A Thought on Income Inequality

Income inequality has become a popular Progressive trope with which to demonize Republicans, Conservatives, and the United States generally over our alleged insensitivity to the plight of our poor.  Notwithstanding the immorality of capping whatever it is we use for income in order to take from the better off and give those takings to the poorer off, there are practical failures in this meme, as well.

One source of information that clarifies this matter comes from Stanford University’s Hoover Institution in the form of a paper by Kip Hagopian and Lee Ohanian, titled The Mismeasure of Inequality.  Following are some highlights from that paper; RTWT.

…the Census Bureau, which uses what it calls “money income” in its measurement of income inequality.  Money income, which is the definition of income typically used in public references to inequality, consists of cash income only, does not subtract taxes, and excludes the value of noncash transfer payments (such as nutritional assistance, Medicare, Medicaid, and public housing), as well as many other components of income.  In addition to transfer payments, which are a substantial portion of income at the low end of the income scale, some of the other missing components of income are: employer-provided fringe benefits (primarily retirement benefits and health insurance, which can amount to as much as 30 percent of income), capital gains, imputed rent from owner-occupied housing, and increases in the value of home equity


Based on this more relevant definition [which included all those exclusions], income inequality declined 1.8 percent during the sixteen-year period between 1993 and 2009….

But even using the Gini coefficient, a popular “measure” of income inequality—which uses only money income as its measure—income inequality in the US only grew by 10% over the last nearly 30 years.

But it also turns out that income isn’t the only way to measure what’s intended with “money income” or “total income,” nor is it necessarily even the best measure.

…almost singular focus on income as a measure of economic well-being, when there is a clear consensus among economists that the best measure of living standards over the long term is not income, but consumption.  Focusing on consumption rather than income provides a very different picture of inequality.  … [A]ccording to the BLS [Bureau of Labor Statistics], during the fifteen-year period between 1986 and 2001, consumption inequality went down slightly; from a Gini of .283 to a Gini of .280.

Consumer Expenditure Surveys say much the same thing: consumption is relatively equal across incomes.  Even at that,

[C]urrent methodologies measure only market consumption rather than total consumption, which is the sum of both market (purchased) and nonmarket (home-produced) goods.  This is important because lower-income households consume a disproportionate amount of goods produced in the home (what economists call “home production”), including home-cooked meals, household-provided child care, and household home improvements and maintenance. Economists have estimated that home production is around one-third of GDP, yet this form of consumption is not counted in the total when measuring consumption inequality.

And none of this addresses the dynamic nature of income and consumption, what’s called economic mobility, or the ability of folks to move (or down) the economic ladder.  Here, we are wanting: upward economic mobility requires, among other things, job availability and, for homeowning job hunters, the ability to sell their homes pursuant to a job-related relocation.

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