Was the Panic over ‘Income Inequality’ All Based on a Mistake?

By Brad Polumbo

Wednesday, December 20, 2023

 

Few topics have animated more intense mainstream-media coverage and outrage from progressive politicians than the idea that income inequality has skyrocketed over the past 60 years in the United States. The left-wing senator Bernie Sanders, for example, has decried income inequality as the “great moral, economic, and political issue of our time.” Meanwhile, CNN coverage suggests that “America is suffering from ever-worsening income inequality.”

 

But what if this was always all based on a series of mistakes?

 

That’s the radical implication of a groundbreaking new study published in the prestigious, peer-reviewed Journal of Political Economy out of the University of Chicago. In it, authors Gerald Auten and David Splinter find that, when accurately measured, “income inequality” has actually barely changed since 1962.

 

How could this narrative have gotten things so incredibly wrong?

 

Well, as Auten and Splinter explain, research from a leftist economist named Thomas Piketty has driven most of the media coverage and public discussion over income inequality. His research looked at U.S. income-tax returns and reported massive increases in the share of income being earned by the top 1 percent amid near stagnation for the bottom half of earners. But it turns out that Piketty’s research, which made him something of a media star and was uncritically parroted by journalists and the political class, is rife with errors and deeply flawed in its methodology.

 

Piketty’s widely reported 2003 study, for example, found that since 1962 the income share earned by the top 1 percent more than doubled. But it reached this conclusion by looking at individual income-tax returns.

 

Notably, income-tax returns don’t account for “government transfers” (existing welfare and benefits programs) nor do they account for nontaxable job benefits such as health insurance and retirement plans. They also fail to capture a significant portion of national income that doesn’t show up on individual income-tax returns. As a result of these and other shortcomings, Auten and Splinter conclude that this approach provides a “distorted view of income inequality levels and trends.”

 

Their own comprehensive analysis, which corrects for all these issues and examines after-tax, after-transfers income levels — in other words the reality Americans actually experience — finds very different results. Rather than doubling, they find that the share of income earned by the top 1 percent increased only 0.2 percentage points since 1962.

 

That’s . . . not exactly the meteoric rise in income inequality that we’ve all heard so much about.

 

They also find that the supposed stagnation plaguing the bottom half of American earners no longer exists once you look at post-tax, post-welfare data. Auten and Splinter report: “Instead of real per capita incomes of the bottom half of the distribution appearing unchanged since 1979, we find that after taxes and transfers they increased by two-thirds.”

 

Unfortunately, their more accurate research is unlikely to receive a fraction of the attention that Piketty’s did because it’s not useful for ideological progressives. The narrative of soaring inequality helps progressive media activists make the case for the radical redistribution of wealth advocated by Senator Bernie Sanders, Senator Elizabeth Warren, and their ilk.

 

“​​Piketty and his co-authors have made a habit of pushing out deeply suspect statistical claims about rising inequality by taking them to ideologically friendly reporters,” economic historian Phil Magness told me. “Journalists, in turn, use Piketty’s stats to stoke a political narrative about skyrocketing inequality. They then make the case for tax hikes to combat the illusion of a problem that they just created by promoting Piketty’s stats without proper scrutiny.”

 

“Meanwhile, more-accurate and methodical inequality metrics take years to produce and are stuck playing catch-up to the Piketty/media–established narrative,” he concluded. “Most other measures show a modest rise [in inequality] at best.”

 

Other experts think the jury is still out on just how much income inequality has changed in the United States over the past 60 years.

 

“The proper takeaway from the literature is that we do not have a good estimate of what has happened to inequality,” economist Brian Albrecht, who has analyzed the research in this area, told me. “The problem is that the most sensational number gets the headlines. So if ten economics papers find numbers between zero change and doubling, the media will focus on the doubling result.”

 

So, the real lesson from this new research is not that income inequality is definitively a nonissue in the United States. It’s that any time you see headlines touting drastic statistics that perfectly suit one side’s ideological narrative, a healthy dose of skepticism is due.