Proposition: Is Income Inequality a Problem In the United States?

Proposition: Income Inequality Is A Problem In the United States


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Apr 16, 2011

Affirming the Proposition: Income Inequality is a Problem in the United States (Closing Statement)

In my original post, I argued that income inequality was a problem because “60% of the difference in average income between 1979 and 2007 is accounted for by the top 1 percent of households” and that “most American households have seen little gain in income in the last three decades despite rising productivity growth.” Instead of directly refuting my claims, Mr. Weinberger has gone on the offensive, accusing me of presenting inaccurate statistics, arguing that inequality estimates are “exaggerated”, and presenting alternate data in an attempt to show that income inequality doesn’t matter.
In this final post, I will show that Mr. Weinberger’s repeated attempts to deny income inequality’s existence are unpersuasive, and his arguments as to why inequality is not a problem have been rudimentary at best.

In his rebuttal, Mr. Weinberger argues that the data I present in my opening statement from the Census Bureau and the Congressional Budget Office (CBO) are pointless since “those income statistics don’t include benefits” or transfer payments. What Mr. Weinberger is suggesting is that the statistic we should really be looking at is disposable income ([market income + transfer payments], after taxes). From a statistical standpoint, it makes sense to focus either on market income – which doesn’t include transfer payments or taxes – as the Census, CBO, and Piketty-Saez data do, or disposable income. The difference is whether one is trying to analyze pre- or post-tax income inequality. So it would be perfectly acceptable for one to look at disposable income statistics, yet the Stephen Rose evidence that Mr. Weinberger presents not only has serious flaws but doesn’t even fit Mr. Weinberger’s own criteria: Mr. Rose never says a word about including taxes or transfer payments. And Mr. Weinberger’s evidence from Alan Reynolds suffers from a more serious problem: Mr. Reynolds defines income as personal income from the National Income and Product Accounts (NIPA) which adds transfer payments from the government to market income but doesn’t subtract taxes.

And in case anyone is wondering, the disposable income distribution doesn’t look much different from what the Census, CBO, or Piketty-Saez data suggest. The NIPA accounts show that transfer payments only increased by 2.3% as a percentage of personal income from 1980 to 2004 while the federal tax burden on the top 1% – the percentage of income that a family in the top 1% pays in federal taxes – has shrunk from 44.4% in 1980 to 30.4% in 2004. Because the decrease in the tax burden at the top far outweighs the increase in transfer payments at the bottom, the top 1%’s share of America’s disposable income has likely more than doubled since 1979. Indeed, when the Organization for Economic Cooperation and Development (OECD) looked at the distribution of disposable income in the United States compared to other advanced nations, it found that the US had the greatest amount of inequality of them all.

Even Mr. Weinberger’s point on how average income statistics can be misleading misses the forest for the trees. It’s true that drawing conclusions by looking at the average income of the entire distribution isn’t fair, but that’s exactly why I showed the divergence between mean and median income growth since 1979 in Figure 3 (which Mr. Weinberger ignores). More to the point, Figure 2 shows the percent change in average incomes within certain percentiles of the distribution, not average incomes overall, so the “average income” critique has no ground to begin with.

Mr. Weinberger then argues that Figure 2 “amplifies economic inequality” because “the numbers in each segment of the various income groups…are unequal.” He then presents his own chart, splitting up the distribution equally by quintiles. For starters, anyone familiar with math knows that the chart doesn’t “amplify economic inequality.” Rather, it gives a better picture of where the inequality is taking place. Second, splitting up the chart this way shows how income inequality is a much bigger problem within the top 1% (and higher) than in the rest of the upper quintile.  For example, Figure 2 shows that the percent change in average incomes from 1979-2005 for the top 10-5% was 46 percent. But for the top 0.01%, it was 384%. You could, as Mr. Weinberger does, average all the numbers out in the upper quintile to get a much more “equal-looking number”: but, ironically, all that does is mask the gigantic income increases at the very top of the distribution. And Mr. Weinberger accuses me of presenting inaccurate statistics?

