You Can Start Disbelieving the Nonsense About the 1% Getting Richer

In the U.S., the 1% are getting richer, and no one else is. Right? That, at least, has been the narrative over the last fifteen years or so. The first pass research on this, by Piketty and Saez in 2003, helped make them famous.

The evidence for that has been based on individual tax returns. But tax rates change through the years. Looking at tax returns without considering the underlying rates (and how they might change behavior) is called the unadjusted approach. It shows the 1% getting much richer.

So what needs to be adjusted for?

• The biggest tax reform of the last 50 years in 1986
• Corporate profits, that are paid out as dividends at different rates depending on tax rates.
• Value of employer provided health insurance.
• Smaller household sizes, and lower marriage rates.
• Government transfer payments

Now the tax experts have incorporated corrections for all of those. The big ones are that the treatment of corporate profits that were not paid out (but that rich people had access to, say, through corporate owned vacation property) was much larger in 1960, while it turns out that now the top 1% is actually supporting a bigger group of unreported dependents (rich families aren’t the ones getting smaller).

Piketty and Saez reported that the share of income taken in by the top 1% doubled since 1960. The new research by Auten and Splinter find that over 90% of Piketty and Saez’s increase is there because they didn’t adjust for that stuff. Basically, the 1% are a tiny bit richer. Not enough to worry about.

One thing that both studies find is that the share of the top 1% dropped significantly in the 1970’s. So their share is U-shaped. This is consistent with tons of evidence that business cycles hit the income of the rich the hardest, and there were 4 recessions in a 13 year period centered on the 70’s.

Over the last couple years, it’s also become common to remark that the share of income paid out to individuals has fallen, and that the share going to profits, interest, and rent has gone up. The adjusted “broad income” in this chart shows that’s not the case:

What the new research corrects for is that about half of income is now coming from stuff other than wages and salaries:

Piketty and Saez were looking mostly as the center section.

This points to a good convention when thinking about news reports about inequality: if they focus on wages and salaries, they’re cherry-picking.

Second of Two Pieces on Income

Martin Feldstein is a macroeconomist from Harvard (probably their oldest). He’s been well-known since before I started college (he was one of Reagan’s economic advisors in the early 80’s).

In a September 8 op-ed piece in The Wall Street Journal entitled “We’re Richer Than We Realize” he argues that real GDP (and its growth rates) are understated.

The common assertion that middle-class households have seen no increase in real incomes for 30 years is simply not true. And contrary to a common fear, most members of the younger generation will have higher real incomes as adults than their parents had at the same age.

There are two reasons for this, and he argues that both of them are getting more severe.

First, government statisticians grossly understate the value of improvements in the quality of existing goods and services. More important, the government doesn’t even try to measure the full contribution of new goods and services.

On the first count, the government is basically “old school”. They view quality improvements as largely proportional to costs. This might make sense for home construction, but not so much for smartphones.

… In reality companies improve products in ways that don’t cost more to produce and may even cost less. That’s been true over the years for familiar products like television sets and audio speakers. The government therefore doesn’t really measure the value to consumers of the improved product, only the cost of the increased inputs. …

The official estimates of quality change are therefore mislabeled and misinterpreted. When it comes to quality change, what is called the growth of real output is really the growth of real inputs.

The second issue is about the introduction of new products. We’re OK at counting the value of the new products, but we don’t make much of an attempt to figure out how much richer we are from mitigating the problem the new product solved:

Think about statins, the remarkable class of drugs that lower cholesterol and reduce deaths from heart attacks. By 2003 statins were the best-selling pharmaceutical product in history. The total dollar amount of statin sales was counted in GDP, but the government’s measure of real income never included anything for improvements in health that resulted from statins—such as a one-third decrease in the death rate from heart disease among those over 65 between 2000 and 2007.

Think about that: one third of deaths from the biggest killer eliminated in 7 years. That’s a ridiculous improvement to leave unmeasured. But, of course, the techniques for counting GDP were developed before things like this happened regularly.

