The Determinacy of Income Growth

Will Wilkinson has a post up at his blog called "The Indeterminacy of Income Growth" (pointer to Steve Randy Waldman). He makes a number of points about inflation indices which leads him to conclude that it really can’t be said with any confidence that the rich have in fact been getting richer over the course of the last thirty years – despite evidence to the contrary.

This is what I wrote in the comments in response:

I don’t find the arguments presented here convincing. Let me make an analogy as to why.

In the days before powerful computing, investors like Warren Buffett were able to successfully make bottoms-up calls on the stock market because of what Buffett and his mentor Ben Graham call a "margin of safety" about the value of an individual share. Graham and Buffett were less interested in precision and much more interested in the "margin of safety" which allowed them to be imprecise.

Fast forward to today’s world of stockpicking based on precise mathematical formulas like the Capital Asset Pricing Model and you have a whole industry of stock pickers who attempt to define with great precision how much an individual share is worth.

In reality, nothing has changed except the precision with which practitioners operate. And this precision gives practitioners a false sense of accuracy in their conclusions.

As a result, your final statement would be correct as much for stock-picking as it is for inflation estimates:

"My takeaway from all this is that if you’re committed to a story about American political economy that requires a great deal of confidence about how much median income or income inequality has or hasn’t risen since the 1970s, you should know that no such confidence is warranted."

The problem, however, is that you do not need inordinate precision to understand that income inequality in the United States has risen tremendously. Rather, you can look at the aggregate economic statistics on things like income growth, people living below the poverty line, relative life expectancy, infant mortality rates, percentages of Americans with health care insurance, etc, etc
All of these statistics point to a growing divide between rich and poor. There is more than ample "margin of safety" to have "a great deal of confidence" that "median income or income inequality has" risen since the 1970s.

The discussion of multiple price indices is very much beside the point. See here:
http://www.interfluidity.com/v2/966.html

The last link is to Steve’s post at Interfluidity, which is a lot more wonkish than mine here. But I recommend you read it either way.

Many have defended the widening gulf in income in the United States because of the perceived "winner take all" tendency that globalization has ushered in.  Salaries in sports might be a place to look in examining whether we are indeed living in an increasingly "winner take all" world.

Irrespective, there are many who would argue that a widening distribution of income is not something which government should be in the business of acting upon. These arguments go to the role of government. And you can have a political debate about this until the cows come home.

However, to be honest with you, it seems almost ludicrous that anyone would dispute the fact that there is a widening income and wealth gap in the United States. Almost all economic data point in this direction. Here are a few articles summarizing this trend along with a number of local anecdotes and discussions about government’s role:

Why are people denying this?

UPDATE: Also see Mark Thoma’s "The Great Income Shift" and "Income Inequality Reached High in 2009" from Catherine Rampell in today’s New York Times. She quotes the AP:

the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations.

11 Comments
  1. Tom Hickey says

    Is the indeterminacy argument grasping at straws or sewing confusion?

    “The Great Income Shift”

    1. Edward Harrison says

      Both! I added an addendum from Economix:

      “the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations.”

  2. Vortex says

    Another Link http://www.slate.com/id/2266025/entry/2266026/ of support for Edward’s assertion.
    It isn’t in great depth, but is well attributed in the studies it quotes to support it’s reasoning.

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