June 3, 2014

INCOME INEQUALITY NUMBERS NOT WHAT THEY SEEM:

The trouble with “market income,” he notes, is that it ignores taxes, most fringe benefits (mainly employer-paid health insurance and pensions) and government transfers (Social Security, Medicare, food stamps and the like). All these affect inequality and living standards. So does the slowly shrinking size of U.S. households. Smaller households mean that a given amount of income is spread over fewer people. Per capita incomes rise. Two people with $75,000 are better off than four people with $75,000.

Correcting for these shortcomings alters much of the conventional wisdom, says Burtless. The Congressional Budget Office makes many of the needed changes in its studies of income distribution and tax burdens. It finds that inflation-adjusted after-tax incomes have not stagnated for most groups. For the poorest fifth of Americans, they rose about 50 percent from 1979 to 2010. For the middle 60 percent of Americans, gains over the same period averaged about 40 percent. In any year, tiny increases may be barely detectable; there may even be declines. But over time, gains are significant.

Nor is today’s income distribution as skewed as in the 1920s, says Burtless. We have a welfare state now; we had none back then. “In 1929 government transfer payments to households represented less than 1 percent of U.S. personal income,” he writes. “By 2012 they were 17 percent of personal income. . . . Everything we know about the distribution of government benefits suggests they narrow income disparities.”

The Piketty-Saez estimates of “market income” may have reflected the 1920s’ actual income distribution, because the market was all there was then. Now, its role is tempered.

That’s by no means all — or even mostly — good, but it does make the “inequality” comparisons between now and then misleading at best.