The Inequality Debate

A good friend of mine, recently turned lefty, has been harping on the income inequality tune lately. It’s new to him, so he finds it quit convincing. We’ve been going back and forth on it now for some months (see here and here, for example) but he tried to address all of my arguments in one post. See here.

My response was too long for a single comment, so I broke it down into bits. I thought I’d post it here in full (with some minor typo and other corrections) for others to see as well. It’s a good intro to the income inequality debate and the response to it from those that disagree.

You can start with his post here and my response is below.

Finally, a response. You have been harping the income inequality argument for some time now, and simply ignoring the responses that have come (see here and here, for recent examples). Lets discuss.

First, family size. You write, I’m told that the increase in inequality is due to the changing family structure. More single family homes. It’s interesting that a lot of these responses I get come without evidence. It’s just a claim that sounds plausible.

This is the wrong way to look at it Jon. Remember, it’s not the right that is making the income inequality argument, it’s the left. The reason you don’t find a lot of responses controlling for family size is because frankly, there are few, if any solid ones. But that speaks ill of the left, not the right: after all, income inequality is their argument – their primary argument, in many ways – and the fact that they haven’t taken the time to control for such basic differences speaks badly of their academic objectivity, wouldn’t you say?

With that said, all you had to do was ask. Here is one, two, three, four, five, six, seven, eight and nine responses that deal directly with family size.  Remember, it’s not just divorce rates and working hours that matter, it’s also immigration and more importantly, the rise in single mothers and the age of the population that matters.

Second, total compensation. Were not just talking about 401k’s here, were primarily talking about healthcare costs. And when you factor those in, almost all of the income inequality disappears. Cornell University professors Richard Burkhauser and Kosali Simon write in a NBER paper:

In this paper we take estimates of the value of different types of health insurance received by households and add them to usual pre tax post transfer measures of income from the Current Population Survey’s March Annual Demographic Supplement for income years 1995-2008 to investigate their impact on levels and trends in measured inequality. We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend. (emphasis mine)

But again, doesn’t the dearth of studies that take into account health care costs and 401k’s say something about the academic integrity of those that constantly put forth the income inequality argument (the economists, that is)? It’s like they are cherry picking the data that most fits what they want to believe.

Third, consumption inequality. Then there are mitigating factors to income inequality. Income inequality just looks at the inputs to income but what about the outputs? In other words, instead of looking at wages, lets look at purchasing power. And when you do that, you see that the trend is the opposite:

Looking at trade data between 1994 and 2005, Broda and Romalis construct inflation rates for different income groups and find that rates for the richest outpaced rates for the poorest by about 4 percent over the period. Since income inequality between the top and bottom 10 percent of earners grew by about 6 percent, the different inflation rates among income groups wipes out about two-thirds of the rise in inequality.

This study is by two University of Chicago economists. This is how University of Chicago economist Steve Levitt (and author of Freakonomics) puts it:

Their argument could hardly be simpler. How rich you are depends on two things: how much money you have, and how much the stuff you want to buy costs. If your income doubles, but the prices of the things you consume also double, then you are no better off.

When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.

What caused this dramatic drop in the prices of goods purchased primarily by the poor vs those by the rich? Levitt explains that as well:

Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!

China is able to produce clothes, electronics, and trinkets incredibly cheaply. Poor people spend more of their income on these sorts of things and less on fancy cars, expensive wine, etc. According to Broda and Romalis, China alone accounts for about half of their result….

MIT economist Jerry Hausman (who taught me econometrics in my first year of graduate school) and co-author Ephraim Leibtag have analyzed the impact of the entrance of a Wal-Mart superstore on local food prices.

Not only are Wal-Mart’s prices lower, but its entry also induces competitors to lower prices. The impact is much larger on the poor than the rich, both because the poor are more likely to shop at Wal-Mart and because they spend more of their income on food.

In other words, the two greatest forces in mitigating the impact of income inequality are precisely the other two things the left dislikes most: globalization via China and Walmart.

With that said, I don’t want to leave the impression that I think there has been no increase in income inequality. I do believe that there has been in fact real inequality and it has been growing (and for precisely the same reasons economists generally believe: technology, greater division of labor etc). I just disagree with the magnitude and more so, the importance of it.

Fourth, culture. Much of the increase in income inequality is a result of cultural changes, specifically in marriage mating. Arnold Kling writes:

There is also another factor at work. A trend is underway in America for marriage to be increasingly “assortative.” That means children of well-educated parents tend to marry one another and the children of less educated parents tend to marry one another. This was less the case a few generations ago. For example, sociologists Christine Schwartz of the University of Wisconsin and Robert Mare of UCLA found that beginning in the early 1970s there was a striking “decline in the odds that those with very low levels of education marry up.” And they found that between 1940 and the late 1970s the likelihood that someone with only a high-school diploma would marry someone with a college degree dropped by over 40 percent.

Indeed, economists Betsey Stevenson and Justin Wolfers at the Wharton School at the University of Pennsylvania believe that a revolution in modern marriage has taken place. According to their view, two generations ago, a husband and wife married in order to share production, with the man working in the market and the woman working at home. Today, the husband and wife are both likely to work in the market, and they choose one another because they have similar tastes in consumption….

Stevenson and Wolfers point out that it may well have been the case a few generations ago that “opposites attract” and the production-based marriage benefited from differences in backgrounds and skills. Today, the consumption-based marriage benefits from the couple’s similarities. Thus, marriage becomes less a driver of mobility across income segments and more a driver of income inequality.

