Economic Inequality: The Wall Street Journal is Just Wrong

by Bruce Judson on September 14th, 2009

For anyone with even a passing familiarity with issues associated with economic inequality, The Wall Street Journal front page story last week was shocking. Its use of bad data was a misuse of this important forum. In effect, the article says that economic inequality was never really a problem, and even if it is we no longer have to worry about it. These conclusions are just plain wrong.

The Journal article effectively leads the reader to two conclusions: First, any issues that may exist around economic inequality are disappearing, because of the likely decline in the outsize incomes of the top 1% of Americans, those with a minimum income of $400,000. Second, the problem was never really that bad in the first place. Using Census Bureau data, which has been widely discredited for this type of analysis, the article asserts that growth at the top of our society was only slightly higher than for the nation as a whole, saying

The gains at the top didn’t necessarily come at the expense of others, because the economy expanded greatly after 1980, letting incomes grow across the spectrum. But those at the top end rose more rapidly. In 1980, for instance, the income of the top 5% of households was 2.86 times median incomes; by 2007, it was 3.52 times the median. In other words, the gap widened by 23%, Census data show.

Unfortunately, few conclusions could be further off the mark.

In some eras, when America did well everyone did well. However, this has been far from true for the past thirty years. Moreover, as a result of the Great Recession we may have to worry more about economic inequality rather than less.

First, let’s start with what we know about economic inequality.  Scholars have, with few exceptions, reached a consensus that Census Data is not appropriate for measuring high incomes. To ensure the privacy of individuals, the census assumes a maximum individual income of $999,000 or less.  So, it does not capture the true income of oil traders or anyone else earning $100 million, $50 million or five million per year. Second, the Census data does not include capital gains, a central source of the wealth created in private equity and hedge funds. Finally, the Census is based on samples, and the small proportion of wealthy Americans, as compared to the total proportion, further limits the accuracy of its projections.

In response to these limitations, two economists, Professor Emanuel Saez at  Berkeley and Professor Thomas Pickety  at the Paris School of Economic developed a highly regarded technique for measuring the distribution of income, including capital gains, by using IRS data. So, the Saez-Pickety data goes back to 1913, when the modern income tax was introduced. Saez updates the data each year, and the analysis of the most recent data, for 2007, was released in early August of this year.

The validity of Census Data for measuring economic inequality was the subject of intense discussion several years ago, when Alan Reynolds. of the Cato Institute, wrote an article in The Wall Street Journal, titled The Top 1%… of What? in December, 2006 similarly asserting that economic inequality had been overstated.  In response, Saez  posted a detailed open letter on his Web site, explaining  why Census Data was entirely inadequate for measuring income inequality and refuting Reynold’s claims.  In the open from Saez and Pickety, they state:

“The … Census Bureau estimates are based on survey data which are not suitable to study high incomes… In contrast, tax return data provide a very accurate picture… Our key contribution was precisely to use those tax data to construct better inequality estimates.”

“In sum, our work has shown the top 1% income share has increased dramatically in recent decades… [C]onservatives like Alan Reynolds … prefer to dismiss the facts about growing income inequality rather than face the debate on income tax progressivity at a time of growing economic disparity.”

Before joining the Obama Administration, an independent study by Larry Summers based on Congressional Budget Office data, similarly concluded that economic inequality had increased massively in past decades. In a June 2007 article in the Financial Times Summers wrote:

Indeed, in a recent paper on tax policy prepared for the Hamilton project, my collaborators and I concluded from Congressional Budget Office data that, since 1979, changes in income distribution had raised the pre-tax incomes of the top 1 per cent of the population by $664bn or $600,000 per family – an increase of 43 per cent.By definition what one group gains from changes in the distribution of income another group must lose. The lower 80 per cent of families are $664bn poorer than they would be with a static income distribution, which works out to $7,000 less in income per family or a 14 per cent loss.

To put this in some perspective, the total gain in median family incomes adjusted for inflation between 1979 and 2004 was only 14 per cent. If middle income families had shared fully in the economy’s income growth over the past generation their incomes would have risen twice as rapidly!

With few exceptions, scholars have concluded the Saez-Pickety data is correct.   The basic conclusion of this data, that the nation suffers from extreme and growing income inequality is essentially irrefutable.  Moreover, when the latest data was released a few weeks ago, Paul Krugman called the findings of growing income inequality “truly amazing” in a blog post titled Even More Guilded.

