax rates are not incompatible with healthy growth.”

There are fascinating questions about income inequality that cry out for serious public debate, and we look forward to debating them with Corcoran and others. But let’s not get caught up in a sideshow dispute over whether billionaires are just figments of our imaginations.

Financial Post

Linda McQuaig is a journalist and Neil Brooks is a *professor of tax law at Osgoode Hall Law School. Their book, The Trouble with Billionaires, is published this month by Penguin Books Canada. A Toronto launch event is scheduled for Tuesday at the Ryerson Student Centre and on Sunday in Calgary at the Plaza Theatre.

Read more: http://opinion.financialpost.com/201...#ixzz18DcPUkDK

______________________________________
Apparently, the above author, Diana Furchtgott-Roth, LIES! Including the title of the paper.

"Apparently, the above author, Diana Furchtgott-Roth, LIES! Including the title of the paper."

So Typical LOL.

Maybe McQuaig and Brooks are the liars? I'm now sure you were not on the debate team as calling the opponent a "liar" probably isn't good debate.

I think she cites Gordon's paper correctly. Let's check.

Heading on Paper: Misperceptions About the Magnitude and Timing of Changes in American Income Inequality

Citation is F-R's article: Misperceptions about the Magnitude and Timing of Changes in American Income Inequality

Aside from "About" and "about", I think YOU lie. :)

My conclusion, after exhaustive research, is that the subject of "economic inequality" is simply a liberal talking point used by the democratic party to incite and inflame the American working class with the intention of securing their votes for the preservation of their politiical POWER (aka - tending to the flock) with the minority actually believing it. If you take the red pill, you can uplug yourself from this Matrix.

The conservatives preach "equality of opportunity" vs. "equality of outcome".

In Interview, Bernanke Backs Tax Code Shift
By SEWELL CHAN
Published: December 5, 2010

WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke (appointed by George Bush), said in an interview broadcast on Sunday evening that rising inequality was eroding social cohesion and that Congress could help economic growth by making the tax code more efficient.

The statements, in an interview with “60 Minutes” on CBS, were a rare foray outside the strict boundaries of the Fed’s mandate, to which Mr. Bernanke has typically confined his remarks.

In the interview, which was taped last week during a visit to the Ohio State University, Mr. Bernanke was unusually blunt in defending the Fed’s decision last month to inject $600 billion into the banking system to jolt the flagging recovery.

“This fear of inflation, I think, is way overstated,” Mr. Bernanke said. “We’ve looked at it very, very carefully. We’ve analyzed it every which way.”

On fiscal policy, a topic he has largely avoided, Mr. Bernanke repeated his point that the government should avoid an immediate contraction that could jeopardize the fragile recovery, while at the same time starting to address “the long-term structural budget deficit.”

But he went slightly further when asked how Congress might help the economy grow.

“The tax code is very inefficient — both the personal tax code and the corporate tax code,” Mr. Bernanke said. “By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest.”

That statement seemed to be an endorsement of one proposal from the fiscal commission appointed by President Obama. Among the ideas it put forward last week was reducing personal income tax rates but eliminating a number of popular deductions.

When asked about rising inequality in the United States, Mr. Bernanke offered a response that was likely to be embraced by liberals.

“It’s a very bad development,” he said. “It’s creating two societies. And it’s based very much, I think, on educational differences. The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is 5 percent. If you’re a high school graduate, it’s 10 percent or more. It’s a very big difference.”

Mr. Bernanke added: “It leads to an unequal society, and a society which doesn’t have the cohesion that we’d like to see.”

During the interview, Mr. Bernanke reiterated his view that a double-dip recession was unlikely, but added, “We’re not very far from the level where the economy is not self-sustaining.”

The chairman also left open the option of going beyond the $600 billion of Treasury securities the Fed plans to buy through June 2011.

“It’s certainly possible,” Mr. Bernanke said, adding: “It depends on the efficacy of the program. It depends on inflation. And finally, it depends on how the economy looks.”

Mr. Bernanke offered a retort to critics, saying, “We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.”

Mr. Bernanke’s remarks suggested that the Fed was highly unlikely to change course when it meets on Dec. 14 for the final time this year.

The Fed has made it clear that its implicit long-run target for inflation is around 2 percent or slightly less, and Mr. Bernanke said that “we’ve been very, very clear that we will not allow inflation to rise above” that level.

It's good that you recycle. But now that you bring it up again, what is the solution to income inequality, and who should employ the unemployed which will narrow the income inequality gap.