Tuesday, December 17, 2013

on income inequality...

There are at least three points to make here.

The first is statistical. A simple income inequality measure is, at best, incomplete. Are we talking about individuals or households? (See: the attached link.) How do we deal with other income (e.g., capital gains)? Are we talking about pre or post-tax and/or transfers? In other words, what are we trying to measure? 

The P&S study goes a step further and follows the trends over time. That's somewhat interesting, but most people are more interested in how a poor person in 2002 is faring ten years later. For example, the most extreme possibility, from their data, would be that every person in the lowest quintile in 2002 happened to be in the highest quintile by 2012-- and had been replaced by other people (e.g., new graduates from high school and college or those who have fallen on tough times). By construction, their data tell us *nothing* about the dynamics in the system. 
As an economist and a teacher, this is a topic I cover frequently-- and often is a surprise for students. It's not brain surgery, but many of them had never considered these points. Unfortunately, the more useful data are much more difficult to garner. You need to follow people for ten years, instead of taking a quick snapshot once every ten years.
The second is a matter of preferences. On the spectrum of such things, people will differ in how much they care about dynamics vs. statics; long-run vs. short-run; poverty vs. inequality. My preferences have a greater concern for the former in each pair, but many people are more concerned about the latter.

As an economist, I don't spend much time working on people's preferences. But, still, it's interesting-- and something to know and maybe try to measure. I've done some informal work-- and there's a mature literature-- on these topics. 

For example, what if you offered people this scenario: drop all of the (inflation-adjusted) incomes above-- those making more than $40,000 to 190 * the square root of their current income; and those making less than 40% by 5%. This would greatly reduce income inequality, but increase poverty and reduce standards of living across the board. Some people would immediately think this is outrageous; others would happily and quickly take the deal (in the name of improved equality); others would wrestle with it before deciding.

Third, in any case, now what? Well, we can start by thanking President Bush and President Obama (check out the P&S study on "the recovery"!). But aside from snarkiness and wishful thinking about President Bush/Obama and his Keynesian/interventionist/regime-uncertainty-enhancing Congresses.

If we want to deal with poverty and/or inequality, do we start with fundamental K-12 school reform-- the policy that has the most direct impact on the skills of lower/higher income people? 

Do we address or at least acknowledge the deterioration of family structure/stability that have devastated children and crushed the household income inequality numbers? (See: the attached link. Just looking at the statistic: what happens to the numbers when a lower-middle class family divorces or fails to marry? Hey, we've had a bunch of that over the past 40 years. Another reason why concerned people need to read Murray's Coming Apart.) 

Do we want more transfer of income and wealth? Well, at the least, we should be looking at post-transfer and post-tax income distribution numbers to inform that discussion. And so on.

Hope that's helpful...


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