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Making Sense of Inequality

by Scott Winship
The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, by Timothy Noah (Bloomsbury, 272 pp., $25)

Not long ago, a former colleague asked me to recommend the best accessible reference on income inequality. I immediately suggested Timothy Noah’s 2010 series of essays, “The Great Divergence,” written for his then-employer, Slate. Why, then, do I find Noah’s new book of the same name — an expansion of the award-winning series — so frustrating?

The book largely follows the outline of the series, with its clearly presented statistics on the rise in inequality and Noah’s impressive explication of what social scientists have found regarding its causes. The frustrations come, in part, from the additional space a book provides for Noah to wade into the perilous business of dot-connecting. But even the original series was irksome in the way it (faithfully) conveyed the conventional wisdom about the supposed connections between inequality, economic mobility, and living standards. Both the original series and the new book are fantastic distillations not only of a messy literature on inequality and its causes, but also of a seriously flawed conventional story about their consequences.

Noah is an engaging and informative writer, and the first chapter of the book shows off his skills (even as it reveals the ideological commitments the reader will have to be wary of). It provides an improbably captivating overview of what we know about inequality trends and how we have come to this knowledge. He intertwines this history with a broad account of how living standards and economic security have changed, and it is here that he falls into the traps of convention.

The “Golden Age” of the 1950s and 1960s followed a steep decline in inequality and preceded our modern period of rising inequality. In Noah’s view, “there probably was no better time to hold membership in America’s middle class.” This widely held — but wrong — view reveals the extent to which inequality has come to dominate the evaluative standards by which liberals judge the economy. In fact, the median American family is twice as rich today as it was in 1960, if one takes into account changes in family size, government and employer benefits, and rising immigration. That much of this improvement came before 1979 — even 1973 — hardly negates this central fact. Congressional Budget Office statistics indicate that the median household was 35 percent richer in 2007 than in 1979. The bottom fifth of households was about 20 percent richer.

Noah and other liberals have a series of standard (but flawed) arguments that minimize the extent of this improvement: A huge share of gains since 1980 went to the top 1 percent. Family-income growth hasn’t kept up with productivity increases. Income growth is due solely to wives’ supplementing their families’ incomes. Each of these claims is supported by naïve interpretations of readily available data, but a more careful examination belies them.

Let’s begin with the share-of-gains estimates. Noah plays up a finding that 80 percent of the increase in income from 1980 to 2005 went to the top 1 percent. This is a figure derived from the work of Thomas Piketty and Emmanuel Saez. But their updates in recent years have used a more appropriate adjustment for inflation, and their more recent estimate is not 80 percent but 58 percent.

Also, for a number of reasons, the share-of-gains figure is not as straightforward as it would seem. For example, this figure looks at income gains after adjusting the 1980 numbers to reflect 2005 purchasing power. But if we ask what share of income gains went to the top before taking account of the fact that 2005 incomes bought less for rich and poor alike because of inflation, the answer is that the top received just 28 percent of income gains.

Piketty and Saez garnered quite a bit of attention in their latest update, when they found that 93 percent of the gains from 2009 to 2010 went to the top 1 percent. But the computation they use also found that 49 percent of the gains from 2007 to 2009 went to the top, which is interesting, because the total income received by the top 1 percent fell over those two years — by, on average, half a million dollars. It is a strange statistic that indicates that a group commanded half of all income gains when the data on which it is based shows the group losing income.

As for the income-versus-productivity comparison, that one should be shelved for good, because researchers on both left and right have shown that, when properly analyzed, median family income actually tracks productivity very well. Noah cites a 2005 paper co-authored by economist Robert Gordon to back up his claim, but in 2009 Gordon wrote a widely cited paper showing that median income and productivity actually aligned closely from 1979 to 2007, with the former increasing by 1.50 percent annually and the latter by 1.66 percent. On the other hand, male earnings have lagged behind productivity growth over the past few decades. The simple explanation is that in earlier decades (during the peak union years), male-earnings growth outpaced productivity increases, and the past few decades have seen men’s earnings fall back to earth. (Women’s-earnings growth, meanwhile, has far exceeded productivity increases.)