The full article, which I highly recommend, can be found here.

Fifth, the benefits of income inequality. Let’s remember from our basic economics course that some income inequality is good. It serves as a signal mechanism to encourage more productive behavior, such as, getting an education. This is the basic argument that Gary Becker and Kevin Murphy of the University of Chicago make here.

Sixth, the irrelevance of income inequality.There are powerful arguments on why income inequality should be ignored. For example, here and here. But my favorite of em all, is the growing irrelevance of income inequality. Don Boudreaux explains:

But I here suggest that economic growth, even as it might generate ever-larger income inequality, increasingly renders these same differences in money income or wealth less and less relevant as a measure of differences in quality of life. Some examples:

– Inexpensive consumer electronics enable almost all Americans, even the poorest, to listen at their leisure to the world’s finest orchestras perform great music; contrast now with, say, 1880, when only the relatively rich could afford to hear great music – and only the superrich (by hiring their own chamber orchestras) could enjoy listening to such music whenever they wished.

– Today’s inexpensive Chevrolets and Kias are more reliable and better equipped than were top of the line Cadillacs of 40 years ago.

– Fifty years ago European vacations were a luxury enjoyed mostly by the rich and upper middle classes; today – chiefly because of inexpensive air travel – such vacations are within the means of a much greater proportion of the population.

– The clothing worn by wealthy Americans is virtually indistinguishable from the clothing of ordinary Americans; Bill Gates, Tom Hanks, and Laura Bush are not distinguished from the vast majority of Americans by their clothing. In both quality and quantity, clothing is nearly super-abundant in modern western society.

The further back you go in history, the greater were the material differences that separated rich from poor. Many of these distinctions were evident to the untrained eye (for example, the rich rode in carriages; the poor walked). Fewer of the distinctions today between rich Americans and middle-class Americans – even poor Americans – are as palpable, as salient, as stark, as were the distinctions of generations past.

Bill Gates has many more zeroes in the accounts of his finances than I have in the accounts of my finances. But I don’t see these. What is seen, what is experienced, what is palpable, as differences between Gates’s financial status and that of ordinary Americans is increasingly disappearing.

In other words, whats important here is economic growth, if you have that, income inequality matters less and less.

Update: Jon responds here.

7 Responses to “The Inequality Debate”


  • Here is my response to Jon’s second post:

    Before I respond, I want to make sure we understand each other fully on what exactly I am arguing. Here is the gist of my argument stated in my first response:

    “With that said, I don’t want to leave the impression that I think there has been no increase in income inequality. I do believe that there has been in fact real inequality and it has been growing (and for precisely the same reasons economists generally believe: technology, greater division of labor etc). I just disagree with the magnitude and more so, the importance of it. ”

    Moreover, I am not arguing that any one thing here eliminates income inequality, only that it mitigates it. Jon sees income inequality as a grave danger. This is because he believes the magnitude and “feel” of it is much greater than what I believe it to be. I am here addressing that belief.

    So when I bring up the divorce rate, or single mothers, or immigration, or age of population, or healthcare costs, or whatever, I am not arguing that it explains all of income inequality, or even the most of it (individually). Only that it reduces it, atleast somewhat. Which it does. So Jon’s response has to be read again in light of this further clarification of mine (in which case, I don’t need to respond to everything, since on some of those points Jon implicitly seems to agree – there is a mitigating factor but not a substantial one).

    One point I do think Jon especially missed the importance of is immigration. Jon dismissed it too quickly (which I don’t blame him, these are long articles and one shouldn’t be expected to read everything in detail) by stating, “The fifth link clarifies the fourth and in fact has a link to a study which claims that the net effect on wages of immigration is positive. This of course would suggest that immigration doesn’t suppress wages, but in fact should increase them.”

    If you actually click through the link provided, you will see that Borjas argues for exactly the opposite of what you state here (and in all fairness, what is stated in Cafe Hayek, a pro-immigration blog, btw).

    He writes:

    Recent evidence on the national labor market impact of immigration is striking. The evidence indicates that the wage of the skill groups—defined in terms of educational attainment and labor market experience—that experienced the largest influx of immigrants grew most slowly over the 1960–2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3–4 percent for every 10-percent increase in the number of workers that can be attributed to immigration.

    This is a double negative when seen from the eyes of income inequality, as Borjas explains further:

    Although the entry of immigrants reduces the wages of comparable natives, it increases slightly the income of U.S. natives overall. Using a well-known formula in economics (a variation on the theme of the so-called Harberger triangle), we can estimate that immigration increases the real income of natives, but only by about 0.2 percent. U.S. natives’ economic gains from immigration, therefore, are relatively small: about $22 billion per year (in 2003 dollars). Of course, not everyone benefits equally from immigration; workers with competing skills lose, while owners of land and capital gain.

    In other words, immigration harms those at the bottom and benefits those at the top. The rich governors of California benefit from cheap nannies and gardeners, but the black high school drop out is harmed by the competition (see more of Borjas on this here).

    This is especially striking when you consider the drastic change in immigration policy from the 1970’s onward. Check out the title page of this CBO report to see the explosion in immigration from the 1970’s onward. This is further compounded by the fact that from 1965 onward, the demographic makeup of immigration drastically changed (more at the Borjas link above) from primarily European to primarily poor and of Latin American origins.

