U.S. inequality debate only in the minds of the deniers

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There is a growing debate in the United States on the issue of income inequality. What may surprise you is that the debate is over whether income inequality actually exists.

Much of the "myth-busting" about income inequality has been produced by the American Enterprise Institute, a right-leaning, market embracing think tank.

James Pethokoukis, a former Reuters columnist who now writes for AEI, offered " 5 reasons why income inequality is a myth -- and Occupy Wall Street is wrong" last month.

Four of the reasons cited a variety of academic studies; one focused on the gap between income and productivity growth; another pointed out that most studies of income inequality fail to account for government program income and taxes paid.

Mr. Pethokoukis' final reason: "Set all the numbers aside for a moment. If you've lived through the past four decades, does it really seem like America is no better off today? … No doubt the past few years have been terrible. But the past few decades have been pretty good -- for everybody."

Steve Conover, sharing his doctoral dissertation from the University of Texas at Dallas in another post on the AEI blog called " The Myth of Middle-Class stagnation," used numbers from the U.S. Census Bureau to argue "in the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller."

And Mark Perry, a professor of economics at the Flint campus of the University of Michigan, used a statistical measure of dispersion called Gini coefficients for a post titled " income inequality in the United States has been flat since 1994."

Alas, the AEI blogs can be picked apart. When readers went back to the source of Mr. Pethokoukis' first citation, they found that the first sentence of the economic study was "The evidence is incontrovertible that American income inequality has increased in the United States since the 1970s."

(A lengthy critique of Mr. Pethokoukis' piece can be found here.)

Both Dr. Conover and Dr. Perry illustrate that a great deal depends on the time periods selected; Dr. Conover's chosen timeframe of 2001 to 2007 includes two major declines in the U.S. stock market and a resultant decline in capital-gains income.

Dr. Perry's use of census data treated all household income above $100,000 as a single set of data; this, a commenter on the blog observed, had blunted the change in inequality, as measured by the Gini coefficient technique.

Here, perhaps, is the study that should settle things: The Congressional Budget Office, fulfilling a bipartisan request to look at the issue, released a study in October that measured trends in distribution of household income from 1979 to 2007. (Those endpoints allow comparisons between periods of similar overall economic activity, the CBO says, because they were both years before recessions).

• From 1979 to 2007, real (inflation-adjusted) average household income, measured after government transfers and federal taxes, grew by 62 per cent.

• For the 1 per cent of the population with the highest income, average real after-tax household income grew by 275 per cent.

• For the 60 per cent of the population in the middle of the income scale (the 21st through 80th percentiles), the growth in average real after-tax household income was just under 40 per cent.

• And for the 20 per cent of the population with the lowest income, average real after-tax household income was about 18 per cent higher in 2007 than it had been in

1979.

Of course, the CBO study won't silence the skeptics. Or should we call them deniers? Perhaps income inequality is the next climate change.