The recent stagnation of male earnings has led many analysts to argue that middle-class families have stayed economically afloat only because wives increasingly bail out the boat. Noah cites the work of lawyer (and U.S. Senate candidate) Elizabeth Warren. There are three problems with the theory that families’ gains have come from the employment of economically pressured wives. First, all signs are that the embrace of work among wives is part of a longer-term story in which women get to lead more fulfilling lives. In developed countries around the world, birth rates have declined, marriage and parenthood have been pushed off to increasingly older ages, and women have had more educational opportunities. A June 2000 NBC News/Wall Street Journal poll found that just one-fifth of married parents had a wife who worked “to make ends meet” but preferred staying home. Second, husbands’ earnings are likely lower than they would have been because some of them have reduced the hours that they work and changed the type of jobs they take in response to the money their wives now bring in. Finally, husbands’ earnings would be higher today if not for the increased competition from working wives.

Reflecting his misguided view that it’s been downhill for the last 50 years, Noah titles his first chapter “Paradise Lost.” He writes that the political economy of the Golden Age “represents a path that would be abandoned in the late 1970s,” suggesting that paradise was not so much lost as thrown away. But he never provides a convincing case that things might have evolved differently. Economic growth slowed throughout Europe after the 1960s, and median-income growth since 1980 has been no better in Canada, France, Germany, or Sweden than in the U.S.

Noah says we should worry about rising inequality, but he evades the central questions: Do gains at the top really come at the expense of the incomes of the middle and bottom? If they do not, do the gains worsen inequality of opportunity in the next generation? Noah’s discussion hardly even attempts to make the case that inequality matters. Instead, he counters various arguments that inequality does not matter, which he invariably describes as “conservative.” He spends a single paragraph shrugging off the view that absolute living standards are more important to people than equality.

On the question of income mobility, Noah casually dismisses the possibility that having a higher absolute standard of living than one’s parents is more important to Americans than ending up at a higher rank than one’s parents when assessed against peers. But if “absolute mobility” is what really matters to Americans, and if the U.S. looks more impressive than other countries in this regard, then the American Dream doesn’t look quite so delusional, nor ambivalence about inequality quite so misguided. These are empirical questions that have not been answered, but Noah cannot even imagine a story in which Americans’ conceptions of their opportunities are consistent with reality.

Noah closes the book with the obligatory policy-recommendation chapter that so often proves unsatisfactory even when written by genuine policy experts. Noah wants to “soak the rich,” create a public-jobs program, “impose price controls” on colleges, “revive the labor movement,” and “elect Democratic Presidents.” This last recommendation derives from research by Princeton political scientist Larry Bartels claiming to show that the middle class and poor do better when a Democrat is in the White House — research debunked, separately, by National Review contributor Jim Manzi and political scientist James Campbell as dependent on fragile methodological specifications.

In the course of the book, Noah deftly explains the relative roles of discrimination, rising economic returns to education, increased trade and immigration, declining unionization, and public policies in contributing to rising inequality. Where the topics are narrower and more clear-cut, Noah is on firm ground in his presentation of the evidence and his conclusions about where it points. Where they involve broad questions of economic and political power, his ideological presuppositions tend to bring back one’s frustration, even as his writing remains engaging. I learned a lot from Noah’s thoughtful mini-history of the labor movement, even as I marveled at his refusal to concede that there is any legitimacy in corporate concerns about the fairness of the regime that New Deal policy created. His chapter focusing on the unique factors behind the divergence of the top 1 percent from everyone else is particularly well done, but readers who are not inclined to view the top 1 percent as the “stinking rich” will have to get past Noah’s demagogic chapter title.

It is probably too much to ask of an inequality primer that it be engaging and simultaneously transcend the ideological commitments that taint so much treatment of the topic. Inequality, after all, is an issue that inspires even Nobel laureates to make sweeping arguments that academic research does not support. At least Noah writes well. But I do hope that in five years I can refer interested parties to a second inequality primer against which The Great Divergence can be balanced.

Mr. Winship is a fellow at the Brookings Institution.