So, the Journal based it’s claims on data that is, with very few exceptions, considered essentially worthless for measuring income inequality.

Now, where do we really stand: The data released in August showed that, by some measures, the nation was at its highest level of income inequality in its history.

In 2007, the percent of total income received by the top 10% of families was 49.74%, or effectively one-half of the nation’s total. This compares to 1980, when the top 10% received 34.63%, or about one-third of all income.

By looking at Census data, the Journal article finds that “the gap” in median income between the top 5% of households and all U.S. households “widened by 23%” since 1980. Such a finding may not be good, but it does not seem so extreme. This supports the unconscionable conclusion that “The gains at the top didn’t necessarily come at the expense of others, because the economy expanded greatly after 1980, letting incomes grow across the spectrum.”  Of course, as already noted, the Census Data is completely unreliable for measuring these types of changes.

The Pickety-Saez data paints a very different picture. It shows that the average income in 2007 dollars (which adjusts for inflation) for the top 5% of households grew from $134,800 in 1980 to $220,100 in 2007; an increase of 63%. In contrast, over this 27 year period, the average real household income of the bottom 90% of families increased from $29,800 to $32,400; less than 9%.

So, real income among the top 5% grew at seven times the rate of income of the bottom 90% (63% as compared to less than 9%), an extraordinary difference of 600%.  Second, these percentage increases reflect much higher absolute numbers. The average income growth of the top 5% in a single year between 1980 and 2007 was almost $3,200, which is more than the $2,600 average income growth of the bottom 90% for the entire 27 years. As others such as Joseph Stiglitz have noted, the vast majority of Americans have been waiting three decades for a decent raise.

It is also impossible to understand how The Journal could seriously assert that the income gains at the top occurred because of a widely shared growing pie, as opposed to one group taking a far larger piece of the growth.

Once again this is at odds with the Saez-Pickety data, whose conclusions are  far more consistent with the real life experience of today’s struggling middle income households.  The data released by Saez in August shows that between 1993 and 2007, the top 1% of Americans received 50% of the entire income gains in the nation. In the shorter period between 2002 and 2007, the top 1% received an even more concentrated 65% of the entire income gains in the nation. In fact, on September 9th, the day before the Wall Street Journal article ran, the Council on Budget Priorities and Policies, released a detailed analysis of this data, titled, Top 1 Percent of Americans Reaped Two-Thirds of Income Gains in Last Economic Expansion. This analysis, or its implications, was nowhere to be found in the Journal story.

In addition, I am forced to wonder about what interviews the reporters conducted before releasing the story.  The central argument in the article, that the percentage of total income received by the top 1% will decline,  gains enormous legitimacy by stating near the start of the piece that  “Mr. Saez and other economists expect income going to the top 1% of taxpayers…will drop..by 2010.” I cannot speak for Professor Saez, and I don’t know whether he was interviewed for the Journal article, but any reading of his work suggests that the article provides a skewed representation of his views.

In a short paper accompanying the updated August data, Professor Saez concludes that “the most likely outcome is that income concentration will fall in 2008 and 2009.” But, he follows this conclusion by stating that in the absence of significant policy actions such declines will be temporary:

“Based on the US historical record, falls in income concentration due to recessions are temporary unless drastic policy changes, such as financial regulation or significantly more progressive taxation, are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration till the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.” (references to charts omitted).

My  intense study of past history, which will soon be released in It Could Happen Here is in line with Professor Saez’s conclusion.  Once  income concentration becomes a reinforcing cycle of the kind we are witnessing, it is never stopped by pure market forces. Only extensive government intervention, of the kind that will inevitably create high controversy, reverses this trend. Indeed, the policies of the New Deal, which led to the rapid decline of inequality, reflected bitter and hard fights.  Time magazine reported in April 1936, that:

Certainly no President in recent times has so bitterly aroused the enmity of a whole class as Franklin Roosevelt has aroused the economically substantial element of the U. S. Regardless of party and regardless of region, today, with few exceptions, members of the so-called Upper Class frankly hate Franklin Roosevelt.

It’s possible that the growth in income concentration may take a brief respite, but without substantial intervention the long-term trend toward ever greater concentration will march forward.

