Saturday, November 05, 2011

CBO on inequality

While those with a life may have missed it, there has been an interesting back and forth between Jonathan Chait and James Pethokoukis over the topic of income inequality. It started off with this column by Chait that prompted responses from Pethokoukis here and here, which then led to this return volley from Chait that was lauded by Paul Krugman. In Chait's latest piece on the topic he writes:
Here are the basic facts. For Americans at most income levels, wage growth has dramatically slowed over the past three decades, compared with the three decades that followed World War II. At the same time, overall inequality has risen, and inequality between the richest 1 percent and everybody has skyrocketed. The Congressional Budget Office’s masterful study lays out these facts in impressive detail.
The CBO study confirms Chait's claim that income inequality has increased. But it also has this to say:

In other words, every single income group is better off by a minimum of 18 percent. So where is the problem here? This is yet another impressive victory for capitalism, steadily raising the standards of living for everyone. Further, as Mark Perry notes, because of income mobility between groups -- people tend to start off in a lower group, rise to a higher group during their prime earning years and then fall back down again in retirement -- the composition of these groups is always changing. Thus, a number of people in the bottom 20 percent who saw their incomes rise by 18 percent probably also spent some time in a higher income group where the gains were even greater. 

Furthermore, let us imagine a scenario in which income inequality actually diminished, with the bottom 20 percent seeing their incomes rise by 10 percent, the next 60 percent by 8 percent and the rest by 5 percent. Everyone would be worse off than currently, and yet income inequality would be reduced. Would that be cause for celebration and uncorking the champagne? Rhetorical.

Income inequality remains nothing more than a red herring tossed around by the left in a bid to delegitimize capitalism. Remember, without windmills to tilt at, there is no need for government intervention and the left is then out of a job. 

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