Middle class income is higher than Piketty claims

Reuters

French economist Thomas Piketty, May 13, 2014.

Article Highlights

  • "Rising income inequality" is not alienating America's middle class as proposed in Piketty's new book

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  • American household wealth and personal income have grown at virtually the same pace since 1960

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  • Analysis of income & wealth distribution over time requires careful analysis of the data

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More about the important issue of wealth distribution across America's population, also raised by Piketty's book, will be forthcoming in Makin’s upcoming AEI study.

The oddest thing about the huge flap over economist Thomas Piketty's data-crammed, "rich-get-richer"- tome, "Capital in the Twenty-First Century," is this: Its claim, that "rising income inequality" is alienating America's middle class, was shown to be false well before its spring 2014 publication.

Most labor market specialists, save perhaps don't-pester-me-with-data grumps like Paul Krugman, have long known that once you adjust for taxes, government transfers, household size and the change in labor force composition toward services and away from manufacturing, the "rising income inequality" chimera disappears.

 The issue has been addressed extensively across a broad spectrum of academics and think tanks. The fall 2013 Brookings Papers on Economic Activity published an extensive study by Michael Elsby, Bart Hobijn and Aysegul Sahin on how faulty assumptions about average wages among the self-employed and changes in payroll share of industries can distort measures of labor's share of income. Brookings Institution labor market specialist, Gary Burtless, in a May Real Clear Markets piece, reminded us that, "To disregard the impact of transfers and progressive taxation on the distribution of income and family well-being is to ignore America's most expensive efforts to lessen the gap between the nation's rich, middle class, and poor." Washington Post columnist Bob Samuelson expanded on Burtless' analysis. Both observed that Piketty’s claim, that American income inequality is at its highest level since the 1920's, collapses once adjustments are made for some obvious distortions. Burtless noted that, "an increasing percentage of the gross incomes received by Americans is excluded from the most commonly cited income measures.”

[READ: Piketty's Old News]

This fact reveals a great irony. The higher, more progressive taxes, proposed by Piketty, economist Emmanuel Saez and Krugman as remedies for rising income inequality would actually increase income inequality under the faulty measures of income distribution which they employ. Give me a break!

My AEI colleagues Kevin Hassett, in an interview for PBS and a conference at the Urban-Brookings Tax Policy Center, and Stan Veuger, in print and radio, have written and commented extensively on the errors in Piketty's assertions about rising income inequality. In addition, economist Martin Feldstein has documented how tax changes, ignored by Piketty, distort his results. Importantly, Feldstein observed that American household wealth and personal income have grown at virtually the same pace since 1960. This fact, that America's wealth/income ratio has been constant since 1960, undercuts Piketty's claim that a real return on capital above the growth rate leads inevitably to a rising inequality of wealth and income that must be offset by more progressive tax rates.

In sum, a broad spectrum of serious scholars has long agreed that accurate analysis of income and wealth distribution over time requires careful analysis of the data. In Burtless’s words, a "comprehensive-and-meaningful-definition of family income” renders as "flatly untrue" Piketty's claim that American inequality has returned to peak levels last seen in the 1920's.

[GALLERY: Cartoons on the Economy]

Piketty's new book is a valuable and impressive study insofar as it has provoked a careful re-examination of what we know about the important issue of income distribution. The most widely cited measures are misleading. That said, the middle class is still hurting, due to the disproportionate wealth destruction it suffered in the aftermath of the 2008 financial crisis.

 

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John H.
Makin

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