When the historians Will and Ariel Durant completed their massive multi-volume study of history, encompassing the broad sweep of time from ancient Greece to the modern United States, they subsequently wrote a short book of 102 pages titled The Lessons of History, in which they sought to identify the broad trends that are common to civilizations.  The chapter economics and history is all of six pages, and the bulk of it addresses the inevitable concentration of income that occurs in societies over time. The Durant’s bluntly conclude that such concentration ultimately leads to redistribution of some type, by “violent or peaceable” means.

We conclude that the concentration of wealth is natural and inevitable and is periodically alleviated by violent or peacable partial redistribution. In this view, all economic history is the slow heartbeat of the social organism, a vast systolic and diastole of concentrating wealth and compulsive recirculation.

The Journal article give us the false impression that, counter to all historical evidence, we no longer need to worry about economic inequality. It will take care of itself.

Finally,  it is not even clear that the central point of the article is correct. Yes, the rich are suffering relative to the past. However, the middle class and underclass are suffering as well. Jobs continue to disappear and housing could still decline substantially. With each job loss or foreclosure, another family joins the ranks of the former middle class. Simon Johnston, in a New York Times blog post, The Two-Track Economy: Inequality Emerging From Today’s Recession, among others, has pointed out that the Great Recession may be creating an even less economically equal society:

The overall numbers on outcomes by groups can get complicated (here’s a partial guide), but the simple version is: The top 10 percent of people are going to do fine, those in the middle of the income distribution have been hard hit by overborrowing, and poorer people will continue to struggle with unstable jobs and low wages.

Can the richest people spend enough to power a recovery in overall G.D.P.? Perhaps, but is that really the kind of economy you want to live in?

The United States has, over the past two decades, started to take on characteristics more traditionally associated with Latin America: extreme income inequality, rising poverty levels and worsening health conditions for many. The elite live well and seem not to mind repeated cycles of economic-financial crisis. In fact, if you want to be cynical, you might start to think that the most powerful of the well-to-do actually don’t lose much from a banking sector run amok — providing the government can afford to provide repeated bailouts (paid for presumably through various impositions on people outside the uppermost elite strata).

All of this suggests that we have a lot to worry about. On its front page, The Wall Street Journal may say that it never happened, and even if it did it is fixing itself. Everything we know suggest that this reading of the past is wrong, and such a future –without determined government action — is unlikely. The larger worry is that we will emerge from the Great Recession as a society sharply divided between a small privileged upper class, and an underclass that lacks basic economic security. What happens then?

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36 Comments
  1. Francois permalink

    The scarcity of comments on this blog is proof positive that an immense majority of Americans are still in deep denial that income inequality is a fundamental component of their actual economic misery.

    Excellent refutation of the WSJ BTW. I feel compel to comment on one point you alluded to:

    “It is also impossible to understand how the WSJ…”

    On the contrary, it is very possible to explain how…and why. They did it because their conclusions were pre-ordained. If one look back at the WSJ treatment of the topic of income inequality, it is not possible to find an inequality they didn’t like.

    So, all they need to do is ignore any data that won’t fit this belief. They’ll acknowledge it the day they believe it.

  2. Greg permalink

    Rising inequality is a function of a two-tiered education system. Becker and Murphy show that increasing educational attainment in the population is responsible for the rapid rise in incomes among collge/professionally educated population.

    You have two education systems in America – One in the suburbs/private schools. The other a terrible, broken public school system in the inner cities that traps students and offers them no choice but to attend the worst.

    If you’re looking for drivers of this inequality – start there. Otherwise, I see no way to stop increasing inequality unless you want to stunt the education of those who are, at least, receiving it now.

  3. Stelios Theoharidis permalink

    1. I am in agreement the general direction of the article. I’m actually curious whether you are familiar with any scholarship on a possible relationship between the concentration of wealth, social, and political power and speculative bubbles like the last five (Savings & Loan, Telecom, Internet, Crude Oil, Housing) and the sixth in 1929. Excess capital is just looking for somewhere to go, but there is an imbalance between this investment and the ability of consumer markets to absorb the excess capacity created. Extending credit to consumers absorbed this excess capacity for quite a bit of time, but it eventually collapsed as we see now. Concentrated wealth and therefore power also lead to the dismantling of the financial regulatory framework and in many cases regulatory capture, allowing large companies to speculate as they pleased to the detriment of the public at large.

    2. So the haphazard collection of safety nets constructed to appease certain groups within American society (social security, medicare, medicaid, minimum wage) were constructed to cushion against the possibility of a revolution which was a real concern as communism was emerging and labor activism was at its peak. Some groups now cling onto many of these concessions and have interest in maintaining them. Medicare recipients for example often oppose reform fearful that universal healthcare will cause considerable strain their access to service. A boiling point may come but it may pit certain ‘former middle class’ groups against each other.

