'7 reasons why Obama is wrong about income inequality'

Rick Moran
James Pethokoukis at the Enterprise blog has some fascinating data on "income inequality" that the CBO numbers did not take into account when they showed the top 1% gaining 275% in wealth over the last 30 years.

First, according to the CBO;s own numbers, median household income grew by 35% in that 30 year period. Median, as opposed to average, is a better indicator of top to bottom growth.

Here are the other reasons:

2. The CBO fails to factor in that American households in the top income quintile have, on average, almost five times more family members working than the lowest quintile. (Analysis by AEI blogger Mark Perry.) Those folks are also far more likely, as Perry notes, than lower-income households to be well-educated, married, and working full-time in their prime earning years. Perry also notes that "individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes." (Indeed, a Treasury study on income mobility found that starting in 1996, half of taxpayers who started in the bottom 20 percent had moved to a higher income group by 2005.)

3. Price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor.

4. Apples-and-oranges kinds of issues-such a differences in household size and inflation indexes-has led highly respected Northwestern University professor Robert Gordon to conclude that the "rise in American inequality has been exaggerated both in magnitude and timing."

5. The Minneapolis Federal Reserve concluded-after taking into account household size and differing price indexes-median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

6. As technological change accelerates and becomes more pervasive, the market will reward workers with more education and skills. As CBO notes: "Numerous researchers have concluded that, on balance, the technological changes of the past several decades-and perhaps the entire past century-increased employers' demand for workers with higher skills and more education. That increase, along with a smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated worker. In the past decades, inequality has been going up everywhere." It is a global phenomenon.

7. And why did the top 1 percent do particularly well? One potential explanation from CBO: "The compensation of 'superstars' (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in income for such people." The CBO also mentioned "changes in the governance and structure of executive compensation, increases in firms' size and complexity, and the increasing scale of financial-sector activities" as possibilities.

In short, the CBO report cherry picked data to show more income inequality than is present.

James has several recommendations to close the gap including "a pro-growth tax system, smarter regulation and far better human capital (helped by higher teacher pay in exchange for eliminating tenure, more skilled immigration, etc.)."



James Pethokoukis at the Enterprise blog has some fascinating data on "income inequality" that the CBO numbers did not take into account when they showed the top 1% gaining 275% in wealth over the last 30 years.

First, according to the CBO;s own numbers, median household income grew by 35% in that 30 year period. Median, as opposed to average, is a better indicator of top to bottom growth.

Here are the other reasons:

2. The CBO fails to factor in that American households in the top income quintile have, on average, almost five times more family members working than the lowest quintile. (Analysis by AEI blogger Mark Perry.) Those folks are also far more likely, as Perry notes, than lower-income households to be well-educated, married, and working full-time in their prime earning years. Perry also notes that "individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes." (Indeed, a Treasury study on income mobility found that starting in 1996, half of taxpayers who started in the bottom 20 percent had moved to a higher income group by 2005.)

3. Price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor.

4. Apples-and-oranges kinds of issues-such a differences in household size and inflation indexes-has led highly respected Northwestern University professor Robert Gordon to conclude that the "rise in American inequality has been exaggerated both in magnitude and timing."

5. The Minneapolis Federal Reserve concluded-after taking into account household size and differing price indexes-median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

6. As technological change accelerates and becomes more pervasive, the market will reward workers with more education and skills. As CBO notes: "Numerous researchers have concluded that, on balance, the technological changes of the past several decades-and perhaps the entire past century-increased employers' demand for workers with higher skills and more education. That increase, along with a smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated worker. In the past decades, inequality has been going up everywhere." It is a global phenomenon.

7. And why did the top 1 percent do particularly well? One potential explanation from CBO: "The compensation of 'superstars' (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in income for such people." The CBO also mentioned "changes in the governance and structure of executive compensation, increases in firms' size and complexity, and the increasing scale of financial-sector activities" as possibilities.

In short, the CBO report cherry picked data to show more income inequality than is present.

James has several recommendations to close the gap including "a pro-growth tax system, smarter regulation and far better human capital (helped by higher teacher pay in exchange for eliminating tenure, more skilled immigration, etc.)."