A few years back I got so exasperated reading a Journal of Economic Perspectives piece on income inequality (by Emmanuel Saez and Peter Diamond) that I did a post calling it “propaganda.” I probably shouldn’t have used that term, but I was reminded of my frustration when reading a very good Alphaville post by Cardiff Garcia:
The issue of whether US inequality has climbed since the recession of 2008 has been relitigated this week. A short analysis by Stephen Rose claimed that income inequality had actually fallen, assigning the credit to public policy.
David Leonhardt of the New York Times discussed Rose’s findings, followed by further analyses and critiques from Ben Walsh and Nick Bunker. I’ll present the findings first before adding my own thoughts at the end.
Mainly in response to the heavily cited claim by Emmanuel Saez that 95 per cent of the income gains in this recovery have gone to the top 1 per cent of earners, Rose emphasizes a couple of broad points.
There are two problems with the 95% claim, one has already been discussed by David Henderson, while the other is often overlooked. David pointed out that when evaluating income equality you want to remove cyclical effects, as it’s a long term problem. It’s not unusual for the share of income going to the rich to fall during recessions (as capital gains plunge), and then rise during expansions. It would make more sense to compare 2014 to a year with similar unemployment, say 2004.
The less often discussed problem is that talking about shares of growth can be very misleading, especially when growth is slow. I’m going to give an extreme example, just to make the point more obvious.
Suppose nominal income and the CPI rose at roughly the same rate between 2004 and 2014. In that case real income would be roughly unchanged. But let’s also suppose it wasn’t completely unchanged, just roughly unchanged. More specifically, assume real income rose from $15,000,000,000,000 to $15,000,000,010,000. That is, real income rose by $10,000.
Let’s suppose that in 2004 Ray Lopez worked at a car wash in LA, making $10,000/year. In 2014 he had two car wash jobs, and was working much harder. Assume his real income had risen to $18,000.
Now here’s my question: Is it accurate to say that between 2004 and 2014, 80% of the entire the gain in real income for the United States of America went to Ray Lopez, car washer in LA? You’re damn right it’s accurate! And I’m willing to assume that the cited claim by Saez is also accurate.
But there’s another question that goes beyond accuracy; is it misleading? To me it’s obviously misleading to say that one car washer in LA received 80% of all the real income gains in America, even if my hypothetical data were true. That’s because one could say the same thing about his cousin, if she had gone from doing one house cleaning job to two, with the same $8000 gain in real income. Indeed I would have earned more than 100% of all real income gains, as my real income rose by more than $10,000 over that decade. Any time an aggregate doesn’t change very much, but there are significant changes to the components within that aggregate, there are lots of ways of slicing up the data to create misleading impressions. Presenting data that way may not be propoganda, but it certainly does more to confuse than enlighten.