Is Income Inequality Really Getting Worse? New Report Shows Leading Economists Overstate Disparities

WASHINGTON—While income inequality is rightly a cause for concern in the United States, influential analyses by leading economists have dramatically overstated the trend in disparities between the wealthiest people in society and everyone else, says a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy. Policymakers need a better understanding of the real state of income inequality to make the best policy choices to increase productivity and grow wages for American workers.

The report, “Sensational, But Wrong: How Piketty & Co. Overstate Inequality in America,” critically analyzes the widely cited work of economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, who argue that the richest 1 percent of Americans have received the lion’s share of recent economic growth while the bottom 50 percent have received either none or a mere pittance. ITIF’s report shows they dramatically overstate their case. In fact, middle-class incomes have been growing, and data from the Congressional Budget Office show the rate of growth in inequality has been slowing.

“Getting economic policy right depends on getting the facts and analysis right. Income inequality has certainly grown, but Piketty, Saez, and Zucman did everything they could to exaggerate the picture,” said Stephen J. Rose, author of the report. “Without understanding what is really happening with income growth for U.S. households, policies that are meant to address the problem will be misdirected.”

Among the methodological problems with the Piketty, Saez, and Zucman analyses, the report highlights:

• In one paper, Saez cherry-picked the time period he measured to show that from 2009 to 2012 the gains even though the income of the rich in 2007 was higher than that of 2012;
• In another paper, Piketty and Saez focus on tax filers and exclude Social Security income from elderly households. This research leads to the head-turning, but incorrect conclusion that median incomes in 2014 were lower than they were in 1968.
• In a third paper, older children living at home are treated as low-income people, even if they live in a family with a modest to high income.
• In the same paper, they grossly misallocate the value of government services such as defense and education. While everyone in the bottom 50 percent of the income distribution gets $4,000 of government services, those in the top 1 percent get $190,000 each and those in the top one-hundredth of 1 percent get $4 million each.

“Measured and accurate analyses show that inequality has grown since 1980, but the real incomes of middle-class Americans have improved modestly,” Rose said. “The takeaway is that economic policies to ‘grow the pie’ do in fact benefit everyone, not just the rich. Turning around America’s anemic productivity growth will make it possible to have more robust and consistent wage growth for most American workers.”

Read the report.