    To summarize then, immigration fits precisely the pattern that Jon is looking for. It had a dramatic increase from the 70’s & 80’s onward, and its presence makes income inequality worse (harms the poor, benefits the rich). Again, this doesn’t account for all of income inequality, but it certainly explains a good chunk of it.

    Regarding my second point, total compensation. I want to make clear that it did not address 401k’s (why I didn’t respond). It only addresses healthcare costs. And by just focusing on that one part of total compensation (ignoring 401k’s, pensions, and others), and including it as part of “total wages”, it claims to almost completely eliminate income inequality. Wow!

    Jon tries to cast doubts by stating, ” How does it factor in the additional cost of health care? Because the inequality evaluations are being done in terms of dollars that are adjusted for inflation. Are they adding in rising health care costs in terms of dollars not adjusted for inflation to income dollars that are adjusted for inflation? We haven’t seen so we don’t know and we can’t evaluate it.”

    But it’s important to remember that these are not sociology professors making the argument. These are two Cornell University professors in the Department of Policy Analysis & Management. They also didn’t publish this from a blog. It is posted on the National Bureau of Economic Research, a peer reviewed organization that must pass through various economists hands in order to be deemed acceptable. Now granted, given all of this, they may still have made such a fundamental error, but the probability of doing so is very low.

    Again here, its important to stress that the income inequality argument is not mine. It’s Jon’s. It’s the lefts. It is their responsibility, not mine, to defend the position. For as much as you see Jon make the income inequality argument, you would think that a mere $5, would not be enough to prevent him from reading further on a rebuttal to his most cherished argument. And does Jon have a counter argument? Does he have a study that even claims to take healthcare costs into account and show the opposite conclusions? I’m not even asking for one that definitively proves the point, just one that atleast tries to address it???

    The mere fact that one would expect healthcare costs to be included in “wages” and yet there are no such studies, save this one, that even attempts to include them speaks volumes, IMHO, of the academic integrity and objectivity of those that harp on the income inequality argument. It’s like the economists intentionally cherry picked the data that most fits their already held conclusions. Don’t you think?

    Regarding the third point, consumption inequality, here is the data explained. Here is the gist of the argument:

    Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged. And the reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

    Regarding the cultural causes of inequality, Jon responds, ” People with college degrees marry people without a college degree at a lower rate now. Isn’t that because fewer people lack a college degree? There’s less people without a college degree available for marrying.”

    Jon doesn’t even address the article at all. It specifically explains why there is such a stark difference today.

    First, Since 1980, the proportion of never-married mothers among college graduates has stabilized near 3 percent, while the proportion among high school graduates has risen from 3 percent to 10 percent, and the proportion among high school dropouts has doubled to nearly 15 percent. These figures are important because, as Hymowitz points out, “Virtually all—92 percent—of children whose families make over $75,000 are living with both parents. On the other end of the income scale, the situation is reversed: only about 20 percent of kids in families earning under $15,000 live with both parents.”

    There is also another factor at work. A trend is underway in America for marriage to be increasingly “assortative.” That means children of well-educated parents tend to marry one another and the children of less educated parents tend to marry one another. This was less the case a few generations ago. For example, sociologists Christine Schwartz of the University of Wisconsin and Robert Mare of UCLA found that beginning in the early 1970s there was a striking “decline in the odds that those with very low levels of education marry up.”

    This is backed up by research from economists Betsey Stevenson and Justin Wolfers at the Wharton School at the University of Pennsylvania (Not members, btw, of AEI or any rightwing organization).

    Interestingly, these two points follow exactly the pattern that Jon is looking for: drastic changes in and around the 70’s and 80’s that would have a direct impact on income inequality. Yet Jon simply dismisses it out of hand?

    The reason I included this argument is to show that atleast some of income inequality is cultural and can’t be changed by legislation (unless you support regulating who marries who). It’s a fundamental change in the preferences of our citizens.

    Then there is the long rant against AEI. But Jon, if this is the case, then can I so easily dismiss the majority of your links, afterall, they do come from leftwing sources (just as leftwing as AEI is rightwing – ie, huffingtonpost, EPI, State of Working America etc)?

    Let me conclude by pleading that the reader interested in this discussion read all the links provided. Both the ones that Jon listed and the ones I listed. Then read Jon’s response and my response. Ask yourself, who is being fairer with the data? Is Jon really giving the counter arguments a fair share? Then remember, that this is a fundamental premise to his worldview. Without it, much of the rest of what he argues falls apart.

  • Here is my response to Jon’s third post:

    It’s important to understand the causes of income inequality because it gives a drastically different view of the importance of it. So when I say that a good chunk of income inequality is due to the divorce rate, or single mothers, or immigration, or age of population, or healthcare costs, or marriage preferences, or technology, or division of labor, what I am really getting at is that income inequality is a natural part of the system. At most it is a symptom, not a cause, of social turmoil.

    Let’s take the widely held economic view of the causes of income inequality: hours worked (the higher the quintile, the more hours worked), education level, immigration and trade. All of these things, I would argue, are good things in themselves. They make the world better for all. The fact that they happen to increase income inequality is a side effect that should largely be ignored.

    Trade, for example, exasperates income inequality by making the goods available to a wider audience. Charles Dickens is probably a far better author than J.K. Rowling’s, but because J.K. Rowling’s wrote her books (author of the Harry Potter series) in a time of the Internet and globalization, she was able make alot more money, thereby, reach the top 0.01% of income earners. Or take Alex Rodriguez, he is probably not as good of a baseball player as Babe Ruth was but because Alex Rodriguez plays during a time where baseball and American sports in general are viewed around the world, his premium is much much higher (in fact, many economists argue that the drastic rise in the wealth of superstars and sports stars explains a good chunk of income inequality, see here).

