Has U.S. Income Inequality Really Increased?

This paper is a comment on a policy analysis paper by Alan Reynolds of the Cato Institute, titled “Has U.S. Income Inequality Really Increased?” On January 11, 2007, Gary Burtless participated in a panel discussion on the topic at the Cato Institute with Alan Reynolds and Diana Furchtgott-Roth of the Hudson Institute.

Alan Reynolds poses a straightforward question: “Has American inequality really increased?” Based on my reading of the evidence, including his new paper and the talk we just heard, my answer is “Yes, inequality has increased.” I would guess, based on the paper and his talk, this is not the take-away conclusion he hoped to hear.

Reynolds is skeptical there is any clear evidence showing inequality has increased, at least since the late 1980s. He offers a number of reasons for his skepticism. Most of them boil down to this: The many data series that show inequality has gone up are not worthy of our trust, whereas the series that show very little trend should be accepted at face value.

Like many students of the income distribution, I take seriously some of Reynolds’s criticisms of the data on income disparities. No single data source is perfect, and a couple of them have serious flaws. An unwary user can draw misleading conclusions if the data problems are ignored. Reynolds points to some serious problems, and in many cases fair-minded experts will agree with him.

The problem is, he is harshly critical of data series that do not support his viewpoint, while he is usually silent about equal or more serious problems with data sets that show little change in inequality.

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