The Most Important Economic Chart in American Politics ... is Kind of Misleading
Some version of the above chart is familiar to anyone who’s read a news story about income inequality. It apparently shows the pre-tax income growth of the top 1% rocketing higher over the past 40 years, the 99% not so much. Powerful prima facie evidence for those promoting the “rich getting richer by taking all the money” explanation for middle-class income stagnation.
But there might be more to the story. Economist Russ Roberts points out that at the same time the growth rate in family income was flattening from 1973 through 1993, there was a big increase in (a) the divorce rate and (b) the number of households headed by women. This was especially true among poorer families. And Roberts contends this had a huge impact on data showing middle-class income stagnation: “That demographic change is going to slow the average measured rate of growth, especially when those families are disproportionately created out of married families that are poorer than the average to begin with.” And this:
So during a time when individual income is actually growing, a rise in the divorce rate, especially among families below the average income, is going to pull down the measured rate of growth. … This has nothing to do with having fewer children or spreading income over a smaller number of people. It’s a result of the divorce rate that leads to measured household income being a misleading representation of what is going on in the economy. … This is important because the measured gains in income of the bottom 99% shown here are roughly zero in the 1980′s, a decade of healthy economic growth. This leads people to conclude that the top 1% got all the gains during that decade. I think that is absurd. My claim is that much or all of this depressing claim is a misreading of the data caused by demographic changes.
Interestingly, Roberts ran this idea past the University of Chicago’s Bruce Meyer, a scholar who has done a lot of great work income and consumption inequality, during a 2011 EconTalk episode. Here is Meyer’s reply: “Well, the share of families headed by single mothers hasn’t gone up that much in the last 10 years. So what you’re describing could be true more historically.”
Indeed! Rising inequality as a historical artifact of the 1980s is very much in keeping with a variety of research suggesting inequality between the bottom fifth and the middle fifth has not grown since the Reagan years. That may also be true of inequality at the top. Using a more comprehensive after-tax, household-size adjusted income definition, one that includes yearly accrued capital gains, health benefits, and transfers among other things, “dramatically reduces the observed growth in income inequality across the distribution, but most especially the rise in top-end income since 1989,” according to researchers Philip Armour, Richard Burkhauser, and Jeff Larrimore. Their research, along with that of Meyer, also suggests average median incomes are up by 40% or so since the 1970s. ( Also interesting: Highly regarded research from the Equality of Opportunity Project found “a high concentration of income in the top 1% was not highly correlated with mobility patterns.”)
The bottom line: Income inequality will likely be a big issue in the next presidential election. Now would be a good time to start getting our facts straight about it and to further the analysis beyond a single chart.