    But how is this in any way harmful to the poor? Why should we work in reversing this very thing? The same can be said of the other causes of income inequality: hours worked (the higher the quintile, the more hours worked), education level and immigration. They are all, on net, gains for the poor.

    Lastly, an assumption implicit in Jon’s responses is the belief that the economy is zero sum: someone else’s gain is my loss. This is a belief that no economist holds (as opposed to being positive sum) and if Jon really believes this I think he owes it to us to explicitly say so. Because then this discussion would need to concentrate far more on basic economics than income inequality. So Jon, please specifically answer the question: is the economy zero sum?

    With that said, I will respond to Jon’s response below.

    Regarding immigration: there are two factors of immigration, both of them directly exasperating income inequality. The first is the drastic increase in low income immigrants, specifically from Mexico. This directly harms the native born and reduces their wages. It also reduces the median wage just by being included (see here for a great example). The second is the drastic increase in high income immigrants, specifically from India, China and Africa. These immigrants directly increase the wages of the upper class. Both, adding to income inequality. And if Jon thinks this is minor, again, look at the CBO chart I mentioned in my previous response. The additional immigrants added has been exponential from the 1970’s and onward. This is no small matter.

    Regarding healthcare costs, the study did not say that “the inequality gap disappears”. I don’t know where you got that from. It said, “We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend.”It explains a substantial amount of income inequality…not all. What they are arguing is that much of the wage increase has gone to pay for rising healthcare costs. So the problem is rising healthcare costs, not inequality itself (again, inequality is a symptom…). The inflation argument was answered in my previous response, so I won’t repeat it here.

    Regarding the burden of proof, you write, ” Mine is the position of the majority of economists and is the prima facie conclusion based on an analysis of income data.” But it really isn’t, is it? We both agree that income inequality is rising. So on that point it is. But do you really agree with the majority of economists in attributing the causes of income inequality? Specifically, do you agree that its because of hours worked (the higher the quintile, the more hours worked), education level, immigration and trade? If so, were done here. I agree as well. But if not, then it is you drifting from mainstream economics, not me.

    Also, income inequality is not really germane to my political philosophy. Based on my views – and I would argue the views of most Americans – it’s a big dont care, but you claim that it is a cause of worry. In which case, its your burden to show that in fact it is. If its merely a statistical mirage, a fact of forgetting to include changing households, single mothers, immigrants, or healthcare costs, then its up to you to show otherwise. Otherwise, we all go back to the default position of ignoring it.

    Regarding changing marriage preferences, the causes are simply that, preferences. We now have the ability, because of widespread economic growth, to choose partners for different reasons than economic gain (division of labor). So people do. Its really that simple. Reread the article, that is precisely what they argued. Here is another attempt at explaining it to your satisfaction.

    Either way, the causes are not what is important here. It’s the effect. If marriage has moved towards a consumption partnership, where the rich are largely marrying the rich, and the educated marrying the educated, this will directly increase income inequality. And more importantly, this is something that legislation cannot stop. It is a fact of changing preferences (also, I don’t know where I implied that this slowed down in the 90’s, on the contrary, like income inequality this trend seems to be increasing…).

    Lastly, lets talk about sources. I want those reading this post to notice two vastly different methods of arguing here. Jon, primarily quotes EPI and leftwing sources. For those not familiar with the EPI, it is, “a progressive non-profit American think tank that was created in 1986.” (See here). It’s board of directors consists primarily of union advocates. And unions have a clear interest in promulgating the idea of increasing income inequality. So this is really no different than having a debate on the economics of oil and Jon quoting economists from oil producing companies. How objective do you think their studies would be?

    On the other hand, the studied I have quoted come from mainstream economists who have no political ax to grind. And from academic economists, who have no clear incentive to promote the idea of income inequality.

    I could have easily taken the road Jon does. I could have quoted from right wing sources, for example, see here, here, here, here, here, and here. All of these links contain studies, graphs, and data. They could stand on their own. But why? I don’t need to. The arguments I make here are strong enough to stand on their own.

  • My response to Jon’s fourth comment:

    Responses below:

    Good to hear that you don’t believe in zero sum economics. But then, I have to ask, why the focus on income inequality at all?

    Regarding immigration, you write, “There are counterbalancing forces, including the fact that poor immigrants experience income gains at a higher rate than the native population.”

    Right – but it comes at the expense of the poor native population, as I have shown above. I plead the reader to look at the title page of this CBO report on immigration and notice that it starts to rise drastically right around the time Jon is concerned about income inequality (1980’s and forward). Add in the fact that our immigration policies drastically changed also around the same time (including Reagan’s immigration act of the 1980’s) and it fits perfectly into the income inequality time frame Jon is worried about.

    Also, this is only half of the contribution from immigration. There is also the drastic increase of educated immigrants from India, China, South Korea and other recently industrialized countries that have made the rich richer, all around the 1970’s, 1980’s and forward. In other words, the recent impact on income inequality from immigration cannot be so easily dismissed as Jon tries to do above.

    Regarding marriage preferences, Jon writes, “What if there are just fewer marriageable people that lack a degree?” Whatever the reasons, it doesn’t really matter – the effects are the same, an increase in income inequality.