    Greg. That terrible education system is also abundantly present in the rural areas of the USA.

  4. Goldilocksisableachblond permalink

    The WSJ says:

    “The gains at the top didn’t necessarily come at the expense of others, because the economy expanded greatly after 1980, letting incomes grow across the spectrum.”

    I encourage readers to prove to themselves the fallacy in this statement , by doing a few simple compound interest calculations using different hypothetical scenarios. Here’s one example :

    Assume long-term real , per-capita GDP (i.e.income) growth is 2.4% annually ( pretty close , if not too high , for advanced economies like the U.S.) Now assume that the top 1% garners 10% of the income at TimeZero ( about what their share was in 1980 or so). Then , assume that the top 1% achieves real income growth of 6% annually , on average , over the long haul ( 6% ain’t that much of an increase , right ? They’re the best and the brightest , after all ! )

    What happens ? Around 68-69 years after TimeZero , they are getting 100% of income. Nothing , nada , zilch , is left for the other 99%.

    Crunch the numbers and see for yourselves. Then show your daffy rightwing supply-side friends. It might take some time , and a few beers , before it penetrates their thick skulls , but keep at it. It’s important.

    Of course , you could never reach the point where the top 1% received 100% of the income , because that would be slavery , right ? Something would happen to change the course of events in the interim. In 1933 it was FDR. Today , or tomorrow , it could be Obama , but that won’t happen unless people become educated about the current situation and how we got here. This blog , and I’m guessing , Mr. Judson’s book , is as good a place as any to get started.

  5. NEIL PASSAGE permalink

    Great article on income inequality and Wall Street Journal reporting.

  6. Alex permalink

    Being concerned about income inequality in the abstract makes sense, given John Rawls and distributive justice. However, in works quite differently in practice. The are several reasons why income inequality has increased in the past few decades:

    1) Immigration. The number of immigrants has increased multiple fold, from under 3-4% in the 1970s to over 10% of the population today. Most of our immigrants are either very poor and don’t have high school degrees, or they are from families that would be considered upper middle class in their countries, and have college and advanced degrees. The poor immigrants compete at the bottom for jobs, reducing wages there. Those at the higher end make it easier for higher end business sectors to operate well.

    2) Education. Our education system is horrible, the worst in the OECD by far. When it comes to tetriary education, the only reason it works is nearly all the students at the top schools are from the upper middle classes or abroad. Lots of people are for allowing poor and middle class students into our top universities. Do that, and our colleges will look like our high schools, unacceptable and incompetent.

    Because education is so poor here, those who are somewhat educated (have a college degree, even though the quality of over 90% of US colleges and universities is seriously in queation) make way more money than they would in other OECD countries, and the best educated (top colleges for undergraduate, advanced degrees, etc.) are being very well compensated for work that can’t be done abroad as well, and for which only a few people here can do.

    3) Effeciency. Yeah, I’m sorry, but when the economy is based on rational things, like pay based on performance, weakening unions so they can’t distort economic efficiency (although we’ve failed to stop them in public education, and we know the state of that), as well as having companies that seek to be competitive, many people will be paid less than they would otherwise if the economy was much less efficient, and the state put in more regulations. Check out other countries. Japan’s service sector is very inefficient, and hey, they’ve got life time employment and way more employees than necessary. Could there be a connection? Could there also be a connection that Japanese and German exporters are successful because workers in those industries have not been getting wage increases for nearly a decade, because the government didn’t force them to? Just maybe.

    4) Societal Incentives. If you see that income inequality is pretty large, then you have a clear incentive to work your ass off to get ahead in education, employment, performance, etc, since if you don’t, you will suffer far more than you would otherwise. Its the stick, not the carrot at work. And if you look at the US, people here do work harder, are more competitive, and more entreprenuerial than in other OECD countries. So, it seems to have the right effect on society.

    These all seem like positive things to me, but who knows. I could just be some crazy right winger because I think that 1+1=2, the sun rises in the east, the earth does exert the force of gravity, and other absurd and insane things.

  7. AlanDownunder permalink

    What Stelios said in point 1.

    Inequality means more debt and a larger financial sector – more and more excess wealth employing more and more intermediaries to find more and more borrowers who are less and less creditworthy.

