Flat-Earth economics: Equality Bites

by Jonathan Chait | January 29, 2007

If 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 forthe 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 the1960s 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 asenior 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 counter establishment 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 Ecole Normale Superieure 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 1percent 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 1percent 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.

And some of Reynolds’s critiques are simply mistaken. For example, he argues that Piketty and Saez’s data does not account for the massive rise of tax-sheltered pensions, such as 401(k) plans, which are "invisible in tax return data." Because 401(k) plans are now common among middle-class earners, tax returns miss a huge source of their wealth and thus make them look misleadingly poor. This sounds sensible enough, but it is wrong on several levels. 401(k)s didn’t just appear out of nowhere; they mostly replaced defined benefit pensions. And, like the old pensions, 401(k)s do appear on tax returns when the accounts are withdrawn. On top of that, economists think most tax favored assets are concentrated in the hands of the rich anyway, so, even if Reynolds were right about tax returns, it would very likely make inequality look even worse.

But whether the missing data would make inequality look worse or better is really beside the point. Reynolds’s role is merely to point out that the data is imperfect. The skeptic challenging the expert consensus must be fluent enough in the language of the experts to nibble away at their data. (The evolution skeptic can find holes in the fossil record; the global-warming skeptic can find period of global cooling.) But he need not—indeed, he must not—be fluent enough to assimilate all the data himself into a coherent alternative explanation. His point is that the truth is unknowable.

You might suppose that somebody in Reynolds’s position would do everything he could to mask his own ideological preferences in order to lend credibility to his research. But Reynolds is completely up front about his beliefs, which are on display in the weekly op-ed columns he churns out. He is a libertarian conservative of the "taxation is theft" variety. "Aside from government subsidies and transfer payments, income is not `distributed’ at all," he wrote last year in a typical passage. "Most income is either earned or stolen. If some group’s income was earned by legitimate means, then it is their income, not `ours.’" (So, for instance, if a soldier loses his legs in battle and is forced to subsist on disability checks from the government, his income is stolen. If, on the other hand, a wealthy heir hires an economist to crank out tracts persuading the public to protect his fortune from taxation, that economist’s income is earned.)

This is not a slip-up. 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; etcetera.

Since the goal is not winning these debates but merely achieving symmetry, the hack’s most effective technique can be taking the accusation that would seem to apply to him and hurling it at his opponents. "The politically correct yet factually incorrect claim that the top 1 [percent] earns 16 [percent] of personal income appears to fill a psychological rather than logical need," Reynolds writes in the Journal. "Some economists seem ready and willing to supply whatever is demanded." So, while you might think Reynolds is a hack mining the data for results that would conform to his political preferences, he has already made the same charge against the other side. Who can tell who’s right?

 

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