Response to HP on Inequality

In my recent post on income inequality I got an extremely lengthy reply from my good friend Hispanic Pundit which can also be read here. Personally I think he should narrow the focus a bit just to make a response more manageable. It's the kind of response that usually wouldn't be addressed at all because it's just too much. However I am glad to get a response even if I'm not able to reply. It at least contains info pro and con so learning can occur.

But in this case I did go through every link he offered and I'm responding below. HP, I'm using the third person just because it was easier to write that way, so don't take it to be rudeness. Again, thanks for your reply and hopefully we can both learn a bit here.

HP has asserted, without evidence, that changing family structure is the reason for the increase in inequality that I've documented. But I did his work for him, showing that divorce rates and the # of children affected by divorce do not correlate with inequality. Divorce rates began increasing in the 60's and leveled off in the 80's. Income gains went to all sectors of the economy, poor and rich, from 1940 to the mid 70's. Inequality began skyrocketing in the 80's with divorce rates leveled off.

So in response HP offers what he says is evidence.

HP's first link offered as evidence says that the number of households has increased faster than the population. You could see why this would tend to suppress family income values. He offers a hypothetical explaining that if incomes doubled, but half the households divorce, then household income stays the same. OK. But does this in fact explain the rise in inequality? He doesn't try to show it. "Could be" is about as far as this can take us.

He says that though the population increased 38% from 1976 to 2006 whereas the number of families rose 60%. He says "presumably" this is due to an increase in the divorce rate. But the divorce rate didn't increase in that time frame and it isn't increasing now (I have data from 1940-1990, 1990-2002 and 2007-2009). The divorce rate is dropping and has been since the 80's.

On the other hand the marriage rate is reducing, so these things can offset one another. This is why the key in my view is the source I provided in the post HP is replying to. Family working hours are increasing. So to offer another hypothetical, if half the families divorced, but working hours for each of those working family members doubled, we'd expect no change in total family working hours. The fact that family working hours are increasing means that the net effect of divorce/delayed marriage is that Americans are working harder for less. The theory sounds plausible, but the data don't support the conclusion.

HP's second link notes, correctly, that the proportion of households headed by women has increased. OK. Has that increase correlated with inequality? No. It increased by a wide margin in the 70's, but not so much in the 80's and 90's. Recall that the total amount of income going to the top 1% has skyrocketed from a mere 10% in 1980 to 23% today. Why has the bulk of the inequality been generated when single motherhood was not increasing as much?

Let me digress for a second here. I get the feeling with HP's analysis that no matter what is occurring in terms of inequality he'll conclude that we can draw no conclusions. Single motherhood has increased. So no matter what other data might show we should dismiss it as of no concern. These same arguments would apply in Haiti or Jamaica. But doesn't that make the view unfalsifiable? Do a thought experiment. Suppose that the top 1% had 10% of all income in 1980 but 90% today. Would it make sense to dismiss it because there has been an increase in single parenthood? No. If you want to argue the point you need to do the work and show the correlations. HP doesn't do that, nor do his sources. They think by merely pointing out one factor which can cause inequality data to be misleading they've shown that there's no problem. I can agree that a rise in single parenthood can cause one to overstate inequality, but I don't think this means that Citigroup is wrong in their economic analysis. They say the economy is being restructured so as to cater to the wealthy. They say this is due to our corporate friendly government. They offer an investment strategy that is based on that conclusion. The fact that there has been an increase in the total number of households doesn't change that.

HP's third link merely repeated what was in the second, so there's nothing to address there.

The fourth link says it's due to increases in immigration. Of course many immigrants are well educated. In fact the % of immigrants with 8 years or less of schooling is less than the native population and is dropping (as it is for the native population.) Some of the highest educated people in this country are immigrants. But also many unskilled immigrants arrive illegally, which is why I noted in the post HP is replying to that the amount of illegal immigration has been dropping since 2007 though inequality continues to rise. So once again no real attempt to show any correlation.