Mr. Weinberger’s last point is that “the overall wealth distribution has not changed since 1922.” Never mind that Mr. Weinberger’s chart doesn’t actually show the entire distribution of wealth. And forget, for a moment, that the chart actually proves my point about growing economic inequality since 1979 (the top 1% had 20.5% of the wealth in 1979 and 34.6% in 2007). But as long as we’re talking about presenting misleading statistics, do I really need to point out that the source of Mr. Weinberger’s chart comes from economist Edward N. Wolff, author of the book, “Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It”? Any guesses as to whether Mr. Wolff agrees with Mr. Weinberger’s conclusion that the distribution of wealth hasn’t changed in about a century? Here’s a snippet from the introduction of Mr. Wolff’s book:
“Examination of the data on the wealth distribution leads to a disturbing question: Is America still the land of opportunity? The growing divergence evident in the income distribution is even starker in the wealth distribution. Equalizing trends during the 1930s through the 1970s reversed sharply in the 1980s. The gap between haves and have-nots is greater now – at the start of the twenty-first century – than at any time since 1929. The sharp increase in inequality since the late 1970s has made the wealth distribution in the United States more unequal than it is in what used to be perceived as the class-ridden societies of northwestern Europe.”
But that doesn’t stop Mr. Weinberger from presenting the evidence as if Mr. Wolff agrees with him. Even the website Mr. Weinberger links to in order to prove his point argues that
“In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers).”
In short, wealth is even more concentrated in the hands of the very rich than income. That’s also the conclusion that the OECD reached in the paper I linked to earlier. To claim otherwise is not only disingenuous, but it ignores a plethora of research on the wealth distribution (including Mr. Weinberger’s own sources!).

One final note, to reply to a point made in comments regarding the effects of tax changes on shifting incomes: this was covered in the Piketty-Saez rebuttal to Alan Reynolds I linked to in my last post. I’ll paraphrase their argument here.

Mr. Reynolds argues that the very rich used to receive a large portion of their income as corporate income or from realized capital gains in the early 1980s, then promptly switched to ordinary income when income tax rates were lowered. The implication is that while reported income went up, capital gains income went down, and the entire increase in income at the top is just one giant illusion. Yet the data show that the top 1%’s share of total income, excluding capital gains, was 8.03% in 1979 and 18.29% in 2007; when capital gains are included, the income shares range from 9.96% in 1979 to 23.50% in 2007. In each case, the top 1%’s 2007 income share is slightly more than double its 1979 share (an increase of 128% from 1979-2007 excluding capital gains vs an increase of 136% including capital gains).

These results suggest that it doesn’t matter much to the income inequality debate whether income shifting happened or not because the polarization of the distribution is present whether capital gains are included or excluded. But this should come as no surprise: public economics literature suggests that while the taxable income of the very rich is quite responsive to tax rate changes in the short run, it is only because it reflects a change in the timing of compensation in the year of a tax change, not a permanent increase/reduction in taxable income.

In summary, the evidence that has been presented in this debate on whether income inequality is a problem overwhelmingly favors affirming the proposition. When voting on the proposition, one should ask if it’s a problem that 60 cents of every dollar of average income earned in America over the past thirty years has gone to the top 1% of households (a point Mr. Weinberger never refutes). If that’s not a problem, then at what point does it become one?

Recall from Mr. Weinberger’s opening statement where he framed the debate in terms of economic justice – the harder you work the more you will earn – and that “rather than begrudging the rich, we should be thankful that we benefit from their prosperity.” Notice that Mr. Weinberger can’t admit that his definition only fits up to a point: no doubt America rewards hard work, but Mr. Weinberger’s premise assumes total equality of opportunity even though our society, demonstrably, doesn’t produce anything close to that. So even if one were to operate under the “economic justice” framework as Mr. Weinberger does, one would have to be in favor of radical changes to American society. But Mr. Weinberger isn’t. In this context, Mr. Weinberger has lost the debate on his own merits.

At some level, I’m not shocked: refusing to acknowledge the obvious inequalities in income and wealth allows Mr. Weinberger to pretend like he lives in the world his political ideology preaches. The fact is, even if I were to convince Mr. Weinberger that income inequality does in fact exist, the presence of economic inequality in America isn’t really what matters to Mr. Weinberger. What matters is whether the facts gel with conservative dogma. And of course, they don’t.  

Read Mr. Weinberger's Closing Statement

Read Mr. Mitchell's Rebuttal

Read Mr. Weinberger's Rebuttal

Read Mr. Mitchell's Opening Statement

Read Mr. Weinberger's Opening Statement

1 comment:

  1. Mr. Mitchell-

    I am a conservative and did my best to come into this debate open-minded. I originally sided with Mr. Weinberger, but your last post on this topic was outstanding. You answered my question about transfer payments and convinced me that we have an income inequality problem in this country. Thanks for all the helpful thinks to papers and such...this is fantastic work.

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