Connecting the dots

Jonathan Chait connects the dots between dishonest conservative (fn1) claims about income inequality (coming in this case from Alan Reynolds) to similar arguments made about evolution and global warming. As he says, to construct an alternate reality in which income inequality is not increasing, global warming is not happening and the world is near the end of its 6000 years anyway, there’s no need to prove a case – just cast enough doubt on the facts and ideology or faith will do the rest. The Republican War on Science is so broad-based that here is now no academic discipline whose conclusions can be considered acceptable to orthodox Republicans.

Chait does a good job on all this but it’s a pity he doesn’t extend it to his reconsideration of the Iraq disaster. If liberal hawks like Chait had taken the (correct) view that everything coming out of the Bush Administration and its supporting thinktanks was advocacy designed to achieve a predetermined political goal with no regard for the truth, would they have been so keen to support the war?

If they had disregarded the ‘evidence’ on WMDs presented by Bush and Powell for example, and looked at the reports of UN weapons inspectors, would they have still accepted the casus belli on this issue. And if they had assumed that any Iraqi touted by rightwing thinktanks, such as Ahmed Chalabhi, was bound to be worthless as a guide to conditions in Iraq, would they have been so quick to believe that things in Iraq were likely to turn out well? Finally, if they regarded reality as an important basis for policy, wouldn’t they have realised that any enterprise run by people who prefer lies to truth is unlikely to succeed in a place like the Middle East, where reality tends to obtrude itself rather brutally?

And, while we’re on the topic of Iraq, the Project on Defense Alternatives has just released a plan for US withdrawal that seems at least as likely to produce a reasonable outcome in Iraq as any of the alternatives on offer (not that that’s saying much).

1. Of course, there’s nothing conservative about these guys: they are radicals in policy, not to mention epistemology. A better term might be ‘movement conservatives’ or just ‘Republicans’.

40 thoughts on “Connecting the dots

  1. I should say at the outset that I do not think that income tax data are the best source for looking at trends in income inequality if one wants to get an overall picture of income inequality.

    This is because tax data are based on individuals and usually do not measure inequality at the household or family level (unless some form of matching is carried out). They are also subject to changes in what is declared (the introduction of capital gains tax in Australia seems to have been associated in an increased declaration of income for higher income groups – i.e. they had unmeasured incomes before), and most studies do not equivalise (adjust for household size), plus they may not include the impact of social security benefits (unless this is included in taxable income – for example, in Australia disability pensions and family payments are not taxable). So overall, what you get is a partial picture of income inequality.

    Having said this, absolutely everything reputable I have ever read about trends in income inequality in the US (in refereed journals or reliable working paper series) finds that household income inequality has risen significantly since the 1970s.

    It is true that in some years US household inequality has fallen (I think the second half of the 1990s), but the long term trend is undeniable.

    Also while relative poverty is related to inequality, poverty can go down while inequality rises. This has happened in the UK, for example, under “New Labour” – all this means is that the poor do get better off relative to the median, but the rich enjoy even bigger increases.

  2. The following article takes a look at inequality on the global level. A few extracts follow.

    http://www.heritage.org/research/features/index/chapters/htm/index2007_chap1.cfm

    Researchers have long worried about world income inequality. Recently, policymakers have joined the debate. For example, in its 2001 Human Development Report, the United Nations Development Programme (UNDP) argues that global income inequality has risen based on the following logic:[14]

    Claim 1: “Income inequalities within countries have increased.”

    Claim 2: “Income inequalities across countries have increased.”

    Conclusion: “Global income inequalities have also increased.”
    To document Claim 1, analysts collect the Gini coefficients, which measure inequality, for a number of countries. They notice that the Gini “increased in 45 countries and fell in 16.” To document the second claim, analysts go to the convergence/divergence literature and show that the Gini coefficient of per capita GDP across countries has been increasing unambiguously over the past 30 years. This increasing difference in per capita income across countries is a well-known phenomenon that empirical growth economists call “absolute divergence.”

