U.S. Income More Equal than Advertised
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Critics of Piketty & Saez highlight errors in their methodology, such as excluding gov’t transfer payments from national income calculations. Adjusted figures reveal a much flatter curve in income distribution.
James Freeman, "U.S. Income More Equal than Advertised,"Wall Street Journal, December 12, 2018, https://www.wsj.com/articles/u-s-income-more-equal-than-advertised-11544574351
U.S. Income More Equal than Advertised
Remember the 2014 bestseller “Capital in the Twenty-First Century” by French economist Thomas Piketty? Beachgoers in the Hamptons couldn’t be seen without it tucked under an arm if they wanted to be regarded as serious people concerned about the plight of the less fortunate. The dismal tale of exploding inequality and capitalist failure has been a recurring theme in political chatter ever since. But a new report highlights just how poorly Mr. Piketty’s thesis has held up under further study.
This column should note that some scholars saw problems right from the start. In a 2014 Journal op-ed, Harvard economist Martin Feldstein ticked off a series of fundamental errors, including those related to Mr. Piketty’s practice of comparing the incomes of top earners with total national income. “National income excludes the value of government transfer payments including Social Security, health benefits and food stamps that are a large and growing part of the personal incomes of low- and middle-income households,” wrote the Harvard prof.
Then Chris Giles of the UK’s Financial Times examined Mr. Piketty’s work and found that “the rock-star French economist appears to have got his sums wrong.” He added:
The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings... The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.
Now a new report from the Urban Institute goes back further, to Mr. Piketty’s influential research with University of California, Berkeley professor Emmanuel Saez published in 2003. Stephen Rose writes:
Piketty and Saez’s findings garnered tremendous attention and were cited repeatedly. But many researchers eventually found problems with Piketty and Saez’s approach and developed income inequality measures that led to different findings.
Phil Magness of the American Institute for Economic Research writes today:
In short, the widely reported explosion of inequality in the past three decades is likely a myth, built upon outdated and flawed statistics... Whereas Piketty and Saez show a massive century-long swing of almost 20 percentage points in the income share of the top 10 percent, the adjusted figures show a much flatter curve with a little over half the variation. Inequality still falls and rises under the revised numbers, but at a comparatively subdued rate. Under the adjustments, the top 10 percent income share seldom strays more than 5 percentage points away from a century-long average of about 35 percent.
Perhaps instead of assuming that we’re in the midst of a surging inequality crisis, we should first settle more fundamental issues affecting the accuracy of our measurements over the past century.
Perhaps we should also focus on ensuring an abundance of opportunity, rather than regarding it as a problem when some people inevitably make more than others.