Some smart cookies take issue with my recent blogging on the Burkhauser-Cornell University study on income inequality. First up is my pal Derek Thompson of The Atlantic. Here is the core of his argument and the chart he comments on:

 

 

First, I see more evidence that market wages have clearly declined for the bottom half of earners. Just look at the far left column. Pre-tax, pre-transfer wages dropped 33% for the bottom fifth. That’s horrible. Companies have found ways to replace or negotiate down low-income workers. For me, that statistic is the beating heart of income inequality concerns.

Second, I see evidence that without many of the same government transfers that Pethokoukis and other conservatives hate, income inequality would be much worse. This chart suggests that, in the country Pethakoukis wants to live in, which cuts government aid, income inequality would be much more severe than it is today.

Third, I think the last column isn’t a good measure of income equality because it lumps the rising cost of health insurance in with straight-up income transfers. If the government gives me $1,000 in refundable tax credits, that makes me richer. If Medicare or my employer’s health insurance pays $10,000 for a surgery that five years ago cost only $1,000, does that make me $9,000 richer? I’m not sure it does.

My purpose isn’t to embarrass Jim, but to point out that it’s interesting, if predictable, that we’ve both found confirmation for our old biases in this chart. Still, I think he should acknowledge that his, and Paul Ryan’s, and Mitt Romney’s vision of America would reduce the kind of income and medical transfer payments that so clearly mitigate income inequality.

A few responses:

1. The single biggest and most critical error that economists like Thomas Piketty and Emmanuel Saez make is how they measure a household. I think Burkhauser makes a persuasive case on why he does it his way. And the impact is huge, as Burkhauser points out:

I think interesting about, and is so profound–this one table, as we go through it, is, I think, so shocking that you can get such dramatically different numbers for a simple concept, like median income. So, we’ve gone from tax units, where there’s an increase between 1979 and 2007 of 3.2%, simply from going from the tax unit to the household unit, we get 15.2%.

And that figure doesn’t yet include adjusting for household size.

2. The tax code makes a big difference in reducing inequality. Yet, according to the Obama White House, the tax code has made inequality worse.

3. I have no problem with a social safety net, as long as it is fiscally sustainable and does not create bad incentives. I support the Ryan plan, after all, and that spends quite a bit of money on the safety net.

4. These income numbers are not adjusted for chronic inflation mismeasurement, which would sharply raise the income numbers, particularly for the bottom half.

5.  Actually, Russ Roberts, who interviewed Burkhauser, makes a good point about the health insurance issue:

Now, you have to be careful because–and I’m talking about individual workers now–one of the mistakes that people make, it’s a very subtle point, is that if you are taking an increasing share of your income in the form of health care insurance from your employer, the Consumer Price Index (CPI) that you are using then to deflate your market earnings is misleading. Because that CPI has been going up somewhat dramatically partly because health care costs are going up. But if you have health care insurance you are insulated from that somewhat. You are taking your income in the form of that insurance, but you can’t then use the entire CPI to deflate your market income. It’s not the correct measure because you don’t have to use that market income to buy health care. So, that’s a subtle point; I don’t know if people listening can grasp it; maybe I spoke too quickly there. But the point is that on the surface the stagnation of market income is not encouraging. It’s not that comforting to be told: Oh, well, don’t worry, you are getting it in the form of health care insurance. Well, yeah, but what I have left over isn’t changing much. Part of what you have left over is actually a little bigger than it appears because of the way the CPI is calculated and this fact that you are getting this in-kind transfer.

6. It seems funny for Team Obama to complain that there has been this huge jump in inequality due to the tax code and the breakdown of the social safety net — yet once you account for those things, the increase is quite modest. You can’t have it both ways.

7.  But that being said, I certainly think we need to reform Medicare and fix how third-party payments are driving healthcare cost increases.

8. Where Derek and I certainly agree — or at least I am pretty sure we agree — is that the U.S. could be doing a lot better, particularly the bottom half. And that means increasing productivity and innovation through a reformed tax code, more basic research spending, an improved infrastructure, and education reform. We may well be between innovation waves, as Tyler Cowen has suggested, and I would like to get to the next wave ASAP.