What if We're Looking at Inequality the Wrong Way? - NYTimes.com - 0 views
opinionator.blogs.nytimes.com/...ng-at-inequality-the-wrong-way
inequality research economics income
shared by Javier E on 27 Jun 13
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By defining income as “post-tax, post-transfer, size-adjusted household income including the ex-ante value of in-kind health insurance benefits,” Burkhauser and his co-authors achieved two things: a diminished degree of inequality and, perhaps more important, a conclusion that the condition of the poor and middle class was improving
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Burkhauser has come up with statistical findings that not only wipe out inequality trends altogether but also purport to show that over the past 18 years, the poor and middle classes have done better, on a percentage basis, than the rich.
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You get different answers depending on whether you measure income before or after taxes and transfers, whether you count fringe benefits (mainly health insurance), and whether you look at families or households, and whether you count the big hitters as the top 20% or the top 1 percent. Counting health care mutes the increase in inequality, but that really means that most of the increase in working class incomes has been siphoned off to medical providers. Looking at households has the same effect.
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In his 2013 paper, Burkhauser and his two co-authors have completely upended the thrust of Figures 1 and 2.
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Burkhauser’s 2011 methodology worked to make the pattern appear far less extreme, as illustrated by Figure 2:
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First, take a look at Figure 1, a 2011 Congressional Budget Office chart showing significant inequality in the distribution of income gains from 1979 to 2007. Many on the left consider work done by the C.B.O. to be the gold standard of inequality measurement:
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The Burkhauser approach does a number of things. First, it spreads and flattens income from capital gains over the duration of ownership. For a wealthy individual who makes a huge killing selling stock or a businesses, his or her income does not spike in the year of the sale, but emerges instead as a series of yearly incremental gains.
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If Burkhauser’s approach was accepted, it would render moot the basic political and philosophical tenets of the Obama presidency
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Not only would Burkhauser lay waste to a core liberal argument — inequality is worsening — but his claim that a declining share of income is going to the wealthy could be used to justify further tax cuts for the affluent in order to foster top-down investment and growt
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Burkhauser et al. achieve their reversal of past income distribution data by amending the definition of income developed in their 2012 paper — “post-tax, post-transfer, size-adjusted household income including the ex-ante value of in-kind health insurance benefits” — to incorporate another accounting tool: “yearly-accrued capital gains to measure yearly changes in wealth.”
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Burkhauser attempts to measure the year-to-year increase in taxpayers’ assets — stocks and bonds, housing and privately held businesses – and to count those annual increases as income. Increases in the value of such assets do not show up in tax data because they are taxed by the federal government only when the asset in question is sold and the increased value is realized as taxable gains.
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If — a virtually impossible if — the economic and policy-making community were to reach even a rough consensus in support of Burkhauser’s 2013 analysis, the victory for the right would be hard to overestimate.
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For assets that have been held for a long time, the Burkhauser system effectively backdates much of currently realized capital gains onto earlier years. This is especially significant in calculating income gains from the current sale of assets purchased in the 1980s and 1990s, since much of the added value was acquired in those earlier decades.
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I raised the following question: Is it a fair measure of a person’s well-being to include unrealized capital gains? Their house or other assets may have increased in value, but their standard of living has not changed.
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The unfairness of Burkhauser’s approach is clearly acute at the bottom and middle of income distribution. The most common large asset for those on the bottom rungs is a house. Burkhauser would increase the income of those below the median lucky enough to own a home by the annual appreciation in the value of the home through 2007. For many of these families, however, selling their home is not an option. In Burkhauser’s view, their income goes up even if their living conditions remain unchanged.
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Burkhauser is respected by his peers; his critics, including some friends, do not accuse him of ideological bias. In addition to A.E.I, he has received support from such center-left institutions as the Pew Foundation, Brookings Institution and the Russell Sage Foundation.
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the “problem is that in such things, especially when it is a difficult task based on lots of new data sources, the devil is in the details. It’s pretty hard to judge those details without doing a substantial amount of work.” Acemoglu’s conclusion: “Bottom line: conceptually there is a valid point here, and this is a serious paper. The rest is to be determined.”
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“Rich Burkhauser’s work is really the state of the art — the most important research on inequality being done, in my view,” Scott Winship, of the Brookings Institution, e-mailed me. Winship voiced some concern over the reliability of the statistical data used by Burkhauser, but concluded:All that said, I think Rich’s paper is incredibly disruptive for many fields of research in labor economics and other social sciences, and potentially it could change our entire view about rising inequality over the past few decades.
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Burtless continued:The problem with the authors’ estimates of accruing capital gains is that those numbers are wholly made up based on a prediction that everyone is equally successful in finding homes, stocks, bonds and other assets to invest in. But they’re not: Some people are wildly successful, and get into the 1%; others are horribly unsuccessful and become paupers (or receive foreclosure papers); and most earn mediocre returns that are — surprise! — a bit lower than the economy-wide average.
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Burkhauser et al. measure the period from 1989 to 2007 because those are both peak years in the business cycle. This timing results in a failure to account for the consequences of the 2008-9 financial crisis and the subsequent struggle toward recovery accompanied by persistent high levels of unemployment.
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During the post-crisis years 2009-11, according to the Pew Center, the wealthiest mean of the nation saw the value of their assets grow by 28 percent, to $3.17 million from $2.48 million, while the bottom 93 percent saw their net worth drop by 4 percent, to $133,816 from $139,896.
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Wealth trends since the 2008 crash, shown in Figure 5, demonstrate an extraordinary growth in inequality, suggesting that Burkhauser’s findings — restricted to his carefully tailored definition of income — are fatally flawed as an instrument to assess the current real-world position of the poor and middle class compared with the very rich:
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A key purpose in measuring both wealth and income is to determine what kind of standard of living is possible for those at the top, the middle and the bottom. Do individuals, families and households have enough to provide for themselves, perhaps most importantly for their children? Do they have the financial resources to enter the highly competitive global marketplace?On that score, Burkhauser’s use of “yearly accrued capital gains” fails the test of measuring what is most significant to know in policy making and in assessing the true quality of life in America.