    Our recent inequality spike presaged the GFC just like the gilded age presaged the GD.

  8. Jeff J permalink

    Any comments about this, Mr. Judson?

    http://papers.nber.org/papers/w15351

  9. Mogens permalink

    Mistrust and inequality is not very productive in any society.
    The way we measure economic performance is far too primitive to give any usefull information about the quality of life.
    Consider the following example. In the USA the amount of lawyers pr 1000 inhabitants are far greather than in Denmark, because we generally trust each other. Does those extra misstrust costs allthough they boost the US GNP actually makes anyone (exept the lawyers) any richer or more happy? I doubt.
    Another example. The health system in the USA costs 16% of GNP, and the danish costs about the half. Their performance are almost similar, and the coverage in Denmark is 100%.
    Does that mean, that the addidional costs, increasing the GNP of the USA with about 8% actually makes anyone having a better life?
    We have to find other ways to measure economic performance.

  10. Ffred permalink

    My impression of some opinion columns I have read, by members of the Ayn Rand Institute, is that so-called Objectivists can blind themselves to inconvenient portions of John Galt’s teachings just as so-called Christians can blind themselves to inconvenient portions of Jesus’ teachings.

    This comment was originally posted on Curious Capitalist – TIME.com

  11. bryanfromhouston permalink

    Hu Jintao was interviewed by Fareed Zakaria on his show.

    He noted that all too many people don’t appreciate the full works of Adam Smith.

    The Wealth of Nations gets all the press while The Theory of Moral Sentiments, arguably the more prescient writing, is ignored.

    In his interview, he makes a compelling argument that Americans are too much into the former without understanding the need for balance with the latter. Capitalism on its merit without more cannot be compassionate. Compassion is only manifest from the human spirit and not the invisible hand.

    This comment was originally posted on Curious Capitalist – TIME.com

  12. donthelibertariandemocrat permalink

    I agree with Judson, so I’ll get his book. My solution is a Guaranteed Income. I suppose that I’m different in one respect: I would like a robust Social Safety Net for the poor, and policies that will grow the economy such that fewer and fewer people need the social safety net. In order for that to work, we need a middle class that feels middle class, and not one mishap from penury. That’s the only way to have a smaller govt. Namely, make our citizens wealthier. All our citizens.

    This comment was originally posted on Curious Capitalist – TIME.com

  13. gappy permalink

    I don’t know if this a plug for a former colleague-boss-friend, or a link borne out of authentic interest. In the latter case, my consideration for Fox is diminished. The claims in the Amazon product description are rather tall. For example, the statement "The last time inequality rivaled current levels was in 1928" is based on a single paper, by Picketty [not Pickety, as Judson writes in his blog] and Saez, based on admittedly censored data. It is not true that the precursors of collapses are "extreme economic inequality and an increasingly impoverished middle class". Most definitely this was not the case of several modern-era collapses; more importantly, it was not the case of Russia in 1991 and many european countries in 1989. Even if we believe in this statement, inequality in the US is not extreme (i.e., max or min over a set), unless you define the set to suit your needs. And, is the middle class in the US vanishing? By which measure? I have heard this claim in at least three OECD countries during the past 20 years. I’ll keep an eye on the blog to decide whether to buy the book, but so far it seems an advocacy affair, not quite a research work.

    To those interested in the issue of inequality, this book will provide food for thought from a variety of viewpoints: "Should Differences in Income and Wealth Matter?" (Cambridge U Press). http://www.amazon.com/Should-Differences-Income-Wealth-Matter/dp/0521005353

    This comment was originally posted on Curious Capitalist – TIME.com

  14. Ffred permalink

    OK, at this late hour I couldn’t resist adding my favorite quote:

    John Galt, "An error of knowledge is not a moral flaw, provided you are willing to correct it… but that which you refuse to know, is an account of infamy growing in your soul."

    This comment was originally posted on Curious Capitalist – TIME.com

  15. jfwells permalink

    Four Beats Three : GM’s Chevy Volt has 4 wheels, a battery and nearly unlimited government funding, therefore anything with fewer wheels and a battery that wants some government funding is obviously not a car and doesn’t qualify for any of the funding that GM wants all for itself. Clear?

    I didn’t click through, but if they are referring to the Aptera, it actually isn’t a "car". By having three wheels, it is classified as a motorcycle and is exempt from many of the safety regulations that end up causing cars to be much bigger and heavier.

