Lee Ohanian is professor of economics in the UCLA College. Kip Hagopian is chairman of Maxim Integrated Products and a UCLA Anderson School of Management alumnus, where he sits on the school's board of visitors. They are co-authors of “The Mismeasurement of Inequality” from Hoover Policy Review. This op-ed appeared Oct. 10 in Investor's Business Daily.
Google “income inequality” and you will find almost 9 million references. Every day seems to bring new reports on the magnitude or the growth of U.S. income inequality. These reports often include claims that middle-class incomes have been stagnant for two or more decades, implying a link between the two.
Is income inequality a major problem? And have middle-class incomes been stagnant for decades? The data indicate the answer to both questions is no.
Inequality is higher in the United States than in most other industrialized countries. The Gini coefficient — the standard inequality measure — was 24 percent higher in 2011 than the Organization for Economic Cooperation and Development as a whole.
But the U.S. standard of living and growth rate are also higher. Median income — “equivalized” for family size — was 42 percent higher than the overall OECD in 2010. GDP per capita in 2012 also was 42 percent higher. Americans’ wealth per capita in 2011 was 210 percent above the rich-nation club’s average. Moreover, U.S. economic growth was 12 percent higher, while growth per capita was slightly higher over the prior 30 years.
While we don’t claim causality for these correlations, neither do we believe they are coincidental.
Contrary to popular opinion, income inequality in the U.S. has not increased substantially in recent years. Using a narrow definition of income that excludes important components, such as transfer payments and taxes, the Census Bureau reports that, over the last 20 years, inequality rose only 4.8 percent. And when census’ most comprehensive definition of income is used, inequality actually declined 1.8 percent from 1993 to 2009.
While income statistics are important, most economists agree that the best measure of well-being in the long term is consumption. Consumption inequality is roughly 40 percent lower than the most commonly quoted income inequality statistics.
Moreover, a 2011 study by professors Bruce D. Meyer, of the University of Chicago, and James X. Sullivan, of the University of Notre Dame, found that consumption inequality declined 12 percent from 1990 to 2008.
What about the claim that middle-class and lower-quintile incomes have been stagnant for decades? A 2013 report by the Congressional Budget Office calculated that real, median-equivalized, disposable income grew 53 percent from 1980 to 2010.
During this same period, average-equivalized, disposable income in the bottom quintile grew 57 percent, and disposable income for all quintiles grew 63 percent.
The CBO data showed much higher income growth than the Census Bureau. CBO uses a much more comprehensive definition of income and a more accurate measure of inflation.
The CBO definition of income includes, for example: transfer payments, capital gains, employer-sponsored health insurance, and imputed rent from owner-occupied housing, while the census includes none of these. The CBO also adjusts for taxes.
So while the CBO reported median income grew 53 percent from 1980 to 2010, the census reported just a 10.4 percent gain. We believe the CBO’s income definition and inflation adjustment methodology results in a far more accurate measure of household income.
It is truly disturbing that about 45 million Americans live below the federal poverty line ($23,500 for a family of four). But the living conditions of the poor are ameliorated by more than $900 billion in federal and state government spending. This “safety net” — primarily transfer payments — enables poor households to self-report consumption that is about 140 percent above their income. For example, a family of four reporting $20,000 in income on average reports $48,000 in spending, evincing a higher standard of living than would otherwise be possible.
The current emphasis on income inequality has distracted us from the more important issues of economic growth and standard of living. It has also obscured the real problem confronting American families — the suppression of incomes since 2007 (the year before the Great Recession).
This problem is not due to income inequality but a by-product of the weakest economic recovery since World War II. To remedy this situation, we should focus on raising the incomes of the lower quintiles by promulgating policies that will reduce inequality of opportunity, improve K-12 education and raise economic growth.