It is impossible to know how much the official statistics understate the true growth of real incomes. My own judgment is that the true annual growth rate could exceed the official figure by two percentage points or more, implying that the true annual rate of real per capita income growth during the past two decades has been much more than double the official 1.3%.

I don’t know if I’d go that high, but I wouldn’t even debate a 1% mismeasurement.

First of Two Pieces on Income

The Census Bureau reports this week that real median household income hit a record high.

There’s been quite a bit in the news over the last decade or so about stagnating incomes. This is the piece of evidence that is primarily used to justify that position. In this case, real median income for households just passed the previous peak from 1999. The implication is that incomes fell and recovered in that intervening period:

The discontinuity towards the right notes a change in how the data was measured.

Data like this is used to justify the position that the economy is weak.

That may be, but it’s also important to consider what the data is missing. In this case, it’s the definition of a household. We’re in the midst of a multi-decade phase of people living in smaller households: parents have fewer kids, couples get divorced more, and it’s quite a bit less likely for working adults who are not related (as in TV shows like Two Broke Girls) to live together than it used to be.

If households are getting smaller with the passage of time, this means that the data in the graph above is understating growth in the data, and that understatement gets more severe as you go to the right.

Officially, the Census Bureau does not make that adjustment. But it’s fairly easy to find on the internet (here’s an article from Forbes from a few years back). It combines it with a second adjustment for the price index used to deflate nominal incomes (they advocate using the PCE).

While the Census Bureau estimates suggest that median household income rose by just 10 percent from 1969 to 2013, when the PCE is used for inflation adjustment and incomes are adjusted for the number of adults in a household, the increase was 30 percent. The 10 percent rise the Census Bureau estimates translates into a $4,800 increase. A 30 percent rise in unadjusted terms would amount to $14,400—quite a difference.

These issues are not hidden. But they are on the difficult side.

An appropriate interpretation is that the Census Bureau is providing a first pass estimate that indicates there may be a problem. Dig a little deeper, and the second pass says we should worry less. That part doesn’t get covered in the legacy media enough.

Optional: Traditional (Illiquid) Asset Tokenization

Have you heard of Bitcoin? If not, you should have.

Bitcoin is the best known application of a far more important technical advance called  blockchain.

A blockchain is a secure way to store and update a database.That database might hold the information on something of value. That value can be broken up into little pieces called tokens. Bitcoin is a currency that is not backed by government fiat, and whose tokens (called bitcoins) have value.

The more secure the blockchain, the easier it is to trade the tokens because their value is clear.

So … what if the something of value was an expensive asset that isn’t liquid … and you put its ownership in a blockchain … and then sold the tokens? For example, you might have just created fractional ownership of something like an artwork, or a building, or a ….

This is where the world is heading. It’s not clear how this will impact macroeconomics.

One More Explanation for Increasing Wage Inequality

Wage inequality is increasing.

In America, contemporary discussion often presents this is in political and social terms: market-oriented policies pushed by Republicans (and some Democrats) over the last 35 years have increased inequality.

This argument has a serious weakness, that is well-known outside the realm of politicians and pundits. This is that wage inequality is getting worse in many countries around the globe, particularly in the developed ones. It’s difficult to see how market-oriented policies within the U.S. could have produced that result outside the country.

There’s new evidence from Sweden that it’s about higher pay for non-cognitive skills.

Cognitive tasks are technical and/or quantitative. Think math. Non-cognitive skills are sometimes called soft skills or people skills.

The theory is that we are offloading cognitive tasks onto computers, making those skills less valuable. So demand for cognitive skills is shifting left, freeing up funds for a shift in the demand for non-cognitive skills to the right, increasing their price.

This increase occurred primarily in the private sector, among white-collar workers, and at the upper-end of the wage distribution.

…

… Workers with an abundance of non-cognitive skill were increasingly sorted into occupations that were intensive in: cognitive skill; as well as abstract, nonroutine, social, non-automatable and offshorable tasks. Such occupations were also the types of occupations which saw greater increases in the relative return to non-cognitive skill. This suggests sorting on comparative advantage …

Via Marginal Revolution.