Pethokoukis, Economics, U.S. Economy

Why liberals are way, way too obsessed with income inequality

Credit: National Affairs

Credit: National Affairs

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.”

16 thoughts on “Why liberals are way, way too obsessed with income inequality

  1. You have a red herring argument on income inequality that diverts attention from the real issue. The income inequality is due to a failure to share (and I am not saying equal sharing) productivity gains in the nation over several decades (since the late ’70′s) among all who work in the economy. This has resulted in a concentration of wealth in a small proportion of the population with its resultant politicial influence — and led to a status quo mentality for maintaining the “system” as is. This underminds our democratic ways. [That is how the financial system, concentrated in the New York metro area, got bailed out to the tune of trillions of dollars. Dollars which came from the rest of the nation and is why much of the nation has been in an miasma for several years while Wall Street has been enjoying their bonuses.] Got it?

    • Got it? Well no, actually.

      If I may, you seem to be implying the root issue is not so much income inequality per se but rather the disparate political influence that concentration of accumulated incomes provides.

      So even conceding this point, the solutions generally put forth by indviduals sharing your view to most issues of the day, would seemingly exacerbate the problem you identified. These solutions of course all sharing a common charectertistic of consolidation/centralization of power at the Federal Level.

      In fact we are all now reaping the fruits of national democracy of which the founders explicitly warned.

      So rather than attacking legitimate free enterprise, why not focus on the root issue. Consolidation of power, ill conceived/illicit subsidies of all stripes and moral hazard?

    • Exactly! Did you see the March Consumer Confidence report released this morning,it was not pretty.With a raging bull market why would we have a recessionary level Consumer Confidence report.Because Main st is not benefitting from this QE induced bull run,it is going to the top not trickling down.Plus I believe it is making gasoline prices higher than they would otherwise be by weakening the value of the dollar.Gasoline is killing the middle and lower classes making them feel poorer even while the Dow is at 14,500.

  2. I like Jim’s writing but I already know what studies he’s going to use when making his case about income equality. It’s not wrong but it’s cherry picking. Get a liberal economist,aren’t they all, and they’d come up with different stats. There is income inequality and it’s getting worse. Better be born into a good zip code with great connections.

  3. Income equality as a whole is misleading would it not be more interesting to know how many hours of work were trade for food clothing housing and government in 1950 versus 2012 and also how much of the difference is born by the rich versus the poor

  4. A WISE old man once said:
    “The worst form of inequality is to try to make unequal things equal” -Aristotle
    It still holds true today and in perpetuity, for it is the law of nature that not two things are or will ever be by themselves equal, be that human, social, financial, etc.
    The rest is ink-wasting…

  5. Winship’s central theories strike me as assuming facts not in evidence as well. That today’s family has a much higher standard of living than its 1950s counterpart does not prove that inequality is a red herring. For one, it takes two workers per household to make the nut today. For another, consumer debt was in its infancy in 1950. Are we better off because we are in hock to degrees that Grandad would consider unthinkable?

    His other point, — that wage growth outstripped productivity in the post-war period because of unionization, and is now reverting to mean — is also speculative. To describe capital vs labor as cyclical assumes that the US is a closed system, which it clearly is not. The construction industry soaked up an army of unskilled labor in the latter years of Winship’s comparisons. When will it do so again?

    The line Mr P draws to sacred investment income is also shaky. The economy is awash in unused capital. It is stirrng again because of the first glimmers of demand. in cars and now in the housing market.

    • “Are we better off because we are in hock to degrees that Grandad would consider unthinkable?”

      So “we” should have listened to Grandad instead of Paul Krugrman.

      “The construction industry soaked up an army of unskilled labor in the latter years of Winship’s comparisons. When will it do so again?”

      Probably never as long as the open borders crowd continues to allow Mexico to outsource her poverty to the United States.

  6. Is the “problem” inequality of income, or of wealth? Again, there’s a moral assumption that separates the left and right in the discussion. The core of the left believes that property is theft and profit is exploitation. If so, then any accumulated wealth and resulting inequality is per se evidence of immorality. Redistribution becomes about punishing the wealthy, not about benefits to the poor. This evidence will fall on deaf ears

  7. Income “inequality” is the excuse that liberals (er, now “progressives”) use to destroy the very productivity that we rely on to advance society. Just who, exactly, are they complaining about? For example, do we fret about the difference in compensation between what Oprah earns and what she pays the person who runs the studio cameras? Do we worry about the “inequality” of between how much Jay-Z makes for a single concert compared to how much he pays the roadies to unload his equipment truck? Not a peep. So who, exactly, is the fixation of this horrible crime? What percent of the “1 Percent” are making too much? And who has made it by breaking a law or by insulting moral values? Please, inquiring minds want to know.

  8. When I was poor, I wasn’t worried about income inequality at all. I was interested in improving my standard of living & improving my income. People making more than me did not prevent me from improving my standing. They helped by creating jobs & value.

  9. “Income inequality” is a meaningless statistic that is just used by those with a political agenda. It relies on the false assumptions that there is a fixed supply of income that gets divided up amongst society by some central authority, and that society is divided into fixed classes (“the rich,” “the poor,” “the middle-class,” etc…). The reality is that the various income quintiles are just statistical brackets that have no reflection on the actual flesh-and-blood human beings who make them up and who move into and out of these different quintiles all the time. And income is not something that is produced in some fixed supply that then must be divided up amongst society, it is simply what one earns in exchange for whatever they produce.

    The reality is that inequality is at the lowest point in human history. Never before has the level of wealth held by the average person been so great. Wealth is the goods and services produced by a society. The more and more goods and services that become available to the average person, the wealthier those people are. Today, everyone is wealthy, just unequally wealthy.

    The unequally wealthy is the part that the Left focus on in their complaints about supposed increasing inequality.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>