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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.

  1. EJHill

    Just tell me what you want the statistics to say…

  2. Mark Wilson

    Thomas Sowell has long said that to use “Family Income” or “Household Income” is not to do serious analysis, a fallacy he summarizes as “confusing statistical categories with actual flesh-and-blood people.” 

    Peter coaxed it out of him beautifully on an episode of Uncommon Knowledge.

  3. Bereket Kelile

    I’ve often heard Thomas Sowell say that household figures are bogus because households change over time. Instead, he prefers to track the individual using IRS data. It seems that disagreement is relevant to this topic and I wonder if there is research that looks at this subject using individual data rather than households. Why one and not the other? Is it just a matter of access to data?

  4. Bereket Kelile
    Mark Wilson: Thomas Sowell has long said that to use “Family Income” or “Household Income” is not to do serious analysis, a fallacy he summarizes as “confusing statistical categories with actual flesh-and-blood people.” 

    Peter coaxed it out of him beautifully on an episode of Uncommon Knowledge. · 0 minutes ago

    Great minds think alike.

  5. Mendel

    I seem to recall having this exact same discussion last year.

    And I seem to recall arguing back then that we shouldn’t be getting excited over the fact that tax breaks and government handouts are two of the main reasons income inequality isn’t as bad as it might appear at first blush.

  6. Goddess of Discord

    Supplanting the flattening of the divorce rate, we have an ever increasing proportion of children being born to unmarried parents. I have also long wondered how much the growth in illegal immigration affects the income disparity figures. 

    I also have difficulty with poverty statistics. A family’s poverty status is calculated based on household income and number of family members. Yet the poverty threshold is the same for the 48 contiguous states and Washington D.C.  Granted, a family of four with an income of $23,550 is poor regardness, but I guess that $23,550 will get you more in Mississippi or West Virginia than it will in California. 

    What do you economists think?

    http://aspe.hhs.gov/POVERTY/13poverty.cfm#thresholds

  7. robberberen

    Big Picture Question:

    Even if it’s true that the gap between the rich and the poor is widening, why can’t we simply hang that on the party in power?  Why is it our problem?

  8. Rawls
    James Pethokoukis

    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.

    100% agree. This is a great post.

    Moving forward, what chart should we be using, and what is the tweet-length version of this article? Also, which politician is currently positioned best to make this case?

  9. Johnny Dubya

    Leaving aside methodology and interpretation of the statistics for a moment, and simply focusing on the two trend lines as if the underlying data were sound: 

    To me, the chart looks like it would support claims that one-percenters’ income growth has not significantly outstripped that of the 99-percenters over the long term.  In fact, for much of the later part of the 20th century, it was the 99-percenters who outstripped the one-percenters.

    (This is perhaps one problem with the interpretation of time-series data by someone with a geology background.  In the long run, of course, we are all dead.  In the really long run, the continental plates are subducted, melted, and reconstituted as new continental crust.)

    It would be interesting to see the after-tax income growth.  It would also be interesting to see similar charts for other countries, from Sweden to Saudi Arabia.

  10. Mark Wilson
    Johnny Dubya:

    To me, the chart looks like it wouldsupportclaims that one-percenters’ income growth hasnotsignificantly outstripped that of the 99-percentersover the long term.  In fact, for much of the later part of the 20th century, it was the 99-percenters who outstripped the one-percenters.

    I had the same reaction to the chart when I first looked at it: “What disparity?”  If anything, the 99%ers’ income growth is more stable and seems to be impervious to recessions.  I don’t think the chart is well made.

  11. Petty Boozswha

    Looks like a lot of folks invested their share of the economy’s productivity gains in increased personal autonomy rather than material possessions — the social revolution in what constitutes a “household” makes these statistics worse than lies or damn lies. Are there charts that show an apples to apples comparison over the years? Married, heterosexual nuclear families with two/tree kids? And a breakout of the transfer benefits received by those that reorganize their family structure to take advantage of them would be helpful as well.