What do we really know about income inequality? A fair analysis of the above chart, taken from an essay by Brooking’s Scott Winship in the new issue of National Affairs and combining data from various sources, leads to the following observations about US income growth and inequality since World War Two:
1. Purchasing power has grown for lower, middle, and high income earners across business cycles, though more slowly overall in the past generation than during the immediate postwar boom. (Here’s why we can’t go back to the 1950s, and how the US growth slowdown has been misinterpreted.)
2. Inequality between the poor and middle class increased or declined modestly during all these periods, except the 1980s.
3. High-end inequality has risen dramatically.
Now the core question Winship asks is, basically, “Is income inequality hurting America?” A review of the academic literature and his own new research leads Winship to conclude “the liberal narrative of inequality as a driver of our social and economic woes is not nearly firm enough to support the political and policy arguments now often built upon it.”
It’s a long essay definitely worth a full read, so let me just point out three things.
First, as the chart indicates, high-end inequality has not led to income stagnation. But would less inequality mean even stronger income growth? Winship cites forthcoming work by University of Arizona sociologist Lane Kenworthy which “finds that increases in inequality may lower median incomes somewhat. But when he allows for the possibility that inequality might increase economic growth rates and lead to greater government redistribution, the effect disappears.”
Second, it also seems doubtful that inequality is reducing income mobility much, if at all. Winship recently completed new research that finds men born in the early 1980s have experienced, at most, “only a bit less mobility” than those born in the 1950s.
Among those raised in the bottom quarter of the family-income distribution, the fraction escaping the bottom fourth of earnings as adults fell from 63% to 60%, a decline too small to be reliably different from zero. In fact, they may have experienced greater mobility than men born in the early 1960s, when only 54% escaped the bottom fourth.
In other words, when it comes to the purported relationship between inequality and “declining opportunity,” the problem may not be insufficiently rigorous explanation. Rather, it could be that there is no decline that needs explaining in the first place. Perhaps this is why leading mobility researcher Michael Hout, a Berkeley sociologist, concluded in 2004, “[The] literature to date has offered surprisingly little evidence that links intergenerational difference and persistence (mobility and immobility) to economic or other inequality.”
Third, while income inequality gets blamed for all sorts of social ills, from the increase in teen pregnancy to the widening education gap between poor kids and rich kids, proving causality is tricky. Winship:
A better approach to testing hypotheses about inequality and opportunity is to look not at snapshots of both in a few countries, or at how both evolved in a single country, but rather to test whether any relationships between inequality and opportunity hold as both indicators change across geographies. This strategy has been pursued in ongoing research by Kenworthy, who concludes that rising inequality probably has not lowered college-graduation rates, increased single parenthood, or pushed up murder rates (though it may have had small effects on life expectancy and infant mortality)
So what are the public policy implications of Winship’s essay? As the author rightly notes, you can question the linkages between income inequality and various problems while still working to improve economic growth, health care access, education, and economic mobility. But a knee-jerk, emotional response to the rise in inequality could lead to rash policy decisions, such as cranking up marginal tax rates or further penalizing investment income.
That’s my bottom line. Here is Winship’s: “There is simply very little evidence to suggest that, within the range of inequality that modern countries have experienced and the range seen in our country over the past century, income disparities between the rich, middle class, and poor merit the intense attention lavished on them by the left.”