Pethokoukis

The most important economic chart in US politics … is kind of misleading

112513pikettysaez

Some version of the above chart is familiar to anyone who’s read a news story about income inequality. It apparently shows the pre-tax income growth of the top 1% rocketing higher over the past 40 years, the 99% not so much. Powerful prima facie evidence for those promoting the “rich getting richer by taking all the money” explanation for middle-class income stagnation.

But there might be more to the story. Economist Russ Roberts points out that at the same time the growth rate in family income was flattening from 1973 through 1993, there was a big increase in (a) the divorce rate and (b) the number of households headed by women. This was especially true among poorer families. And Roberts contends this had a huge impact on data showing middle-class income stagnation: “That demographic change is going to slow the average measured rate of growth, especially when those families are disproportionately created out of married families that are poorer than the average to begin with.” And this:

So during a time when individual income is actually growing, a rise in the divorce rate, especially among families below the average income, is going to pull down the measured rate of growth. … This has nothing to do with having fewer children or spreading income over a smaller number of people. It’s a result of the divorce rate that leads to measured household income being a misleading representation of what is going on in the economy. … This is important because the measured gains in income of the bottom 99% shown here are roughly zero in the 1980′s, a decade of healthy economic growth. This leads people to conclude that the top 1% got all the gains during that decade. I think that is absurd. My claim is that much or all of this depressing claim is a misreading of the data caused by demographic changes.

Interestingly, Roberts ran this idea past the University of Chicago’s Bruce Meyer, a scholar who has done a lot of great work income and consumption inequality, during a 2011 EconTalk episode. Here is Meyer’s reply: “Well, the share of families headed by single mothers hasn’t gone up that much in the last 10 years. So what you’re describing could be true more historically.”

Indeed! Rising inequality as a historical artifact of the 1980s is very much in keeping with a variety of research suggesting inequality between the bottom fifth and the middle fifth has not grown since the Reagan years. That may also be true of inequality at the top. Using a more comprehensive after-tax, household-size adjusted income definition, one that includes yearly accrued capital gains, health benefits, and transfers among other things, “dramatically reduces the observed growth in income inequality across the distribution, but most especially the rise in top-end income since 1989,” according to researchers Philip Armour, Richard Burkhauser, and Jeff Larrimore. Their research, along with that of Meyer, also suggests average median incomes are up by 40% or so since the 1970s. ( Also interesting: highly regarded research from the Equality of Opportunity Project found “a high concentration of income in the top 1% was not highly correlated with mobility patterns.”)

The bottom line: income inequality will likely be a big issue in the next presidential election. Now would be a good time to start getting our facts straight about it and to further the analysis beyond a single chart.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

11 thoughts on “The most important economic chart in US politics … is kind of misleading

  1. The only way you recognize income is through activities that others find valuable enough to pay you to do. Is it possible that those on the right tail of the income distribution may actually be doing more things that people find REALLY valuable? I don’t know, like creating tech companies with multi-billion dollar market caps?

  2. Discussions like this are irritating because those wishing higher taxation use graphs such as the one here to “prove” that higher income people should give more money to the govt. As my Mama with the PhD in political science said “statistics don’t lie but liars use statistics.” People, like markets, aren’t static. They move. I was in the bottom 20% for a number of years and am now in the top 5%. It took 30 years of working my own business to get there. It wasn’t magic or given to me. Yet, those who think they are “helping” others are more than happy to take a little bit more of what I make so they can feel good about themselves. Here’s my question; if one wouldn’t go to one’s neighbor and tell him to give one money, they why is it okay for one to get the govt to do that very thing? The issue isn’t one of compassion, it’s efficiency. It is far better to give directly to the local Salvation Army or charity then to be forced to send money to Wash D.C. where it is used as bait to create constituencies.

    • I believe inequality charts are meant to b a critique of trickle-down economics, specifically that it doesn’t trickle down.

      Dubya had a choice of more supply-side BS or fixing entitlements. Grandma is going to be a tad more than irritated when she finds out the Koch brothers have the surplus she paid into SS.

      I believe the churches in Washington, Ill., were flattened along with everything else.

      I worked hard and watched my pennies. too. But you and I had the advantage of growing up when education was considered an investment rather than an expense.

      We agree about constituencies being served, this website being a well-funded example.

  3. Wouldn’t post income tax be a better measure, since the 99% get taxed much less than the top 1% of income earners?

    Especially when you consider that most to breaks disappear at the 150K mark, for most families.

    The chart is a bit disingenuous, I think.

  4. I am glad to see an article calling the ‘inequality of income’ chart into question. I would go a bit further than the author and call the chart ‘deliberately misleading’. The notion that income between groups without factoring in the high taxes on top earners or the transfer payments to the lower income contingent of over one trillion dollars is deceptive. And to plot trends showing rising inequality without showing tax, government benefits, the rise of single parent households or the more recent pernicious effects of unemployment and part time employment on the lower tiers is not analysis but propaganda. But the author is to be congratulated for bringing some sense to the topic.

  5. Russ Roberts’ theory of the rise of mother only families with children under 18 is bupkis. Such families proportion to total households rose from 5.6% in 1973 to 6.7% in 1983 to 7.5% in 1993. A 1.9 percentage point demographic swing relative to median household income over 20 years is minor.

    Sources, Census Tables HH-1 and FM-1

  6. It was my experience, over the past thirty five years, that employee compensation has tilted more and more to non-taxable fringe benefits. In most recent years health insurance.

  7. The marriage penalty is quite severe for lower income couples – they can lise housing, health care, and food subsidies – and pay higher taxes – by tying the knot. It may be short-sighted but rational to avoid marriage.

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>