    I found this article that explains the difference better:

    Part of the reason for the superior gains of married adults is compositional in nature. Marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women. As a result, those with more education are far more likely than those with less education to be married, a gap that has widened since 1970. Because higher education tends to lead to higher earnings, these compositional changes have bolstered the economic gains from being married for both men and women.

    There also is an important gender component of these trends. Forty years ago, the typical man did not gain another breadwinner in his household when he married. Today, he does — giving his household increased earning power that most unmarried men do not enjoy. The superior gains of married men have enabled them to overtake and surpass unmarried men in their median household income.

    In other words, the poor are getting married less and the rich are getting married more, specifically since the 1970’s and beyond (thereby directly increasing income inequality, in the period you are most concerned about).

    And here is another important stark difference: “Among college-educated adults, married men are markedly more likely to have a wife who is college educated — only 37% did in 1970, compared with 71% in 2007.”

    In other words, much of the gain in income inequality since the 1970’s is cultural changes, like deciding to marry and marriage preferences (ie marrying someone with a college degree vs no degree).

    Regarding sources, Cafe Hayek is not rightwing. The authors are generally against wars, and were against the Iraq war. They are also strongly in favor of immigration, including open borders. And they even encouraged their readers to vote for Barack Obama against John McCain. So how does that make them right-wing? If anything, their independence on such issues shows they should be trusted more, not less.

    Contrast that to the sources Jon uses. Can Jon show me one instance of EPI ever going against the liberal line? Of course not, they are just as much of a Democratic mouth piece as you can get. The difference couldn’t be more staggering.

    Furthermore, if Jon really wants to get into a political link dump, irrespective of the source, then I ask readers to look at the right wing sources I did provide towards the end of my previous post. I did not base my arguments on them, but I provide them for completion. They use data, graphs, and various sources just as strongly as Jon’s leftwing sources do. But they come to diametrically different conclusions. Which is why I decided to use largely politically independent sources and ignored those sources in my replies.

    Before we end on the sources differences, I’m curious: do you think it’s disingenuous for EPI to calculate income inequality and completely leave out benefits like healthcare, retirement plans, and other non-wage benefits?

    So in conclusion, I would argue that the rise in income inequality, specifically from the 1970’s, 1980’s and onward, is a direct result of a) rising healthcare costs, b) changes in the marriage rate and marriage preferences, c) immigration and d) trade.

    This is precisely why concerns about income inequality is largely a past time of the elites. The general population just doesn’t care all that much about income inequality. It shouldn’t either, it largely doesn’t affect em.

  • My response to Jon’s fifth comment:

    How is income inequality in anyway central to my worldview? It really isn’t. It’s a nuisance at best, a dont care at worst. I “plead” with the readers to look at the graph precisely because of how big the immigration difference is since the 1970’s and 80’s. It’s exponential and far greater than your hand waving gives it credit for.

    You write, Yeah, immigration went up in the 70’s. But illegal immigration is falling today as inequality continues to rise. But it’s still a net increase. Sure, it has slowed down a bit, but that still leaves an overall net exponential growth in immigrants.

    Regarding highly educated immigrants, I was referring to immigrants like this:

    According to the National Venture Capital Association, immigrants make up only 11.7% of the U.S. population, but have started one in four of all U.S. public companies that have been venture-backed over the past 15 years, including Intel, Google, Yahoo!, Sun and eBay.

    A similar study from Duke University showed immigrants were responsible for starting 25.3% of all new, high-technology businesses in the U.S. during the past 10 years. The greatest percentage of these entrepreneurs hailed from India (26%), followed by immigrants from the U.K., China and Taiwan.

    I doubt CEO’s of Intel, Google, Yahoo, Sun, eBay, Alcoa, Pepsi, Coke, and AIG count as middle class, or do they Jon? 🙂

    Regarding marriage, college attainment has only increased 20% from the 1970’s (from ~10% to ~30%, see here).That could not possibly cancel out the vast marriage differences seen from the 1970’s onward. Such as, “Among college-educated adults, married men are markedly more likely to have a wife who is college educated — only 37% did in 1970, compared with 71% in 2007.”

    Then there is the other issue regarding marriage, namely: Marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women. As a result, those with more education are far more likely than those with less education to be married, a gap that has widened since 1970. Because higher education tends to lead to higher earnings, these compositional changes have bolstered the economic gains from being married for both men and women.

    You try to answer this with, “Family working hours are up for all. Are they up only for the rich? No. This argument is that married people have two income earners/more working hours so they naturally make more. But everyone is working more, rich and poor”.

    But for this to matter, the poor would have had to roughly double their working hours (to account for a “household pair” vs a “household single”) relatively to the rich over the period in question, which is certainly not the case. In fact, after googling this more, I found this chart which confirmed my suspicions that working hours have not really changed all that much (and, in fact, that the richer you are, the more hours you work!). In fact, if you look at the graph, the disparity between working hours of the rich vs the poor has gotten greater, not less, since the 1970’s onward.

    Regarding Cafe Hayek, but that’s the point. They are “right-wing” on economics. “left-wing” on foreign policy. “humanitarian” on immigration, and sometimes Democrat in politics. That makes them, IMHO, independent thinkers. Wouldn’t you say that gives them more credibility, not less? Especially considering that the sources you supply are left-wing in everything – economics, politics, and presidency. They clearly have a political agenda to put forward.