    Although it is true that within-country inequalities are increasing on average, and although it is also true that income per capita across countries has been diverging, the conclusion that global income inequality has risen does not follow logically from these premises. The reason is that Claim 1 refers to the income of “individuals” and Claim 2 refers to per capita incomes of “countries.” By adding two different concepts of inequality to analyze the evolution of world income inequality, the UNDP falls into the fallacy of comparing apples to oranges.

    and the conclusion

    The estimates of a WDI for the 1970–2000 period result in a number of interesting lessons.

    First, global poverty rates, defined as the fraction of the WDI below a certain poverty line, declined significantly over the past three decades. We have documented this claim for the four most widely used poverty thresholds. Poverty rates were cut by a factor of almost three, according to all four poverty lines, and the total decline in poverty head counts was between 212 million and 428 million people. We have shown that this is also true for all conceivable poverty lines. (See Table 1.)

    Second, the spectacular reduction of worldwide poverty hides the uneven performance of various regions in the world. East and South Asia account for a large fraction of this success. Africa, on the other hand, seems to have moved in the opposite direction.

    Third, after remaining constant during the 1970s, inequality declined substantially during the past two decades. The main reason is that incomes of some of the world’s poorest and most populated countries (most notably China and India, but also many other countries in Asia) converged rapidly with the incomes of OECD citizens. This force has been larger than the divergence effect caused by the dismal performance of African countries.

    Fourth, the decomposition of inequality into “within-country” and “across-country” components reflects that within-country inequality increased over the sample period. However, the decline in across-country inequality more than offset the first effect and delivered an overall reduction in global income inequality.

  3. Terje and Peter make good points, but still overlook that while the poor are always with us, those poor now may not always be so. In 1990 the bottom decile of workers in Australia earned a third of the average income of all deciles, but a third of these “poor” were aged under 24, while only 1.6 of the top decile were in this age group. Similarly 12% of the bottom decile were aged 55+, i.e. retired, and only 6% of the 9th decile were aged 55+. I doubt this pattern will have changed, but what is wrong with it, and if it is wrong should we eliminate the young or the old to cure it at a stroke? But come to think of it those poor teenagers do grow up and migrate to higher deciles, to be replaced by the next lot of indigent students and the like. The only permanent poverty at all ages is that of the indigenes across northern Australia.

  4. Tim,

    Yes I agree that income inequality becomes far less important once you consider that peoples incomes fluctuate across their life. If lots of people were permanently stuck at the bottom then it would be a bigger concern. However most people earn more as they get older and more experienced and then less as they get older again and the house is paid for and they wind down. The only real way to get a handle on the whole thing is with good temporal studies. However the results of such studies are not easy to communicate in a political sound bite or newspaper headline.

    Regards,
    Terje.

  5. Tim Curtin is absolutely correct that on a long term basis income inequality and poverty are less than they are on the basis of a week’s income or annual income. This is true in the US and also true in all other rich countries.

    Speaking personally, I think that poverty is probably a lot lower than is measured on the usual basis of annual income – although this is mainly because I think that the virtually nobody has zero or negative incomes in any real sense, and roughly half the people below the poverty line in Australia(either relative or absolute) are people whose stated incomes are not plausible measures of their wellbeing. The same almost certainly applies in the USA but because I do not know the US data as well I would be less certain about speculating on the impact on poverty. However, I have no reason to believe that the impact of unmeasured income is greater in the US than in Australia or most other developed countries.

    We also underestimate the impact of welfare state spending on inequality and poverty if we do not take account of non-cash benefits in the area of health, education and housing. These reduce poverty and inequality, and studies I have seen suggest that this is the case in most welfare states, although their inclusion does not tend to change country rankings.

    However, we probably underestimate the level of inequality by not including employment-related fringe benefits, which are very large in the US, since they are the main vehicle for health care. (Also we should include the value of employer social security contributions in the measure of market income, and depending on the different systems we should also include the value of social security wealth in lifetime disposable income, which would have a big impact on a lot of European welfare states).

    However, this probably does not change trends in income inequality in the USA or alter the fact that income inequality in the US is much higher than in Australia or most other rich countries. As others above have pointed out, the US’s relative position on income mobility is not as good as is often assumed, and a large section of their private welfare spending benefits the middle class or higher. Also employer provided health spending and pensions in the US are not increasing in coverage, but if anything the opposite, and this decline in coverage is likely to affect the lower middle rather than the upper middle.