The fifth link clarifies the fourth and in fact has a link to a study which claims that the net effect on wages of immigration is positive. This of course would suggest that immigration doesn't suppress wages, but in fact should increase them. So the cause of the increase in inequality would have to be elsewhere.

The sixth link talks about how people move about various income groups as they age. It says that this doesn't tell us anything and I agree, so I won't comment.

The seventh link makes points about divorce that I've already addressed.

The eighth link says that it's better to remain married for economic purposes. That's of course true, but the data he presents shows a falling number of children affected by divorce and a falling divorce rate since 1995, though inequality has continued to skyrocket. So obviously this is not explaining inequality.

The ninth link talks about the same divorce study and adds nothing to it.

And that's just HP's first comment. I'm exhausted.

OK, so let's move to his second comment. He says that if you consider total compensation, including 401k's and health benefits, you find that the inequality gap disappears. I addressed this claim directly in the post HP is replying to, but he says nothing of my comments. But let me add a further comment.

HP's evidence is in a paper that requires payment to see and as far as I can tell he hasn't seen it himself. I've asked him directly if he's seen it and he simply won't respond to that question. If we haven't seen the evidence how can we draw conclusions? Does this paper account for the vanishing pension plan or the fact that pension plans out perform 401k's? How does it factor in the additional cost of health care? Because the inequality evaluations are being done in terms of dollars that are adjusted for inflation. Are they adding in rising health care costs in terms of dollars not adjusted for inflation to income dollars that are adjusted for inflation? We haven't seen so we don't know and we can't evaluate it.

HP's next argument is that while things may appear bad, in fact if you modify the CPI as necessary to reflect the cost of goods the poor are most likely to buy you find that things in fact aren't so bad. Luxury goods are increasing in price at a more rapid rate than goods poor people would be likely to consume. Perhaps unbeknownst to HP the source of this claim is no longer available. But the opening sentences from the piece HP is recommending are interesting:

"Inequality is growing in the United States. The data say so. Knowledgeable experts like Ben Bernanke say so. Ask just about any economist and they will agree. (They may or may not think growing inequality is a problem, but they will acknowledge that there has been a sharp increase in inequality.)"

It's worth noting that my claims regarding inequality are the consensus of economic experts. Doesn't mean I'm right, but it does mean that HP's view starts with a presumption against it.

The consensus is wrong according to this unavailable study. Again this is hard to evaluate, but if you read the comments at another source HP provided on this same topic you see claims that this claim regarding inflation bias is only true for people making less than $15K/yr, not the bulk of the population.

Next we're directed to this link that offers a variety of what the author apparently thinks are plausible explanations for inequality. Rich people marry rich people now (as if they didn't before). People with college degrees marry people without a college degree at a lower rate now. Isn't that because fewer people lack a college degree? There's less people without a college degree available for marrying.

But maybe people are doing things like starting internet companies, which can either go bust or make them staggeringly rich, like Sergey Brin. Or maybe people want to be pop stars, so it's big money or bust. Just a bunch of haphazard guesses as to the causes and a final comment that there's probably not much the government can do about it. I'm not shocked to read that this guy is a fellow at the right wing American Enterprise Institute. From shilling for corporate interests on global warming to shilling for RJ Reynolds it's not surprising to see these scatter shot arguments in favor of the status quo from the AEI and it's hard to take it seriously in my view, especially in light of the fact that there's just not much of an argument there.

Some inequality is good we're told. Does that mean Haiti is the place to be? Nobody has argued for perfect equality so I don't see the point of this comment.

Finally we're told that it doesn't matter because life is getting better with technological advancement. That was true in slave societies as well as I already commented. That doesn't mean it's right that the vast bulk of the increases in productivity and efficiency gains are being enjoyed only by the super wealthy. The point is that a better system would be a system that allowed everyone to reap income gains.