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*Economist's View* on Alan Reynolds
Here is a further exploration of data issues.
Another post worth reading is The Conspiracy Against Cuckolds.
Posted by Tyler Cowen on December 17, 2006 at 08:01 AM in Data Source | Permalink
Comments
I have not read Alan Reynolds' new book, INCOME AND WEALTH, so I cannot comment on his evidence to support the ideas presented in the WSJ article. Apparently none of Reynolds' commentators have read the book either. I'd appreciate greatly if you can refer to reviews of Reynolds' books.
Posted by: Edgardo at Dec 17, 2006 8:36:05 AM
I have not been following the debate about Alan Reynolds very closely. So far, I have only read criticisms of the man's work.
Moreover, I personally think the whole inequality debate is silly. I could not care less if some fool down in New York City is making 200 times more than what I make while working 80 hours a week. The man has nothing I want. (Well, I would take the dough if I did not have to pay the price to get it).
But having said all that, the way people are going after Reynolds is bringing out my instinct to defend the underdog. So I have two questions for all those who are defending tax returns as a valid measure of inequality.
How can income measured by tax returns be a valid measure of inequality with out controlling for cost of living? In other words, can you really say that earning $100,000 in Nebraska is the same as earning $100,000 New York City?
This is relevant question since the cost of living has risen far faster in some areas then others. It would seem to me that this affect would partially offset any rise in wages in those areas.
How can you rely on the tax returns of the working poor and blue collar workers as a valid measure of their income with out controlling for amount of money they make under the table?
Almost all of the working poor and the blue collar workers make a significant portion of money under the table. It seems to me that everyone is assuming that the money made under the table is staying consistent with above board income. But based on my observations, this has not been the case. Money made under the table has been rising a lot faster than above board wages for everyone from housekeeping to electrical work.
In fact, I have a theory that this rise in the money to be made in under the table work has been drawing more people into the grey market, thus helping to hold above board wages down.
Posted by: The Chieftain of Seir at Dec 17, 2006 10:46:17 AM
Can someone tell me if this issue of making money under the table is related to what the IRS calls the "tax gap?" In 2001, $290 billion in taxes was not collected that was supposed to be collected. Is this due to unreported income? I can't tell for sure from the article (link below). How much income would have to be unreported to leave $290 billion uncollected in taxes? If the government takes, say, 20% of income in taxes, then we multiply 290 times 5 to get 1450. That would be over a trillion dollars in unreported income. Then the question is which quinitles are earning that income?
Here is the link to the IRS press release
http://www.irs.gov/newsroom/article/0,,id=154496,00.html
I just can't tell for sure why or what the source is of the shortfall in collections. Is it under reporting income or just not paying taxes? How much unreported income is there estimated to be?
Posted by: Cyril Morong at Dec 17, 2006 12:26:45 PM
Me, I'm still fairly sure there's been an increase in wealth inequality. I think Alan Reynolds provides some interesting perspective, but on the whole there's more wealth inequality.
And I may be going back to the same well, here, but I figure that measured wealth inequality is a magnifying function of measured wage inequality. And now we know, thanks to Lemieux, that measured wage inequality is largely due to demographic shifts in the American workforce. We have more older workers and more college-educated workers, and there is and has always been more wage inequality within these groups of workers.
So I'm guessing that wealth inequality within these groups of workers would be even greater, especially within older workers, since most people start accumulating assets as they enter middle age. I bet the increased number of older workers, with the greater wage inequality within that group, combined with the fact that these workers are in their wealth-accumulating part of the life cycle, generates a lot more wealth inquality, especially with the high returns to different classes of relatively widely-held assets like equities and real estate over the last 25-30 years.
Posted by: Keith at Dec 17, 2006 2:22:09 PM
Hmm. In several places Mark Thoma seems to claim "yes, everyone's aware of that objection" as though that explains away the objection in a way that I'm not really comfortable with.
But inequality is complicated because plenty of things are not time-homogenous. As all parties concede, changes like the percentage of women working, immigration, and people staying in school longer (trading years of poverty-level student income for higher incomes once they get out) can increase the inequality statistics without necessarily meaning anything real, or at least inequality in the standard sense.
Posted by: John Thacker at Dec 17, 2006 2:22:49 PM
I read a New Yorker piece on income inequality awhile back, and this seems like the same stuff, with a few more numbers thrown in.
The frightening thing is that supposedly serious minded people want to "do" something about it.
How does the government plan to go about making us equal in outcome? No good can come from such an idea.
