Tuesday, October 6, 2009

Income, Poverty and Economic Growth

New York Times: You Are What You Spend-

"Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society."

Wall Street Journal: Income Mobility- U.S. Treasury Study (link)

"The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.\"

Income Mobility in the U.S. from 1996 to 2005
Report of the

"Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups. The degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility."

From the PEW Economic Mobility Studies:


  Source: The Myth of Middle-Class Stagnation, Steve Conover

From the October 3rd EconTalk podcast, Bruce Meyer discusses income inequality since the 1960's:

"Bruce Meyer of the University of Chicago talks with EconTalk host Russ Roberts about the middle class, poverty, and inequality. Many economists and pundits argue that the middle class has made little or no economic progress over the last 30 years, that poverty rates are stagnant or rising, and that inequality has increased dramatically. Meyer, drawing on his research over the last ten years, argues that these conclusions are either false or misleading. He argues that standard measures of economic progress and inequality are based on faulty inflation data or a misplaced focus on pre-tax income instead of post-tax income or consumption. " 

Some excerpts from Meyer's paper:

Consumption and Income Inequality in the U.S. Since the 1960s*
October 18, 2010
Bruce D. Meyer
University of Chicago and NBER
and James X. Sullivan
University of Notre Dame

"Income data primarily come from the ASEC/ADF Supplement to the Current Population Survey (CPS), which is the source for official measures of poverty and inequality in the U.S. We use data from the 1964-2006 surveys which provide data on income for the previous
calendar year."
What we see is that compare the top 10% (90th percentile)to the bottom 10% the ratio o inequality (income for the top 10% / income for the bottom 10%) has increased very little. Adjusting for taxes, the ratio has went from about 5.5 to about 6.25, while adjusting for taxes and transfers, it has increased from about 4.10 to about 5.75. We don't see drastic changes such as a 10 fold change or even a doubling of the gap as the media might impress. Looking at just the last 10-15 years, the change is even smaller. 
If we look at the top 10% of earners vs. the median earners, (often the most popular claims in the is  that the gap between median income earners and the top earners has gotten larger as median income has stagnated over the last 30 years) we see that the ratio has remained changed very little since 1961, going from around 2.0 to about 2.25 adjusting for taxes and transfers, and has been even flatter since the 90's.
Finally, when compare the median income earners to the bottom 10%, again we find little change in income differences since 1961. There was a growing gap for a period during the 1980's, but those slight increases diminished in the 90's and we finished out 2007 at a ratio right about 2.5 where we started in 1961. 

 As Bruce Meyer's work above indicates, you can't just take income related data at face value. If we look at income inequality based on family market income data used by Picketty and Saez teh picture looks pretty bleak:

Saez, Emmanuel. (2012). Striking it Richer: The Evolution of Top Incomes in the United States. (Updated with 2009 and 2010 estimates). http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf

 However, there are huge differences in outcomes when we consider how we measure income a well as how we account for things like household economies of scale:

"A Second Opinion on the Economic Health of the American Middle Class and Why it Matters in Gauging the Impact of Government Policy," by Richard V. Burkhauser, Jeff Larrimore and Kosali Simon. National Tax Journal, March 2012.

“Researchers considering levels and trends in the resources available to the middle class traditionally measure the pre-tax cash income of either tax units or households. In this paper, we demonstrate that this choice carries significant implications for assessing income trends. Focusing on tax units rather than households greatly reduces measured growth in middle class income. Furthermore, excluding the effect of taxes and the value of in-kind benefits further reduces observed improvements in the resources of the middle class. Finally, we show how these distinctions change the observed distribution of benefits from the tax exclusion of employer provided health insurance”

 For more details about this methodology, see the April 9,2012 EconTalk podcast with Burkhauser:

CNN Money - CEO Pay

From: http://www.epi.org/publication/webfeatures_snapshots_20060621/ 

When considering income, how might the marginal contribution (in terms of the value of output, consumer surplus etc.)  of a CEO vs. the average worker changed over time? Were there changes in capital (which complements labor)? What about the size of the market served by new products?

You can find a very good discussion of these issues from a Cato Daily Podcast here: Steve Jobs, Profit and Social Obligation