    That doesn’t mean Aptera shouldn’t get some Government love, though…

    This comment was originally posted on Some Assembly Required

  16. brucejudson permalink

    From Bruce Judson:

    Gappy thanks for taking the time to write about my ideas. Whether we agree or not, what I think is most important is that we have a fair and open debate. One key to a sustainable democracy is lots of discussion and often messy arguments ensuring that everyone feels their voice has been heard.

    A few points related to your post:

    First, to my knowledge I have never met Justin Fox. I left Time Inc. in 1999, now over a decade ago. I suspect Justin was simply making a comment about my varied background, which is somewhat uncommon.

    Next, the full blog post which Justin references provides an extensive analysis of the several economists who have studied economic inequality and the validity of the available data. In fact, the first two-thirds of the article is a fairly extensive discussion of how the Saez-Pickety data has been confirmed over time, and Census Data has been shown (for reasons described in the post) to be inappropriate for measuring inequality.

    As the post notes, before Larry Summers joined the Obama Administration he led a separate independent study that also concluded economic inequality has increased massively over the past thirty years.

    Moreover, the general conclusion, with a very few exceptions, among economists is that the findings of Saez and Pickety are correct. As you may know, Professor Saez received the 2009 John Bates Clark Medal, awarded to the "American economist under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge," in part, for his work in developing a technique for measuring income inequality. So, the validity of this work has been recognized by the profession, with one of its highest awards.

    Yes, we are now at the highest levels of income inequality in the history of the nation. By some measures, it’s higher than 1928. I can understand why you may feel this is a "tall claim" since this truth is hard to accept.

    My book, "It Could Happen Here", which will be released in the first week of October, discusses, in depth both the issue you raised relative to the middle class and the collapse of the Soviet Union.

    The middle class is notoriously hard to define (as noted by the Executive Director of the Vice President’s Task Force) but it’s also almost irrefutable that typical American families are suffering today and in danger of becoming the "former" middle class. By one measure over 75% of middle class families lack the means to survive for even three months in the event of a job loss. In today’s economy that’s a scary thought.

    There are also serious projections that during this Great Recession there will be 13 million foreclosures, that’s one in every four mortgages. There are few things more devastating than the loss of a home. Will we still be the America we value if we foreclose on this many homeowners? It’s something I hope we don’t have to contemplate.

    It’s your right to question everyone’s motives. So, you can certainly question why I wrote yesterday’s article. However, as a nation, I do believe we have become way too cynical. I have spent several years studying and writing about these questions. Isn’t it possible that I wrote yesterday’s article and the book because I thought they related to important issues we should all be discussing?

    This comment was originally posted on Curious Capitalist – TIME.com

  17. gappy permalink

    Bruce,

    thanks for your comment, and of course thanks to Time and J.Fox for hosting this blog. I’ll add a few comments to make my statements more precise.

    First off, as I said, there would have been nothing wrong if Fox had mentioned the book because it was written by an acquaintance. What concerns and interests me is the message. To set the record straight, let me also remark that I never questioned your motives (which are irrelevant) in my comment. Now, onto the subject matter.

    I would summarize your argument as follows:

    1. the middle class is essential to the stability of a society;
    2. excessive inequality threatens the middle class;
    3. in the US, inequality is extreme;
    4. if we do not do something, we run the risk of experiencing a societal collapse.

    I am unconvinced each one of these claims. This does not mean that I think they are false, but that to prove them true, one should muster strong evidence in their favor.

    Regarding the first claim: as you mention, the "middle class" is hard to define. It definitely is wrong to define it as a quantile interval, since this ignores income changes within a cohort of individuals (I was in the last decile only 10 years ago, and now I am in the top decile), conflates different cohorts (the households earning a median income thirty years ago are not the same earning a median income this year), and ignores the effects of immigration, which were strong in the past two decades. It is especially hard to define now, since even the top earners are "working rich" and not rentiers anymore. Defining the working class in terms of absolute income or purchasing power (without considering distribution) is possible, but then we are moving further away from a shared, commonsense definition of middle class. I suspect that the economic concept of class is mostly a rethorical device. I am ready to be proven wrong, but I am not ready to use vague concepts.

