D. Dowd Muska

 

How to Lie with Statistics on ‘Income Inequality’

August 14, 2014

Economist Alan Reynolds put it best: “The growth and distribution of income is a topic that generates strong opinions based on weak facts.”

Unfortunately, emotions and anecdotes dominate public debate over “income inequality.” The president claims that “inequality and lack of upward mobility” represent “the defining challenge of our time.” Some on the right agree that low-income households are trapped in near-perpetual pauperism while the “wealthiest 1 percent” grab an increasing share of the nation’s prosperity.

“Income Data Is a Poor Measure of Inequality” fires a refreshing dose of debunk at the nation’s class warriors. Written by the Tax Foundation’s Alan Cole, the paper is a brief but blistering assault on the two tools employed to “prove” the inherent unfairness of the U.S. economy: the IRS’s Statistics of Income and the Census Bureau’s American Community Survey.

Both data sets, Cole writes, are “useful” and “have considerable strengths.” But they are “not good for quantitatively measuring … inequality,” because income “over one year is simply a very poor proxy for standard of living.” Another weakness is found in “differences in regional price levels.” Most egregious of all, perhaps, the IRS and census figures exclude “many types of income.”

Scrutinizing income in annual terms can yield flawed conclusions, due to filers’ ability to shift money around. Some live off savings. Others borrow to get past a tough stretch. Many workers “plan their careers on horizons of decades or more.” A dry spell doesn’t necessarily imply a descent into destitution. And mobility is the norm. A foundation analysis conducted in 2010 revealed that of the taxpayers who were wallowing in the bottom fifth of earners in 1999, “a majority -- 57.5 percent of them -- were in a higher quintile by 2007.”

Cole offers an example of a profession that can start lean yet finish in affluence: “Through their twenties, surgeons are in medical school and earning very little. When they finally become residents, they earn moderate amounts. In their prime, with a proven track record and solid experience, they can earn $400,000 or more. The income inequality among surgeons of different ages is staggering.” Some products of higher education needn’t wait long for their reward. Is a part-time pizza deliveryman close to graduating with a B.A. in petroleum engineering worried about his station? Not likely -- according to the National Association of Colleges and Employers, his starting salary will be $93,500.

Would a family reporting a $50,000 annual income live better in Henderson, Nevada, or Bel Air, California? Huntsville, Alabama or Greenwich, Connecticut? “Regional price parities,” driven by government, count for quite a lot when comparing income groups, yet the “Occupy” crowd can’t be bothered to care. As foundation economist Lyman Stone has observed, “People who are ‘poor’ in one state could be ‘rich’ in another without changing the dollar amount of their income.” Cost-of-living discrepancies explain why so many flee the “wealthy” Northeast for the South, and why plenty of Texans, Idahoans, and Nevadans are former Golden Staters.

Finally, Cole argues that income data “isn’t even a good measure of income.” Capital gains provide a telling illustration, since they “are measured only when realized,” not as ripened. “Some people look like they earned a million dollars in a year, when in fact it may have taken them decades to accrue those gains. At the same time, other people look like they’re living a more modest lifestyle, when in fact they have substantial unrealized capital income.” The middle class has tens of trillions of dollars “that the IRS simply never sees,” including pension plans and owner-occupied houses.

The federal government’s stats on income, Cole concludes, have “massive confounding factors; not minor technical nitpicks, but big glaring issues so plain and so relevant that they can be expressed in terms of the lives of ordinary people. People develop professionally with age. People go to college. People think about where rents are high and where they are low. People save in retirement accounts.”

Irrelevant! If capitalism -- or at least, the quasi-capitalistic economic system currently in place -- is immoral, then nothing else matters. The income tax must be made more “progressive.” (Although the top 1 percent of filers supply 35 percent of the levy’s revenue.) Social programs should be expanded. (Forget that the Great Society has produced a half-century of failure.) “Public” schools deserve more “resources.” (The unionized-monopoly scheme is costly and inept, but never mind.)

Income-inequality demagoguery worked twice for Barack Obama. Have a good thought that his successor will be inoculated against junk economics.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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