Friday, March 9, 2012

Wall Street Journal Fail

It seems likely that economic inequality will be one of the dominant issues in the 2012 presidential election, no matter who the eventual GOP nominee is. I've actually been meaning to write a lengthy post on this issue for a while, but have been bogged down by other projects, alas. Anyway, think of this post as a small preview of coming attractions.

As I intend to detail in my eventual post, it is simply a statistical fact that the distribution of income and wealth in the United States has become much more unequal in the United States since the late 1970's. The job of the public sphere should be to weigh whether or not we see this as a problem, and if so what should be done. Unfortunately, we're not there yet. There exists an entire cottage industry in the public sphere devoted to denying that inequality is actually present and increasing in the American income distribution. This is simply unacceptable. It does not bother me as a statistician if such people wish to take the Nozickian stance that the wealthy deserve their earnings because they were earned through a series of just transactions. It does bother me, however, when people who should know better cannot be bothered to actually read the graphs that they claim prove their point.

Which brings me to this morning's Wall Street Journal, an op-ed by Carnegie Mellon's Professor Allan Meltzer in particular. The op-ed draws upon a study by other scholars, "The Evolution of Top Incomes in an Egalitarian Society," by the Swedish economists Jesper Roine and Daniel Waldenström. I will admit that I have not yet read the original study (I intend to do so as soon as possible), but here is the abstract that I have seen:

This study presents new homogenous series of top income shares in Sweden over the period 1903–2004. We find that, starting from levels of inequality approximately equal to those in other Western countries at the time, the income share of the Swedish top decile drops sharply over the first eighty years of the twentieth century. Most of the decrease takes place before the expansion of the welfare state and by 1950 Swedish top income shares were already lower than in other countries. The fall is almost entirely due to a dramatic drop in the top percentile explained mostly by decreases in capital income, while the lower half of the top decile – consisting mainly of wage earners – experiences virtually no change over this period. In the past decades top income shares evolve very differently depending on whether capital gains are included or not. When included, Sweden’s experience resembles that in the U.S. and the U.K. with sharp increases in top incomes. Excluding capital gains, Sweden looks more like the continental European countries where top income shares have remained relatively constant. A possible interpretation of our results is that Sweden over the past 20 years has been a country where it is more important to make the right financial investments than to earn a lot to become rich.
As we shall see, the conclusions that Meltzer wishes to draw do not quite match the conclusions of the study's own authors. But more on that later. Anyway, Meltzer claims the following:
While the Occupy Wall Street movement may be waning, the perception of growing income inequality in America is not. For those on the left, the widening gap between the top 1% of earners and the remaining 99% is proof that American capitalism is unjust and should be traded in for an economic model more closely resembling the social democracies of Europe.

But an examination of changes in income distribution over nearly 100 years, not just in the United States but elsewhere in the developed world, does not bear this out...
Rather, says Meltzer, it is necessary to compare the income share of the top 1% in several developed nations. For reasons that Meltzer cannot be bothered to explain (I will probably have to read the actual study soon, it seems), we are to compare the income share of the 1% elite in the US, Sweden, France, Australia, Britain, Canada and the Netherlands (more below on why this might be a problematic sample to begin with). Meltzer's conclusion:
As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can't be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%.
To prove his point, Meltzer supplies this graph:


Well, yes it's true that the largest increases in the income share of the top 1% have been in the 4 aforementioned countries. What is not true is Meltzer's claim that all 7 countries in the study show the same trend line. Had Meltzer actually looked at the graph, he would have noticed that the share of the top 1% declined during the 1990's in France, and basically remained the same in the Netherlands. In other words, the graph does not prove a major part of his point. Perhaps domestic policy actually does influence the distribution of income and wealth? Alas, that seems to be more intellectual honesty than I can expect from Meltzer and others of his ilk.

I could go on and on about exactly how problematic Meltzer's interpretation of the graph is. While it is true that Canada, the UK, the US and Sweden have seen big increases in the share of income going to the richest households, even in this graph, the US stands out. And, because the authors of the study were trying to say that Sweden more closely resembles the US and other highly unequal countries, they mostly included in the graph Anglophone countries (the US, the UK, Canada, Australia) that tend to exhibit more economic inequality than, say, the Nordic countries. Don't believe me, believe the actual data. Follow this link, and play around with the data to your heart's content. You can generate charts such as this one, comparing the income shares of the top 1% in Germany and the US:

Hmm... Anyone notice that the US and Germany exhibit different trends here? Maybe we can also compare the US to Denmark:


Okay, yes. Danish data from before the late 1970's aren't available. But see the huge spike in the share of income going to the richest 1% of households in Denmark? Yeah, I don't either. Meltzer is not giving the full picture. Either this is because he knows the full picture and does not wish to give it, or he cannot be bothered to do any actual research before writing op-ed columns in one of the world's most prominent financial dailies (that nonetheless sees fit to publish him). Or, he does not know how to do actual policy research, even when the relevant data are publicly available via such obscure sources as the Paris School of Economics.

As I have stated before on this blog, whatever my own political views as a citizen, I do not pretend to be a political philosopher (and I think it would be arrogant on my part to make such a claim in the first place). I can take my stances on what the policy response to income inequality should be, but I don't claim that my views should be seen as any more weighty than those of the average citizen. Of the same caliber as a Jeremy Bentham, a John Rawls or a Robert Nozick I am not. However, I can claim a certain knowledge of statistics, and while I have no right to object in my capacity as statistician to claims that the current distribution of income in the US along with its trends are just, or that a different distribution would be more ideal, I have no patience for individuals who claim that income divergence is not happening in the US, or that the situation in the US is comparable to the situation in other OECD nations (as we will see in my next post, it isn't). Professor Meltzer, you are entitled to your own opinion, but not to your own facts.

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