    You may argue that it’s not the middle class that is essential to the welfare of a society, but the economic status of its members. In this case I don’t believe that the actual household income statistics bear out the hypothesis of shrinking incomes per individual. We can discuss this ad nauseam, and I am sure that Jared Bernstein would have a different view from Marty Feldstein. I just want to make the point that the subject is far from settled, but changes are a) for the better; b) not dramatic. Here are a few links available links.

    Janet Yellen (Governor, San Francisco Fed): Economic Inequality in the United States, http://www.frbsf.org/news/speeches/2006/1106.html
    Terry Fitzgerald (Sr. Economist, Minneapolis Fed): Just what is the middle class, and other stuff, http://www.minneapolisfed.org/research/economists/staff_display_pubs_papers.cfm?id=365
    Russ Roberts (Professor, George Mason University): Half Full, http://www.invisibleheart.com/Iheart/HalfFull0108.pdf

    You then may argue that it’s not individual welfare level that matters, but its distribution. I disagree. I don’t believe that inequality is the primary cause of collapses or revolutions. Rather inequality AND revolutions are caused by other factors, such as dictatorships, absence of rule of law, physical coercion, etc.
    I would not confuse cause and effect.

    Finally, when I mentioned extreme inequality, you interpreted it as "extreme within US history". I instead intended "extreme across countries". Across all countries, the US does not exhibit extreme inequality, and this inequality (say, as measured by Gini index) is not paired with the overall low economic development of countries with similar inequality levels.

    -Giuseppe Paleologo

    P.S.: Incidentally, I believe that Picketty-Saez is vastly correct, although I would like to see their 1913-1944 results replicated by other researchers. They have fewer available data for these years, and rely on more assumptions. It is very difficult to estimate high quantiles (say, top 1% or 0.1%) from a sample, especially when the underlying income distribution is Pareto (as the authors state in their paper). These are delicate statistical issues and need to be verified. The study by L.Summers you cite doesn’t cover this period.

    This comment was originally posted on Curious Capitalist – TIME.com

  18. Re: Excellent Question…

    The answer, Part A, apparently, is that banks, unlike Detroit automakers, don’t have powerful unions representing bank employees, which directed huge amounts of campaign cash toward electing the current White House occupant, and quid pro quo, expected a century of corporate bankruptcy law to be overlooked while the automakers were overhauled at taxpayer expense.

    Part B, the big banks and investment companies and insurance companies, unlike the automakers, have hundreds of grossly overpaid, well-bonused executives and traders who contributed wheelbarrows full of campaign cash to both presidential candidates last year, knowing one of them likely would win.

    This comment was originally posted on Some Assembly Required

  19. Bill permalink

    Three out of Five Doctors: Here’s another poll that indicates the exact opposite.

    http://www.investors.com/NewsAndAnalysis/Article.aspx?id=506199

    "Two of every three practicing physicians oppose the medical overhaul plan under consideration in Washington, and hundreds of thousands would think about shutting down their practices or retiring early if it were adopted, a new IBD/TIPP Poll has found.

    The poll contradicts the claims of not only the White House, but also doctors’ own lobby — the powerful American Medical Association — both of which suggest the medical profession is behind the proposed overhaul.

    It also calls into question whether an overhaul is even doable; 72% of the doctors polled disagree with the administration’s claim that the government can cover 47 million more people with better-quality care at lower cost.

    The IBD/TIPP Poll was conducted by mail the past two weeks, with 1,376 practicing physicians chosen randomly throughout the country taking part. Responses are still coming in, and doctors’ positions on related topics — including the impact of an overhaul on senior care, medical school applications and drug development — will be covered later in this series.

    Major findings included:

    Two-thirds, or 65%, of doctors say they oppose the proposed government expansion plan. This contradicts the administration’s claims that doctors are part of an "unprecedented coalition" supporting a medical overhaul."

    This comment was originally posted on Some Assembly Required

  20. Bill – Hmmm, a poll by a well known independent foundation published in the New England Journal of Medicine comes to different conclusions than a poll run by a marketing firm for a financial newspaper. Will wonders never cease.
    ckm

    This comment was originally posted on Some Assembly Required

  21. tc125231 permalink

    "Rather inequality AND revolutions are caused by other factors, such as dictatorships, absence of rule of law, physical coercion, etc.
    "

    Is this a religious belief, or do you actuallyb have a data set? I looked at your LinkedIn profile, and, although you appear to have fair quantitative skills, there is no experience that would allow you to make an informed personal judgement on the matter.

    Consequently, I think it is fair to ask for the data set underlying that statement, particularly the level of scrutiny you feel is necessary in other matters.

