About That Growth in Inequality

Growing income inequality has been one of the go-to pieces of evidence that people on the left (and also, at times, on the new right) raise to allegedly show that Milton Friedman’s type of free-market ideas have failed the U.S., and, therefore, that it’s time to move to big-government policies.

Obviously, this tactic is funny considering the size and scope of our government currently, especially if compared with the size and scope of government when Friedman’s influence was at its peak. It’s even funnier when you look at places, such as my native country of France, where Friedman had nowhere near the influence that he had in the U.S. I wrote about this here.

And still, the talking points about inequality keep coming thanks to the work of a bunch of Frenchmen: Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. Their various papers and books that purport to measure the rise of income inequality, especially by looking at the very top of the income distribution in the U.S. since the 1960s, are now famous.

On the left, these economists are famous because they allegedly “prove” what those who want more government and more intervention in the economy want to be true. As Phil Magness and Vincent Geloso note:

Piketty claims that US inequality today is higher than it was in 1929 — the highest point on the first half of the U-curve. The main culprit behind rising inequality, according to his story, is a series of tax cuts beginning with the Reagan administration. Just the same, Piketty points to the mid-20th century’s tax system, where top marginal rates peaked at over 90 percent, as the reason for the trough in his U-curve. The resulting series of academic articles — often co-authored with Gabriel Zucman and Emmanuel Saez — are deemed as novel and important contributions to the scholarly literature on inequality.

In other circles, these French economists are infamous because their empirical work is “full of holes.”

For instance, Geloso, Magness, John Moore, and Philip Schlosser disputed Piketty’s and Saez’s claims about income-concentration levels and trends. In other papers, Magness and Geloso have exposed many other historical-data-interpretation and methodological issues with the works of Piketty, Zucman, and Saez. Others have weighed in, too, including Scott Winship.

The latest in this series of disagreements with the claim that U.S. income inequality has grown dramatically comes from a new paper in the Journal of Political Economy, one of the top peer-reviewed economics journals. It’s by Gerald Auten and David Splinter. It’s not their first paper on this issue. It is meaningful because of where and how it was produced. These scholars show no increase in post-tax / post-transfers income inequality in the U.S. over the past 60 years.

Here is a chart from the Financial Times that compares Auten and Splinter’s findings with those of Piketty and Saez:

Obviously, this means that welfare transfers have done a good job of lifting incomes. But that shouldn’t be a surprise. After all, if you give money to people, it only makes sense that their income should go up. And this is not a reason to claim that we should have more redistribution, as it doesn’t account for the distortions created by transfers. Phil Gramm’s, Robert Ekelund’s, and John Early’s 2022 book The Myth of American Inequality has a lot on this issue. The distortions of transfers are both economic and noneconomic, and they are a big deal. We shouldn’t forget about them.

Acknowledging the fact that measuring income, especially income at the very top, is more difficult that it sounds and that this paper will not end the debate about how best to measure inequality, Auten and Splinter’s very serious criticisms suggest that the conclusions drawn by Piketty, Saez, and Zucman regarding income inequality may need reevaluation to say the least. I am curious to see whether these results change the headlines and the claims made by politicians about the state of inequality in the U.S. I will not be holding my breath.