    Regarding healthcare and inequality, you write, “I think it makes sense since income is inflation adjusted, so leaving health care aside means it’s treated in an inflation adjusted way.” This is simply not true. Healthcare costs can also be “inflation adjusted” (there called real vs nominal healthcare costs), so again I ask, why exclude it from the analysis?

    And your next statement regarding 401k’s confuses me, you write, And 401k’s are worse than pensions, so adding those would work against your argument. I’m curious Jon, how could any 401k plan or pension plan “work against” my argument? Even if the plans are performing badly (arguendo), that still means added income to the worker. In other words, as long the plans are > $0, they will reduce income inequality. No matter how bad 401k’s or pensions are, I know of none that performs so bad that the worker ends up owing money to the plan. So no matter how little they have, they still add to the wages earned by workers.

    So again I ask, do you think it’s disingenuous of EPI to exclude healthcare costs from their income inequality calculations? What about excluding 401k’s and pensions from their income inequality calculations?

  • My response to Jon’s sixth comment:

    This is the important part of my immigration claim:

    According to the National Venture Capital Association, immigrants make up only 11.7% of the U.S. population, but have started one in four of all U.S. public companies that have been venture-backed over the past 15 years, including Intel, Google, Yahoo!, Sun and eBay.

    A similar study from Duke University showed immigrants were responsible for starting 25.3% of all new, high-technology businesses in the U.S. during the past 10 years. The greatest percentage of these entrepreneurs hailed from India (26%), followed by immigrants from the U.K., China and Taiwan.

    The link is here. And it’s really a lot stronger than this, as the immigration percentage given (11.7% of the U.S. population) includes all immigrants, the educated from India, the U.K., China, and Taiwan and the uneducated from Mexico and general Latin America region. Now given that immigration from Mexico is probably the larger percentage, it’s safe to assume that the educated immigrants from India and others are an even greater source of entrepreneurship per capita.

    Factor in that the upper quintile is something like only 0.1% of the population, and you can see that you don’t need too many “Intel, Google, Yahoo!, Sun and eBay’s” CEO’s to make an impact.

    So to reiterate, poor immigrants harm those at the bottom and help those at the top. Educated immigrants contribute to the wealth at the top. In the end, immigration is an overall net income inequality riser. And when you factor in the dramatic rise in immigration from the 1970’s onward, you can easily see that it’s a substantial contributor (just as, btw, the majority of economists already believe, see here).

    Regarding marriage, you write, “what this means is that the statement regarding the increase from 37 to 71% doesn’t tell us that preferences have changed. It may mean nothing more than that the college graduation rate is up and we naturally expect the rate of the college educated marrying the college educated to also go up.”

    It’s not just the marriage preferences change at the top that’s important, remember, the marriage rate at the bottom has been decreasing. This makes the situation even worse. Income inequality goes up.

    Regarding working hours, you write, “500 freaking hours per year from 1980 to 2000. 12.5 flipping working weeks per year. That’s not much? And their wages are barely increasing as compared to the rich. That’s pretty darn shocking, wouldn’t you say?”

    But this misses the point Jon, it’s not the absolute amount of working hours that is important – it’s the relative amount. So to make your point, you have to show working hours of the poor and middle class relative to working hours of the rich.

    Second, it’s not true that one hour worked by the rich should be equal to one hour worked by the middle class. The rich make more, so to leave income inequality the same, the middle class would have to increase their working hours by more than the rich. Lastly, the rich are already working exorbitant amount of hours, more so than those who make less than them. So one additional hour is going to be a lot harder than say one additional hour to the very poor, or middle class (as someone who has on occasion worked 16 hour days, I can attest that it’s the last few hours that are always the hardest). So based on this alone, that justifies a higher premium on the riches additional hour worked than say, the additional hour worked by the middle class or especially the poor.

    So when you look at it from this new light, you see a completely different picture. First, as the chart shows, the bottom quintile has actually reduced their working hours since the 1970’s. So it makes sense that their income, relative to the rich, has significantly decreased. The 2nd quintile doesn’t show much of a gain relative to the rich. It’s not really until you get to the 3rd and 4th quintile that you start seeing increases in hours worked relative to the rich. In other words, this explains the income inequality disparity between the richest and poorest, leaves unchanged the 2nd quintile, but lacks an explanation for those in the 3rd and 4th quintile.

    Lastly, its important to stress that what I am arguing here is not unorthodox. I am taking what the majority of economists have been saying for years. Regarding the marriage rate, for example, Wiki writes:

    Inflation adjusted income data from the Census Bureau shows that household income has increased substantially for all demographics, with larger gains experienced by those with higher incomes. The emergence of dual-earner households has had a substantial impact on increasing household income, especially among households in the upper 20%. Along with the entrance of women into the labor force, the discrepancy between those households with one and those with multiple earners was amplified significantly.

    The words “substantial” and “significantly”, are theirs, not mine.

    Regarding immigration, Wiki writes:

    The large increase in immigration over the past several decades, with foreign born workers increasing from about 5% of the workforce in 1970 to over 15% in 2005, has also increased income disparities, as the majority are immigrating from poor countries, come to the US, and attempt to work their way out of poverty and into the middle class. But government policy over the decades have also had its effects.

    The same can be said of trade, education, and other factors listed above.

