Sensational, But Wrong: How Piketty & Co. Overstate Inequality in America

Many pundits argue the biggest problem facing America today is income inequality. But the important question is, how much is this disparity growing? If inequality is growing at a massive rate—with the wealthy getting virtually all the gains of a growing economy—then policies aimed at simply “growing the pie” are unlikely to be successful. But if the growth of inequality is slowing—which this study shows to be the case—then a combination of growth and “opportunity” policies is what’s needed. Without turning around America’s anemic productivity growth—which has been slower since the end of the Great Recession than at any time since the federal government started measuring it in the late 1940s—it will be impossible to restore robust and consistent wage growth for most American workers.

Much of the current narrative about massive increases in inequality stems from the work of economists Thomas Piketty and Emmanuel Saez. Over the last 15 years, they have claimed that the richest 10 percent of Americans have reaped up to 90 percent of the benefits of growth while the bottom 90 percent’s living standards have stagnated since 1973. In fact, Piketty and Saez’s updated data show the median U.S. income in 2014 ($29,200) was lower than in 1967 ($30,012).

But much of their analysis is flawed. They cherry-pick data and make questionable methodological choices that maximize the jarring effect of their findings—vastly overestimating the true rate of inequality growth. This report takes a careful look at their research and highlights critical flaws, such as:

• Including too many individuals with exceptionally low incomes, such as students living at home;
• Examining data from “tax filers” rather than households;
• Focusing solely on “market incomes” and failing to include government cash benefits;
• Reporting income inconsistently; and
• Misallocating the value of public services delivered by government, such as education and defense.

Piketty and Saez’s data on middle-class stagnation—particularly their finding that the lion’s share of growth had accrued to the richest 1 percent of households—has garnered a great deal of attention, almost becoming accepted wisdom. For progressives, these findings are grounds for massive changes in tax, spending, and regulatory policies. For President Trump, the trend is proof of the “American carnage” that has wreaked havoc among the middle class.

But getting economic policy right depends on getting the facts and analysis right as well. Progressives may very well be justified in advancing an economic policy agenda that’s focused almost solely on ensuring a fairer distribution of national income and wealth if Piketty et al. were correct. But, as this paper shows, their analysis was wrong. Productivity growth—even the relatively weak growth of the last 15 years—has benefited most households. Yet this analysis does not show, and should not justify, an Ayn Rand-like approach that leaves everyone susceptible to the vicissitudes of the marketplace. Inequality clearly has grown, and stronger measures are needed to address it, including higher tax rates on the wealthy. But better analyses of what is really happening with income growth for U.S. households suggest we need more effective growth and opportunity policies.