The Inequality Debate Continues

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The Inequality Debate Continues

A well-known set of politicians and economists insists that America's top issue is inequality of income, and they believe action should be taken to correct this problem.  Furthermore, the inequality that matters most involves the top 10 percent, or 1 percent, relative to everyone else.  That's precisely the argument Paul Krugman made recently in The New York Times.1

Krugman argues that inequality has dampened income growth among the poor and middle class in recent decades, and he claims, "Inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s."

He calculates that income below the top 10 percent is "about 8 percent lower than it would have been if inequality had remained stable" since 2000.

Such arguments raise three key questions:

  • First, is the alleged growth in the inequality gap related to the top tier real, or is it an artifact created by interpretation of the data?
  • Second, is significant income inequality an inherent characteristic of a strong economy, and could artificially dampening inequality undermine the well-being of people across the economic spectrum? 
  • Third, what is the income inequality data really telling us, and what, if anything, should be done about it?

Let's start by looking at the interpretation of the data

Krugman uses a spreadsheet from University of California economists Thomas Piketty and Emmanuel Saez.  However, his calculations don't properly account for capital gains.  If he had consistently included capital gains and ranked people using the income measure including these gains, he'd have discovered that income of the bottom 90 percent was just 5 percent lower due to increasing inequality. 

More importantly, using the data excludes most cash and noncash transfer payments and doesn't take taxes into account.  In other words, it ignores the very tools already in place to mitigate inequality. 

The Congressional Budget Office recently updated its own inequality figures to 2010.  It finds that after redistribution, the bottom 90 percent's share rose from 64 percent in 2000 to 66 percent in 2010.  The bottom 60 percent's share rose too, as did the bottom 20 percent's. 

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