Debate on Inequality and Pickety Capitalism

. The Piketty and Saez data for the U.S. indicate that between 1979 and 2012, the bottom 90 percent’s income dropped by over $3,000. However, the official Census Bureau estimates indicate that the bottom 80 percent of households saw an increase of nearly $3,500. Median income—the income of the household in the middle of the distribution—rose by $2,500.

The Census Bureau figures are superior to the Piketty and Saez estimates when looking below the top ten percent in two ways. First, the measure of income derived from tax returns excludes a significant amount of income, and people below the top are disproportionately recipients of that income. Most importantly, in the United States, most public transfer income is omitted from tax returns. That includes not just means-tested programs for poor families and unemployment benefits, but Social Security. Many retirees in the Piketty-Saez data have tiny incomes because their main source of sustenance is rendered invisible in the data. The Census Bureau figures include some transfers, though even they omit non-cash transfers like food stamps, school lunches, public housing, Medicare, and Medicaid.

One can use the Census Bureau data to estimate trends in market income for households with a head under age sixty (and so unlikely to be retired). Among those with any market income, I find an increase of $3,400 in the median (using the same cost-of-living adjustment as the Census Bureau and Piketty and Saez). This estimate does not include the value of employer-provided health insurance or other fringe benefits and does not include capital gains either.

The second reason that tax return data are inferior to Census Bureau estimates for incomes below the top is that tax returns—or “tax units,” which essentially means potential tax returns if everyone filed—are different from households. The Piketty and Saez data include as tax units all returns filed by dependent teenagers with summer jobs and undergraduates with work-study positions. They count roommates and unmarried partners as separate tax units rather than as one household, ignoring all of the shared living expenses that make living with someone cheaper than living alone. As a consequence, incomes are much lower among tax units than among households.

Incorporate these improvements using the Census Bureau data, we find that median post-tax and -transfer income rose by nearly $26,000 for a household of four ($13,000 for a household of one) between 1979 and 2012. If you don’t like the household-size adjustment, the non-adjusted increase was over $20,000 at the median. If you think that valuing health care as income is problematic, that figure drops to $10,400 under the implausible assumption that third-party health care benefits have no value to households. The income of the bottom 90 percent rose nearly $12,000 under that assumption instead of dropping by $3,000 as in the Piketty and Saez data, and it rose by nearly $21,000 if health benefits are included. For a household of four, median market income for non-elderly households (not counting employer-provided health care as income) rose $9,400.

Piketty seems to draw too strong a conclusion (“terrifying,” in his words) about what continued rising inequality would entail for the bottom 90 percent (at least in the U.S.). Rising income concentration has not been accompanied by stagnation below the top, and there is no reason to think that it will be in the future

Kevin Hassett provided a pointed critique of Piketty’s book.

Piketty's capital in the 21st century

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