Friday, January 19, 2007

Jonathan Chait: Flat-Earth Economics

FLAT-EARTH ECONOMICS. Equality Bites by Jonathan Chait Post date 01.19.07 | Issue date 01.29.07 Discuss this article (18) Printer friendly E-mail this article f there is one trend in American life that most irks economic conservatives, it is probably rising inequality. It's not the inequality itself that bothers them, as most will happily admit. It is the perception of inequality and, worse, the constant discussion of inequality that is so irritating. It offends their view of capitalism, helps justify all sorts of nefarious government interventions, and makes the conservative economic agenda (most of which tends to increase inequality) appear unfair. They would very much like for it not to be true. Failing that, they would like for the public not to believe that it's true--or, at the very least, not to be sure whether it is true or not. This is where Alan Reynolds comes in. A manager at J.C. Penney who attended graduate school at night, Reynolds was plucked from obscurity by William F. Buckley in the 1960s after writing a few pieces for The National Review. (He's still "a couple of classes" short of his masters degree in economics.) He later went to the conservative Hudson Institute and from there made his way to the Cato Institute, where he is now a senior fellow. From this perch, and as a syndicated columnist, Reynolds offers up conventional supply-side economic views; but his specialty is denying that income inequality has grown. He has been at this task for almost two decades, and, as the economic consensus that inequality is increasing has grown stronger and stronger, so, too, has his importance to the right. Reynolds's crucial role within the conservative movement was on full display at a packed-house Cato forum last week in which he defended a paper--titled "Has U.S. Income Inequality Really Increased?"--he published earlier this month and summarized in a much-discussed Wall Street Journal op-ed. Reynolds was introduced by Chris Edwards, the director of tax policy studies at Cato, who began by noting that it is a matter of opinion whether income inequality matters at all. (In his opinion, it doesn't.) Nonetheless, he suggested, "Economists and reporters need to be extremely careful in looking at trends in income statistics over time. All sources of income data have various quirks and shortcomings." In other words, conservatives aren't sure whether inequality is rising, and they don't really care if it is. Their primary concern is that newspapers treat the question as a matter of dispute rather than a settled fact. If this sounds like the conservative stance on global warming or evolution, it shouldn't come as a surprise. Like those two issues, the existence of rising inequality is beyond dispute among academics who study it. This applies even to conservative economists with strong Republican pedigrees. (Harvard economist and former Reagan adviser Martin Feldstein: "There has no doubt been a relatively greater increase in higher incomes in recent years in the United States." Columbia's R. Glenn Hubbard, a Bush alum: "We have an issue with emerging inequality in the country.") And so the ambition of the conservative counterestablishment in these areas is not to overturn the scholarly consensus but simply to make the topic appear so complicated that laypeople and the press don't know what to believe. And the science of measuring inequality, like most sciences, is subject to complicating details. The traditional method of measuring inequality has been to examine data from the Census Bureau. Unfortunately, census data isn't very good at detecting shifts among the uppermost slice of the very rich, because it has historically grouped high incomes into broad categories--say, over $999,999. So, in the last few years, economists Thomas Piketty of the École Normale Supérieure and Emmanuel Saez of the University of California, Berkeley, have started looking instead at tax returns, which have shown explosive income growth among the top 1 percent of tax-filers compared with everyone else. Last spring, they published a paper titled "The Evolution of Top Incomes: A Historical and International Perspective," which offered some startling findings: Since 1980, the share of income accruing to the highest-earning 1 percent of U.S. tax returns doubled, the share of the top one-tenth of 1 percent tripled, and the share of the top one-hundredth of 1 percent quadrupled. Their research was widely quoted in places like The Economist and The Wall Street Journal. Greg Mankiw, a former Bush economist, has called the study "very solid empirical work." That was Reynolds's cue to spring into action. In his Journal op-ed, Reynolds lists a series of potential flaws in the Piketty-Saez data. Most of the complaints are simply picayune details. He writes, for instance, that "not everyone files a tax return, not all income is taxable (e.g., municipal bonds), and not every taxpayer tells the complete truth about his or her income." All these points are true enough. But is there any reason to think they would change the overall picture very much? Not really, unless you think undeclared earnings and municipal bonds are a huge and growing share of our income and that the rich are substantially less likely than the rest of us to cheat on their taxes or own municipal bonds.

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