Start the Engines on the Inequality Debate

Posted by Chris Edwards

With the Democrats taking over Congress, most pundits are expecting much debate about income inequality in 2007. Indeed, the debate has already begun in the blogosphere over Alan Reynold’s recent op-ed in the Wall Street Journal.

For other takes, check out econ bloggers Greg Mankiw, Brad DeLong, and Tyler Cowen and Alex Tabarrok’s Marginal Revolution.

A few observations:

Alan’s full paper on trends in income inequality will be released by Cato in the second week in January.
Please join Alan, Diana Furchtgott-Roth, and Gary Burtless for a discussion of income inequality at Cato on January 11.
I believe Alan has uncovered some very interesting information on the use of tax return data to illustrate income trends over time. Trends have been influenced by the rising amount of business income that is now reported on individual tax returns instead of business returns, the 401(k) explosion, and the effects of two types of stock options on reported income.
I’m no expert on income trends, but I know enough to see that there are huge data issues here. You simply can’t look at a raw IRS or Census table and make a hard conclusion about income trends. You need to think about what is included and excluded from “income” at each point in time.
The much-cited Piketty-Saez data on the share of income going to those at the top do not reveal a steady rise over recent decades. Instead, most of the rise comes sharply in a single two-year period, 1987-1988. That should make economists and pundits skeptical about whether the supposed inequality trend is actually related to long-term changes such as international trade or wage premiums for college grads.
I think it’s still an open question whether income inequality has increased or decreased in recent decades, but we’ll see what the experts say on January 11.