All the buzz we’ve been hearing about America’s wealth gap would have us believe it’s reached epic proportions. However, in a new paper two economists argue that it hasn’t grown much at all in the past three decades, and the way we’ve been tracking it is totally off.
The real indicator of this country’s inequality, they say, is consumption, not income data. The reason: It’s easier to tell how well we’re doing by what we can afford.
In “A New Measure Of Consumption Inequality,” Kevin A. Hassett and Aparna Mathur assert that “contrary to popular belief,” things have remained fairly stable over the past three decades, edging slightly higher in the 1980s, then dipping in the Great Recession (2007-2009).
Here’s how the authors arrived at that conclusion: “Income inequality measured using a household’s annual wage and salary income may not provide a true picture of economic inequality, since households experiencing temporary negative income shocks would bias the inequality measures upwards.”
Going further, income inequality is hard to gauge when we aren’t accounting for “transfer payments,” or government aid, at the bottom of the income scale. For example, one popular 2006 paper on income distribution used tax return data from the IRS, which didn’t account for Social Security, Medicare, food stamps and other low-income programs.
Without that info. on hand, it’d be easy to misrepresent what people are actually earning, not to mention the results of the study. Say the authors: “Tax return data are responsible to changes in tax rates.” So “when tax rates are high, tax evasion and tax avoidance could lead to lower reported taxable incomes, biasing the results from the study.”
Consumption data, meanwhile, trumps all.