    So overall, I see no compelling reason for concluding that income inequality in the US has really gone down rather than gone up, if you look at the last 30 years or so.

    Tim is also absolutely correct about the appalling position of indigenous people in Australia on average; but again I doubt that this actually changes Australia’s poverty or inequality ranking relative to the US, simply because there are not enough of them. While African americans do not appear to be as badly off in a relative income sense as indigenous Australians, they are imprisoned (and therefore not included in income surveys) at about the same rate as indigenous Australians (about 9-10 times the average).

    However, I think that is the subject of a different discussion.

  6. Income inequality probably doesn’t matter very much in itself, but it is a good proxy – in context – for some things that very much do matter. For instance, rapid increases in inequality – without overall gains, or without enough of them – mean some people somewhere must be going backwards. Also, it may indicate either the existence of destabilising tendencies, or a reduction of stabilising social tendencies that come from a hollowed out middle (fewer people with a “stake” in things).

  7. There’s a hefty body of research saying that reduced inequality is good for a society across a whole range of measures, crime, health, social capital, democratic inclusion, economic performance, etc. Most well developed moral philosophies consider it to be a worthwhile good as well.

  8. There’s a hefty body of research saying that reduced inequality is good for a society

    So lets burn down most of the houses in Vaucluse. That would reduce inequality in Sydney.

  9. “Most well developed moral philosophies consider it to be a worthwhile good as well”.

    This is true – but has well been pointed out by Sen the real issue is that they argue for equality in different, and incompatible ‘spaces’. Some would argue for inequality of income, others for inequality in opportunity (but allow for inequality in outcomes), others would argue for equality in outcomes – even if this means inequality of resources (income) – others argue for equality of rights – including property rights – and hence against redistributive taxation.

  10. Wilful, I read all the points you make as relating to the underlying stuff, not to inequality (let alone income inequality) per se. An anlogy might help: scar tissue – particularly on a chest X-ray – indicates damage, but the scar itself is a partial healing. It’s the damage that’s the problem, not the scarring by and large. Yes, scarring reduces functionality compared with not being damaged in the first place, but it improves it as compared with no repair attempt at all. (Don’t take the analogy too far, though.)

  11. Given a choice between income transfers and wealth transfers which would people here prefer to see as the basis for addressing inequality. Should we tax people mostly according to their balance sheet or mostly according to their profit and loss statement?

    For instance should the young worker who owns next to nothing but has a reasonable income be paying income tax so as to support the retired pensioner who owns their own home but has no private source of income. Or should we put a land tax on the pensioner to help finance a morgage deposit for the young worker. At the moment we seem to do both.

  12. While I’m not convinced that top incomes have increased strongly in the US or Australia, let us assume for a moment that they have.

    These large increases occurred around the time we saw large reductions in the top marginal tax rate. So one could conclude that top incomes are very responsive to changes in tax rates – ie the elasticity of income to tax is high at the top end of town.

    Policy conclusion – marginal tax rates on the top income earners have high efficiency costs.

  13. This is a good summary of what has happened in the US: http://www.brook.edu/views/papers/burtless/20070111.pdf

    As far as I can tell the tax cuts since 2001 in the US cut the top marginal rate from 39.6 to 35% (and cut lower rates by about 3 points). The cuts came into effect between 2001 and 2002.

    If you look at the Piketty and Saez figures at http://elsa.berkeley.edu/~saez/TabFig2004prel.xls you will see that incomes for top fractiles went down from 2000 to 2003, and then jumped between 2003 and 2004.

    The first part of the trend looks more like variaions in the stock market to me.

  14. I liked the last two paragraphs of Chait’s piece, especially:

    Introducing ideology into a debate is one of the think-tank hack’s strongest weapons. It demystifies a complicated issue, moving it from the realm of science into the realm of politics. The think-tank hack confesses he has his biases but then claims that his opponents in academia or government do, too. Evolution is the secularist science establishment’s campaign to discredit religion; global warming is being pushed by regulators who would gain enormous power from new pollution controls; et cetera.

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