    Jon still refuses to answer my question, which I continue to await. For the third time now: do you think it’s disingenuous of EPI to exclude healthcare costs from their income inequality calculations? In addition, do you think its disingenuous of EPI to exclude 401k’s and pensions from their income inequality calculations?

    Remember, this is important because it directly addresses the heart of our disagreement. It shows, for example, that ” while people are working harder and longer and at the same time they are even more productive by a wide margin their income gains are” not “anemic”. They just have been going to the rising costs of healthcare and been included in other forms of fringe benefits, like 401k’s and pensions. Yet EPI completely excludes them. I say this shows bias and disingenuous on their part. I want to see if you do too.

    Jon writes, So in answer to your question about zero sum, why would I want a system that skews all the benefits to the rich and leaves the rest unchanged? Why not rather have a system where everybody enjoys the gains? That’s why I care about it even though it is not zero sum.

    But that assumes zero sum Jon. In other words, the pie is not fixed. Just because the rich make more, that doesn’t mean the rest have less. The pie grows. Wealth is created. Take for example, google. The founders Brin and Page, by creating google created wealth. Their existence in no way makes braces for your kids more expensive. In no way, makes college education more expensive. In fact, it makes us all richer. I google for free and enjoy that increase in standard of living that my parents never had.

    The fact that they are the top 0.01% of the population is irrelevant from my standard of living perspective. Their existence, their wealth, has also made me wealthier. The pie has grown.

  • Response to Jon’s seventh comment:

    Sorry, I misspoke. I meant the concentration of the upper quintile is only like 0.1% (or even 0.01%) of the population. It is my understanding that what really drives income inequality is more specific than merely the upper quintile, it’s actually a small segment of the upper quintile…something like 0.1% or even 0.01% of the population. My point was that a CEO of Google, or Yahoo, or AIG, etc could easily move up into this small segment and significantly drive income inequality.

    In short, here is my argument with regard to the educated segment of immigration: a) they make a disproportionately large amount of venture capitalists (have started one in four of all U.S. public companies that have been venture-backed over the past 15 years), b) they are considered some of the most educated in the United States (not just masters degrees, but Phd’s and largely concentrated in the sciences) , c) they are disproportionately ambitious.

    Does this mean they are largely responsible for income inequality? On that we would need more data (in fact, I would argue that its not largely, but it is a factor). But I think it’s safe to say that they contribute some to income inequality. Wiki and a majority of economists support my claim. So when you write, I think your point regarding immigration is fair, but I don’t think it explains the situation to a large degree. We fundamentally agree.

    Regarding working hours, your merely reiterating the point I have already conceded, I had said: ” It’s not really until you get to the 3rd and 4th quintile that you start seeing increases in hours worked relative to the rich. In other words, this[working hours alone] explains the income inequality disparity between the richest and poorest, leaves unchanged the 2nd quintile, but lacks an explanation for those in the 3rd and 4th quintile.”

    In other words, I agree that if all we had was working hours alone, the 3rd and 4th quintile would need more explanation. But before we move onto that, you agree that if we look at working hours alone, it explains why the poorest have lost relative gain, correct?

    (btw, the misunderstandings here are all my fault, not yours – I was writing my post late last night, while taking care of a 2 year old and a 2 week old…thoughts sometimes came out faster than I could write)

    Regarding marginal hour worked, you write, You say that the rich should make more because since they already work longer hours 1 additional hour is more strenuous for them. Is that how you think the economy should work? Just because an additional hour is more strenuous, this doesn’t mean they are bringing more value.

    But this is how the economy works. Think about it like this: if you are a laborer, and you work more than 8 hours a day, the company has to pay you overtime, don’t they? It’s the same concept. The more hours are needed, the more the marginal hour requires a premium. Don’t think about it as “more value”, think about it as “what does it take to get me to give up even more of my leisure time”.

    If you work 8 hours a day, and the company asks you to work an additional 9th hour, how much would you require? What if you worked 12 hours and the company asks you to work an additional 13th hour? What about 14 hours and are asked to work an additional 15th hour? 16 hours with an additional 17th? Surely the more “base hours” you work, the more you demand for that additional hour. You can probably get away with 8 hours of leisure, 8 hours of sleep, and 8 hours of work fairly well. But the more you lose leisure, the more valuable each additional hour of leisure is to you. So you require a higher pay premium to give it up. Its what economists call “marginal value”. The less leisure time you have, the higher your marginal value of leisure is to you. So the more you require to give it up. The rich are already at the tail end of working hours, so youd expect that their marginal hour is alot more than say the next quintile.

    I think this is both intuitive and just. After all, there are only 24 hours in a day.

    Regarding EPI and 401k’s, you write: In the case of a 401k, this is an additional employer provided benefit. But as it has come in the pension has phased out. Since this is worse than a pension the net effect is another reduction in pay. But is this true? You cant just say it. You have to prove it. Because my intuition is the opposite, namely: there is a far greater percentage of people covered by 401k’s than ever covered by pensions. And if you include both, pensions and 401k’s, that percentage has been dramatically increasing since the 1970’s. You say no, I say I want proof.

    Regarding EPI and healthcare, you write: With health care as additional costs are imposed on the employee (another drain on income) this has once again exacerbated the inequality problem. This is a complete cop out. This just confirms what we already know: healthcare costs are rising for everybody, employee and employer. So this just makes my argument stronger: why not include the healthcare costs the employer pays as part of wages? They are certainly part of “wages” from an employer perspective and from how leftists argue (just look at the Walmart vs healthcare debates), that’s the direction they want wages to go (first to healthcare costs, then pay).

