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Income Inequality Slugfest

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Well, it’s not quite that bad, but the debate between Alan Reynolds, senior fellow at Cato Institute (among other things, author of two recent Wall Street Journal op ed pieces disputing the widely-held view that income disparity is on the rise) and Mark Thoma, professor of economics at the State of Oregon, continues.

We had reservations about Reynolds’ first WSJ piece:

….Reynolds’ complaints in his WSJ piece lump together things that could possibly be adjusted for with reasonable accuracy (like the failure to include Social Security payments) with ones that are difficult to parse (how much of business earnings in the 1980s really should have been attributed to compensation of the owners?) and ones that are inherently impossible (like the size of the cash economy over time and its impact on income distribution).

The underlying problem is that any analyst is put in the position of not having the right information (the rich are notoriously chary about revealing the extent of their wealth), and like the drunk looking under the light for his keys, winds up searching where the data, rather than the answer, lies.

Nevertheless, Reynolds (with the exception of municipal bond income) overlooks factors that understate income at the very top.

Although the subsequent exchanges between Reynolds and his critics have gotten vastly more detailed, this core objection (repeated in various forms by others) has not been refuted. While Reynold’s critique of the shortcomings of the existing data and analysis may be valid, he has chosen to focus ONLY on those shortcomings that would argue for income disparity remaining the same or falling. In other words, he isn’t acting like a scientist or researcher, trying to get to the bottom of things and come up with a more accurate picture. He is partisan.

To bring you up to date: Reynolds wrote a article the Cato Unbound website, “Income Distribution Heresies,” and Mark Thoma posted a reaction essay there, “Yes, Virginia, Income Inequality is Still Rising.” You can read our take on this round.

This week, we have another back-and-forth at Cato Unbound, Reynolds’ “Why Change the Subject?” and Thoma’s “It’s Time to Ask the Next Question.” Even though Reynolds has provided a good deal of detailed information, he has still failed to make an adequate response to the core objection, namely, that his presentation is one-sided. This is from Thoma’s piece:

Reynolds’ reply shows how he reacts when presented with evidence that does not conform to the inequality story he has been trying to sell. In my reply to Reynolds’ lead essay, I noted research that finds data adjustments that work against Reynolds assertions on inequality. Reynolds’ response to that evidence? He says:
Citing a newspaper article, Thoma opines that treating R&D expenses as an investment would “dwarf the kinds of adjustments Reynolds discusses.”

He then goes on to dismiss the work. In doing so, Reynolds wants us to believe it is just a “newspaper article” that I am citing, nothing more than a “red herring,” as he calls it later, so we should not give it much credence. But this is an example of how he attempts to mislead readers.

Yes, I did link to an article in the New York Times: a well-reported article about the work of a team of economists at the Bureau of Economic Analysis, and “two prominent economists at the Federal Reserve.” The article does a nice job of summarizing their work. Behind the “newspaper article” is a body of academic research supporting the results I cited. But Reynolds doesn’t want you to know that. For example, in his reply he doesn’t cite or even mention any of the economists or their research, instead he says, “The article claims that …” as though the reporter is the one who had done the work and is making the claims….

I do agree with Reynolds in the following sense. There is a big difference between peer-reviewed work in academic journals and newspaper articles — though, as illustrated above, accurate newspaper reports can be very helpful. And to take this a step further, there is an even bigger difference between the peer-reviewed academic work that forms the core of the inequality results cited by professional economists and work appearing on the opinion pages of newspapers. While good work does appear on those pages from time to time, there is nothing to ensure that the claims made in a typical opinion piece are backed by evidence that can withstand professional scrutiny.

That’s why I was surprised to see Reynolds, after implicitly dismissing the work of academic economists as a mere “newspaper article,” say in a different part of his reply that “I have written hundreds of articles since 1972 about income, or about wealth” in an attempt to bolster his own credentials. But how many of those appeared on the opinion pages of newspapers (and predominantly one or two newspapers at that), and how many are peer-reviewed articles appearing in top flight academic journals, or in any academic journal for that matter? When you read Alan Reynolds’ assertions, remember that they have not been subjected to the rigorous process required to get a paper published in a top academic journal, they have only passed through an editorial board at a newspaper. He’s right to suggest that we be wary of such work….

Another point concerns Bernanke’s speech on inequality. Reynolds’ objection is that Bernanke did not use the measure of inequality he wants him to use (the one that supports his conclusion), but instead uses another measure, which shows growing inequality. Of course, in Reynolds’ eyes, the data Bernanke used is “bad data” that is “no substitute for good data.” But we know that the finding of rising inequality is quite robust across inequality measures, so this is not much of a refutation. And on Reynolds’ “good data” — the data that support his conclusion — it’s useful to recall what Gary Burtless said about some of the data Reynolds uses:

The problem is [Reynolds] is usually silent about equal or more serious problems with data sets that show little change in inequality. … What Reynolds doesn’t mention is that the quality of the consumption data has deteriorated badly since the mid-1980s. … So far as I know, no statistical series that tries to approximate total income has suffered such a terrible decline in quality as the data from the consumption survey. You’ll look long and in vain for any mention of this problem in Reynolds’s paper.

If you only look at evidence on one side of the issue, cherry pick results, start in specific years (and insist everyone else follow suit), use the “right” measures of income or wealth, ignore data problems that work against your results, and so on, and so on, you might be able to argue, if everything falls in your favor, that inequality is no worse since 1988. But that does not fairly characterize the overall evidence.

This debate reminds me of the debate over global warming, though using the word “debate” implies there is more disagreement than there really is. There are three questions in the global warming debate. The first question is whether global warming exists. The second question is, if it does exist, what is causing it. The third question is what to do about it. In order to avoid the consequences involved with the third step, doing something about it, there are many who try to cloud the issue and keep the first question alive and kicking for as long as possible, or claim the cause is from natural forces that we can do nothing about.

The inequality debate appears to be unfolding similarly with those who would like to avoid policies to address inequality, policies such as more progressive taxation, hoping to keep the first question open as long as possible or claiming that the rise in inequality is the inevitable result of natural market forces and we should not interfere.

There is a role for skeptics, but there is also a time to accept that the preponderance of evidence points in one direction and to begin to think about and implement corrective measures. I believe an important question is how we respond to inequality – will it be through progressive taxation, minimum wage legislation, changes in the structure of health care, investments in education and retraining programs, wage insurance and so on, or will we do nothing?

The question of what to do is linked to the causes of rising inequality. Has inequality been rising because of tax policy, the decline in unions, the rising skill premium, global competition and changing technology, a falling minimum wage in real terms, or for other reasons? How much does each factor contribute? Is the income of those who have experienced the largest gains based upon economic fundamentals, i.e. does their pay reflect their contribution to production, or does the pay of, say, CEOs depend upon market failures that allow departures from competitive market outcomes?

There are lots and lots of important questions to be answered involving both equity and efficiency (many of which do not require rising inequality since 1988, just its existence) and, as I said in my first essay, it will be too bad if attempts to cloud the issue divert us from discussing how best to respond to income and wealth inequality.

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