Are wealth and income inequality increasing?

It is fairly non-controversial to say that income inequality has been rising in America. Whether you look at market income (what people make from their job plus investment earnings) or income after taxes and transfers, the data clearly indicate that inequality has increased (opens in a new tab) since at least the 1980s. That is why it was surprising when several strident (opens in a new tab) conservative (opens in a new tab) voices (opens in a new tab) started citing a new study (opens in a new tab) by economists Philip Armour and Richard Burkhauser of Cornell University and Jeff Larrimore of the Joint Committee on Taxation claiming that inequality has been decreasing. Upon closer inspection, however, there is much less to this study than meets the eye (I have a very detailed critique here (opens in a new tab)).

The new study by Armour, Burkhauser, and Larrimore stands out because it uses the Haig-Simons measure of income. This measure defines income as the sum of consumption and the change in net wealth. At first blush, it looks like an interesting and possibly useful way to measure economic wellbeing but some shortcomings quickly become apparent. Under the Haig-Simons measure, for example, the billionaire founder of Facebook, Mark Zuckerberg, would have been considered one of the poorest people in the world (opens in a new tab) in 2012 because his net worth fell by $4.2 billion.

Additionally, by ignoring the liquidity of assets such as housing, the Haig-Simons measure obscures changes in wealth and economic wellbeing. Because of inflation in housing prices in the 2000s, the net wealth for many people increased substantially, which the Haig-Simons measures would interpret as a rise in income. Hindsight, however, reveals that much of this valuation was a bubble and that there was a minimal improvement in economic well-being.

Even if we took the measure seriously, should we take the claim of a decrease of inequality seriously? Numerous (opens in a new tab) other (opens in a new tab) studies (opens in a new tab) and (opens in a new tab) measures (opens in a new tab) highlight (opens in a new tab) that income inequality has been rising but the Haig-Simons method also includes the change of wealth. A recent paper (opens in a new tab) by Fabian T. Pfeffer, Sheldon Danziger, and Robert F. Schoeni from the University of Michigan finds that, from 1984 to 2011, the wealth and income of the wealthiest 25 percent and 5 percent of Americans grew much faster than that of the rest of the population.

So it is unlikely that inequality could have gone down even with an awkward measure such as the Haig-Simons metric as the study’s authors suggest. In my detailed critique (opens in a new tab), I explain some of the methodological flaws that would lead to their conclusion about decreasing inequality.

The authors attempted an ambitious analysis of incomes, which should be commended, but their execution is insufficient to support the broad proclamations made by many conservative pundits about declines in inequality. Given the study’s methodological biases and weaknesses in the Haig-Simons income measure, claims by these pundits that wealth and income inequality have decreased tell us more about the messenger than about the state of the world.

I will note that Dean Baker (opens in a new tab), Jared Bernstein (opens in a new tab), and others (opens in a new tab) have critiqued this paper in the past.