Politics & Policy

The Cbo’s Faulty Data

EDITOR’S NOTE: The August 31, 1992, issue of National Review, set out to set the record straight about the Reagan administration’s economic record. We reprint the content of the issue here.

Myth: The top 1 per cent of earners got most of the income gains of the 1980s.

“We all know that there has been a re-distribution of income in America. That redistribution over the last 12 years has been from average working Americans to the wealthiest 1 per cent in our nation.”

–Rep. Steny Hoyer (D., Md.),

Wall Street Journal, April 8, 1992

“Even Among the Well-Off, the Richest Get Richer – Data Show the Top 1 Per Cent Got 60 Per Cent of the Gain in the ’80s Boom.”

–New York Times front-page headline, March 5, 1992

The Texas education establishment was rocked last year by the discovery of 230 mistakes in history books distributed in the state’s schools. Among the interesting “facts” in these texts were that Sputnik was the Soviet Union’s first intercontinental ballistic missile, that the United States easily settled the Korean conflict by using “the bomb,” and that Japan attacked Pearl Harbor in 1942.

These errors were the results of innocent (albeit stupid) mistakes. The same cannot be said of the endless stream of newspaper accounts and “economic studies” purporting to show that, contrary to our best recollections, the decade of the 1980s was not a period of prosperity after all.

The CBO’s figures are particularly suspect. Alan Reynolds details some of its errors above; another is that reporting capital gains, it does not adjust the cost of the asset for inflation. The general effect of the CBO’s methodology is to exaggerate the income of the affluent while understating that of middle-and lower-income groups. Net capital losses are capped and most partnership losses are ignored, even though all capital gains and partnership income is fully counted. Furthermore, capital gains and other income accruing to the middle-income brackets in the form of pension funds (which amount to some $3 trillion) or home values are not counted.

The CBO also adopts a bizarre method of compiling income data. It assigns families to fifths with an adjustment for family size, but the income measured is not adjusted for family size. The CBO indicates that family income in the bottom three quintiles dropped between 1977 or 1980 and 1989. This is flatly contradicted by the Census Bureau, whose data show the average level of income in all quintiles rising between 1977 or 1980 and 1989. The bottom line is that middle-class real family income jumped 13 per cent during the 1982-89 expansion years.

Even if these faulty CBO data were taken at face value, they would place the era of greed, when the top 1 per cent of families had 100 per cent of net income growth, in the Carter years, 1977-80. The share of income gains going to the top 1 per cent of families was 160 per cent higher under Carter than under Reagan.

At the time of this writing Mr. Gillespie is Republican staff director of the Joint Economic Committee. Mr. Frenze is an economist for the Joint Economic Committee.

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