More to the point though, if the poorest among us are really not very poor, what does it matter that the top 5% bring in 16% of the dough? Really, what does it matter? I've done community work in poor neighborhoods, and they are not suffering.
The television argument sounds frivolous, but it is a good indicator of overall economic position when 1) the poor family even has a TV - more often than not a nice one at that, and 2) they have the time to watch so much of it. Leisure time is often used as an indicator of overall economic comfort, and if that's what the poor want to do with their leisure time, then so be it.
So instead of focusing on the extreme fringes of the samplings, as the New Yorker piece did, zero in on what the average low-income household is like. They have plenty of opportunity for advancement, they have airconditioning, they have automobiles, color TVs, refrigerators, they have food to spare, etc.
Focusing on the gap itself is simply wrong on several levels, and in my opinion, is actually dishonest in the larger context of the debate.
Posted by: Ray G at Dec 17, 2006 7:23:51 PM
Tyler,
A few posts ago you were saying Reynold's stuff could be "very very important". Now that Thoma and Delong say that he is essentially a charlatan, you simply point to the posts with no comment.
Cat got your tongue?
Posted by: Robb Lutton at Dec 18, 2006 5:18:25 AM
I'll definitely more on this, right now I am waiting to get the book. 800 words in a newspaper is not enough to judge. The first commentator on this post has the bottom line.
Posted by: Tyler Cowen at Dec 18, 2006 7:36:17 AM
There were two points that I took away from the discussion so far:
1) Publicly available Census Population Survey Data estimates of income distribution are biased because of top coding of high incomes. This is the source of the Reynolds data.
2) Piketty Saez's use of tax returns to compute income distribution may be biased because the sample of tax returns may not be representative of the population.
Here is one approach: Sign a confidentiality agreement with Census to use the non public version of the CPS data. (This may be easier said than done.) This gives the analyst access to tabulate the household income distribution from the CPS which is a representative sample of the US Population.
I'm avoiding the discussion on tax units versus households for now but it is also an important distinction. From my perspective I would be more interested in inter household inequality but using the non public version of the CPS data would give an anchor to an estimate which I would find more believeable. We can then see if there is any bias in the Piketty Saez data.
Posted by: Ban Cheah at Dec 18, 2006 12:37:03 PM
One thing about the Piketty Saez claim that I found somewhat unconvincing:
They claimed that since family size (or tax unit size) is decreasing at largely the same rate across all income groups, it's not an issue.
I would say that that doesn't answer the question. If tax unit size at the high end decreases because of high-powered double-income married couples having fewer children, but decreases at the lower end because of fewer marriage and more illegitimate children.
In other words, two wealthy people having no kids, or one kid instead of none is not the same as a single mother raising one or two children instead of being married. Now, that certainly measures a form of inequality, but the causes and proper policy solutions could well be quite different.
Posted by: John Thacker at Dec 18, 2006 1:17:59 PM
" Publicly available Census Population Survey Data estimates of income distribution are biased because of top coding of high incomes. This is the source of the Reynolds data."
The topcoding of Census Data will only effect distribution analysis that looks at the tiptop. Maybe the 99-10 income inequality ratios are effected but that's about it. Krugman is absolutely wrong with his understanding of topcoding methodology of the Census Bureau. I believe that Krugman or his assistant read the questions of the march survey and that led to his understanding of a topcoding problem in the survey questions.
Also, the Census Bureau had a more hard topcode prior to '95 so you have serious comparison problems due to topcoding before '95.
For topcoding individuals, the Census bureau assembles a matrix based mostly on demographics. Everyone in that cell is given the same level of income that adds up to the aggregate. For instance, if one person makes 800 million and the other makes 200 million, if they're both in the same demographic matric, the Census will report their income as $500 million.
So if you're looking at aggregate levels of the top 5 or 10 percnet, you're fine. If you're lookign at the top 1 percent you'll have some problems. But Census data does contain the aggregate level of income as reported to the Census Bureau.
There are other arguments against Census Bureau data such as the fact that it is consistently short of NIPA data. But that's a different argument.
Posted by: hederman at Dec 19, 2006 10:50:27 AM
A few comments on Alan Reynolds and income inequality:
- Alan's full paper will be released by Cato in the second week in January.
- Please join Alan, Diana Furchtgott-Roth, and Gary Burtless for a discussion of income inequality at Cato on January 11.
http://www.cato.org/event.php?eventid=3441
- I believe Alan has uncovered some very interesting information on the use of tax return data to illustrate income trends over time. Examples include: the rising amount of small business income reported on individual tax returns, the effect of the 401(k) explosion, and the effects of the two types of stock options on reported income.
