90 Miles From Tyranny : Debunking Income-Inequality Research

Thursday, September 12, 2019

Debunking Income-Inequality Research

Barack Obama proclaimed income inequality to be “the defining challenge of our time” in a 2013 speech. Inequality continues to be a hot political topic and serves as the pretext for recent proposals floated by various politicos like a 70 percent marginal tax rate, student loan forgiveness and universal day care.

Indeed, couched in language like “not everyone is sharing in this prosperity” (Sen. Amy Klobuchar) and “the economy … is working for a thinner and thinner slice at the top” (Sen. Elizabeth Warren), the subject received its fair share of attention at last week’s Democratic debates.

Such high political stakes make it even more concerning that the majority of income inequality research is so misleading.
Snapshot in Time

Most income inequality data represent merely a snapshot in time. Of course, people move about income levels through the duration of their lifetime. Today’s “low-income” individual may be a recent college grad from an upper middle-class family merely working an entry-level job on her way to a lucrative career. Or consider a retired couple with pension plans, savings, investments, a paid-off house and other assets. They may have little “income,” but they have enough wealth to afford a comfortable lifestyle.

Conversely, today’s “high-income” earner may be a small business owner who struggled for decades and finally had a successful year. Indeed, according to Tufts University economist Gilbert Metcalf, “higher-annual-income groups are likely to contain some people at the peak of their age-earnings profile for whom peak earnings are a poor measure of annual ability to consume.” That is, someone may put together a few years of high earnings that don’t reflect his or her long-term well-being.

In short, the people captured in the “low-income” category at a given moment in time may not necessarily be poor, and vice versa. Snap-shot income measures in no way tell us anything about the financial well-being over the lifetimes of the people being studied.

For instance, University of Michigan-Flint economist Mark Perry examined US census data to confirm that “more than 3 out of 4 households in the top fifth of (income-earning) households are in their prime earning years between 35-64 years old.” He continued, “The lowest quintile households are more than 1.5 times as likely to be younger (under 35) as the highest quintile households, and more than three times as likely to be old (65 and over).”

In other words, younger, less experienced workers earn less than their older, more experienced counterparts. Should this type of “inequality” be considered “the defining challenge of our time”?

In sum, simple “income” statistics often provide a misleading snapshot of citizens’ financial well-being, and thus provide an extremely poor indicator upon which to base policy.

Rich Getting Richer and Poor Getting Poorer?

Rarely left out of income inequality “analysis” by progressives is the alleged observation that the rich are getting richer while the poor get poorer.

This proclamation, however, also suffers in large part due to a static view of the data.

As Russ Roberts, economist at Stanford University’s Hoover Institution wrote in this 2018 article, “the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time.”

A far better measure is to measure the same people over time, rather than aggregate figures.

“When you follow the same people over time, you get a very different story from the standard one,” Roberts discovered.

Indeed, “When you follow the same people over time, the largest gains over time often go to the poorest workers; the richest workers often make no progress,” he wrote.

Roberts cites a study published by the Pew Charitable Trusts that examined the Panel Study of Income Dynamics which tracked data on the same people from the late 1960’s up to 2002 that showed “children raised in the poorest families made the largest gains as adults relative to...

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