    So you gotta give me something better than this Jon. Or just do the easy thing: admit that EPI is disingenuous for excluding healthcare costs. It seems rather obvious to me and the mere fact that you’re doing everything you can to avoid admitting the obvious is quit telling.

    Regarding zero sum, it still implies that. Remember, I made the Google example above. I could have also made the J.K. Rowlings example. Or the Bill Gates example. Or Alex Rodriguez example. Or Johnny Depp example. Their gains are also our gains. Of course they get more, but they actually did the inventing. In other words, their gains do not subtract from our gains – in fact, they also make our lives better. Do you atleast agree to that?

  • My next reply:

    Sorry, I misspoke. I meant the concentration of the upper quintile is only like 0.1% (or even 0.01%) of the population. It is my understanding that what really drives income inequality is more specific than merely the upper quintile, it’s actually a small segment of the upper quintile…something like 0.1% or even 0.01% of the population. My point was that a CEO of Google, or Yahoo, or AIG, etc could easily move up into this small segment and significantly drive income inequality.

    In short, here is my argument with regard to the educated segment of immigration: a) they make a disproportionately large amount of venture capitalists (have started one in four of all U.S. public companies that have been venture-backed over the past 15 years), b) they are considered some of the most educated in the United States (not just masters degrees, but Phd’s and largely concentrated in the sciences) , c) they are disproportionately ambitious.

    Does this mean they are largely responsible for income inequality? On that we would need more data (in fact, I would argue that its not largely, but it is a factor). But I think it’s safe to say that they contribute some to income inequality. Wiki and a majority of economists support my claim. So when you write, I think your point regarding immigration is fair, but I don’t think it explains the situation to a large degree. We fundamentally agree.

    Regarding working hours, your merely reiterating the point I have already conceded, I had said: ” It’s not really until you get to the 3rd and 4th quintile that you start seeing increases in hours worked relative to the rich. In other words, this[working hours alone] explains the income inequality disparity between the richest and poorest, leaves unchanged the 2nd quintile, but lacks an explanation for those in the 3rd and 4th quintile.”

    In other words, I agree that if all we had was working hours alone, the 3rd and 4th quintile would need more explanation. But before we move onto that, you agree that if we look at working hours alone, it explains why the poorest have lost relative gain, correct?

    (btw, the misunderstandings here are all my fault, not yours – I was writing my post late last night, while taking care of a 2 year old and a 2 week old…thoughts sometimes came out faster than I could write)

    Regarding marginal hour worked, you write, You say that the rich should make more because since they already work longer hours 1 additional hour is more strenuous for them. Is that how you think the economy should work? Just because an additional hour is more strenuous, this doesn’t mean they are bringing more value.

    But this is how the economy works. Think about it like this: if you are a laborer, and you work more than 8 hours a day, the company has to pay you overtime, don’t they? It’s the same concept. The more hours are needed, the more the marginal hour requires a premium. Don’t think about it as “more value”, think about it as “what does it take to get me to give up even more of my leisure time”.

    If you work 8 hours a day, and the company asks you to work an additional 9th hour, how much would you require? What if you worked 12 hours and the company asks you to work an additional 13th hour? What about 14 hours and are asked to work an additional 15th hour? 16 hours with an additional 17th? Surely the more “base hours” you work, the more you demand for that additional hour. You can probably get away with 8 hours of leisure, 8 hours of sleep, and 8 hours of work fairly well. But the more you lose leisure, the more valuable each additional hour of leisure is to you. So you require a higher pay premium to give it up. Its what economists call “marginal value”. The less leisure time you have, the higher your marginal value of leisure is to you. So the more you require to give it up. The rich are already at the tail end of working hours, so youd expect that their marginal hour is alot more than say the next quintile.

    I think this is both intuitive and just. After all, there are only 24 hours in a day.

    Regarding EPI and 401k’s, you write: In the case of a 401k, this is an additional employer provided benefit. But as it has come in the pension has phased out. Since this is worse than a pension the net effect is another reduction in pay. But is this true? You cant just say it. You have to prove it. Because my intuition is the opposite, namely: there is a far greater percentage of people covered by 401k’s than ever covered by pensions. And if you include both, pensions and 401k’s, that percentage has been dramatically increasing since the 1970’s. You say no, I say I want proof.

    Regarding EPI and healthcare, you write: With health care as additional costs are imposed on the employee (another drain on income) this has once again exacerbated the inequality problem. This is a complete cop out. This just confirms what we already know: healthcare costs are rising for everybody, employee and employer. So this just makes my argument stronger: why not include the healthcare costs the employer pays as part of wages? They are certainly part of “wages” from an employer perspective and from how leftists argue (just look at the Walmart vs healthcare debates), that’s the direction they want wages to go (first to healthcare costs, then pay).

    So you gotta give me something better than this Jon. Or just do the easy thing: admit that EPI is disingenuous for excluding healthcare costs. It seems rather obvious to me and the mere fact that you’re doing everything you can to avoid admitting the obvious is quit telling.

    Regarding zero sum, it still implies that. Remember, I made the Google example above. I could have also made the J.K. Rowlings example. Or the Bill Gates example. Or Alex Rodriguez example. Or Johnny Depp example. Their gains are also our gains. Of course they get more, but they actually did the inventing. In other words, their gains do not subtract from our gains – in fact, they also make our lives better. Do you atleast agree to that?

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