- I'm no expert on income data, but I know enough to see that there are huge data problems here. You simply can't look at a raw IRS or Census table and make a hard conclusion about income trends without thinking about what is included and excluded from "income."
- Looking at the Piketty-Saez data on the share of income going to those at the top does not reveal a steady rise over recent decades. Instead, most of the rise comes sharply in a single two-year period, 1987-1988. That should make economists and pundits skeptical about whether the supposed inequality trend is really related to deep and long-term changes such as international trend or wage premiums for college grads.
- I think it's still an open question whether income inequality has increased or decreased in recent decades.
Chris
Posted by: chris edwards at Dec 28, 2006 3:20:47 PM
An early post here asked about reviews of my textbook, Income and Wealth.
It's fairly new, so I have only seen a few:
http://www.nypost.com/seven/11122006/postopinion/postopbooks/money_myths_postopbooks_diana_furchtgott_roth.htm
http://www.townhall.com/columnists/RichLowry/2006/12/07/america_gets_richer
http://www.amazon.com/Income-Wealth-Greenwood-Business-Economics/dp/0313336881
The topic of my Wall Street Journal piece is covered in much more detail in Chapter 5 of the book and the end of chapter 4, and also in the forthcoming paper Chris Edwards mentioned at cato.org. There will be an academic version published later, with a co-author, but such publications always take a long time.
Most posts at Brad DeLong's blog and Mark Thoma's do not address the only topic I covered in my Journal op ed -- namely, the misue of tax data to estimate changes in income distribution. Most comments instead try to anticipate the Cato paper, such as assuming I ignore the CBO or rely entirely on Census data. It is rarely prudent to comment on a purely statistical issue without having first looked at the statistics.
Posted by: Alan Reynolds at Dec 29, 2006 11:42:59 AM
Hederman's comments on top coding are correct.That means Krugman's comments on that topic, and those of Piketty and Saez, are incorrect.
The Census sample is a bit small (57,000) to estimate the top 1%, but ample for the top 5%.
Census data are not perfect, which is why we have the Fed's Survey of Consumer Finances. If we take account of big changes in survey methods, like the break in Census data in 1993, these surveys are informative.
What is reported in various boxes on indivdiual tax returns, however, changes with every change in tax rates and tax rules. And the data break in 1986-88 is huge for CBO as well as Piketty-Saez. The CBO data are hugely affected by changes in the capital gains tax (and stock prices) while the basic Piketty-Saez series is hugely affected by stock option exercises (75% of which are by non-executives) and shifting from corporate to indivdiual tax returns. The SOI tax return sample should not be used for this purpose.
Posted by: Alan Reynolds at Jan 9, 2007 11:21:44 AM
Thacker's comment about family size is very relevant. In replying to me, Piketty and Saez use the word "families" to describe tax units. That's worse than misleading. There are two workers per household in the top quintile, which usually means one tax unit (a joint return). There is one-half worker per household in the bottom quntile, plus a lot of people (especially seniors) who earn too little to file. There are 5.5 times as many full-time workers in the top fifth as in the bottom fifth, and the middle groups are full of households with two or more single people filing two or more tax returns per household. With two salaries called a tax unit at the top and few or many salaries called a tax unit in other quintiles, there is no way to infer family income from tax unit income.
The CBO tries to adjust for family size, to their credit, but that doesn't quite work either.
Posted by: Alan Reynolds at Jan 9, 2007 11:46:27 AM
I've followed some of this debate about the Distribution of Income of late. Those crying foul seem only to mad that someone earned a lot of income --- well, So What?
I've tried to get those who do claim to find a change in the Distribution of Income to demonstrate that the shifts in income were not merit based. If greater Income was simply flowed to those with rare skills, talents, and resources that have become highly valued by the market (e.g. the ability to develop new semiconductor manufacturing processes, pro athletes, Hollywood movie star sex appeal, great musical talent, etc.), then there is no issue. If they can't demonstrate with valid studies that the increased incomes by the top 5%, top 1%, whatever top 0.x%, that they are so troubled by were ill gotten gains, I don't see that there is any basis for them to be crying foul. If they could demonstrate that the top z% were composed of primarily Enron, Worldcom, etc., crooks, then those crying foul would be justified in their outrage and I would join with them in demanding something be done.
Does anyone out there have any solid statistically valid evidence from those that find dissatisfaction with whatever changes in income they are finding that demonstate those increased incomes were systematically derived by theft or other such illegal activities?
I say those with high incomes are innocent till proven guilty, its the American way.
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