    This comment was originally posted on Curious Capitalist – TIME.com

  22. gappy permalink

    It is not a religious belief, but this does not mean that I *must* have a data set (interesting inference, though). I also wonder what qualification would "allow" me (another interesting choice of words) to make an informed personal judgement on the matter. Historian? Right-hand man in a small-country revolution? Now I know that, in absence of such qualifications, I must have a data set. As a personal aside, I would LOVE to have a data set for every belief I have.

    I base this belief on what I know about history, which still qualifies as empirical knowledge not religion. I don’t believe inequality is the primary cause of social collapse, and I don’t think a strong case for reducing inequality has been made yet, that is based on the causal connection between inequality and collapse, so Judson’s book fills a gap. As I said, I am skeptical. This doesn’t mean I won’t read the book and change my mind.

    This comment was originally posted on Curious Capitalist – TIME.com

  23. brucejudson permalink

    From Bruce Judson:

    I am excited by all of the serious discussion taking palce here. I want to repeatedly note that what is most important is that we have this discussion, learn from each other, and attempt to learn from each other. It’s my experience that thoughtful questions about your ideas may not change your mind, but they force you to reexamine your beliefs and to get a better understanding of other perspective.

    This discussion is a true example of the virtues of respectful debate.

    Gappy, first, I want to say that I really appreciate your including your real name at the end of your last post. One of my biases is that I believe we should all be openly willing to stand behind what we say. I know that online culture encourages people to maintain anonymity –but I actually think this encourages less thoughtful debate. Of course, there may be employment of other valid reasons why specific individuals are better served by using online "handles." With this belief, I am always BruceJudson in any discussions or comments.

    It seems to me there are times where reasonable people can agree to disagree and we may have reached that point. I would just add three short ideas:

    1.) I am not asserting, and never would, that economic inequality is the only cause of political instability or revolutions. Although rare events, revolutions can be caused by many unfortunate events. I am asserting that economic inequality can be a primary cause and has been in many cases. It Could Happen Here provides the full discussion of the chain of events that economic inequality often unleashes. One of these is typically an economic shock followed by a period of reform. We are in this now, and it similarly occurred after the very high economic inequality in 1928. It’s when this period of reform, if accompanied by dashed expectations about a large segment of the population fails, that nations can encounter serious issues of political stability.

    Unfortunately, it seems to me that, to date, we are far along in this cycle. Hopefully, we will have a successful period of reform. So, an important message of my book is that successful reform is even more important than most people recognize.

    Second, you are correct when you ask what is "extreme inequality?" By U.S. standards we are at an extreme moment. As compared to the rest of the world, we are far less extreme. However, I think that the changes which have occurred over the past 30 years are sufficient to warrant concern.

    Finally, as you know we can view our Gini index ranking as a cup half empty or half full. A few years ago the Harvad Magazine ran an article called "Unequal America" that included explaine dthe inde and our relative position:

    "One widely used measure of inequality is the Gini coefficient, named for Italian statistician Corrado Gini, who first articulated the concept in 1912. The coefficient measures income distribution on a scale from zero (where income is perfectly equally distributed among all members of a society) to one (where a single person possesses all the income). For the United States, the Gini coefficient has risen from .35 in 1965 to .44 today. On the per-capita GDP scale, our neighbors are Sweden, Switzerland, and the U.K.; on the Gini scale, our neighbors include Sri Lanka, Mali, and Russia." (emphasis added) http://harvardmagazine.com/2008/07/unequal-america.html?page=0,1

    So, we have the highest economic inequality of any industrialized nation. We are not yet at the level of Latin America, but we rank near the bottom of the OECD. It seems to me this should be a cause for concern.

    This comment was originally posted on Curious Capitalist – TIME.com

  24. gappy permalink

    Bruce,

    I agree with you: a civil conversation about ideas help us to better understand our own positions, and occasional to change them. If I have to isolate the single biggest source of kepticism I have with the book, it is the thesis that economic inequality is a primary cause of revolutions and political disruption. It is an intensely researched subject. At this point, I think this conversation has achieved the best possible outcome: it clarified the issue and has interested me in the book. I’ll read it when it comes out. If you read the comments in your blog, I’ll drop you a note there.

    This comment was originally posted on Curious Capitalist – TIME.com

Trackbacks & Pingbacks

  1. Links 9/15/09 « naked capitalism
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