Ignorance and inequality


High-income Americans have done much better than families in the middle since the 1970s. That is a fact. In January, while testifying before Congress's Joint Economic Committee, I pointed out that based on published Congressional Budget Office estimates, one could conclude that more than 60 percent of the growth in average family income from 1977 to 1989 had gone to the top 1 percent of families. In March, the New York Times picked up that number and created a political firestorm that has not yet died down.

If you believe conservatives, I am a villain for raising this issue. President Bush's chief domestic-policy counselor has called me a near communist, the Wall Street Journal's editorial board has called me dishonest and some Republican members of Congress have called me an undisciplined ideologue. Right-wing columnists like Alan Reynolds and Paul Craig Roberts have attacked the CBO and the New York Times as being politically motivated. What is the real story?

There are indeed heroes and villains here. But the heroes are the hard-working, honest researchers at the CBO, the Federal Reserve and the Bureau of the Census who have done their best to give us an accurate picture of the American economy. The villains are the people who are trying to intimidate these researchers, suppress their results and discredit anyone who tries to tell the truth about what is happening in this country. Let's start with the good guys. For some years, researchers at the Bureau of the Census have reported evidence of growing inequality in wages and family incomes. These census data made it clear that the U.S. distribution of income, which had been stable from the 1950s to the 1970s, had started to diverge sharply. As Finis Welch, a UCLA professor who is one of the leading experts in this field -- and a political conservative -- put it, ''The higher up you were, the more you gained; the further down you were, the more you lost."

But census data, on their own, are limited by a technical problem called ''top coding" -- if your income is very high (currently above $ 125,000), it is reported only as ''over $ 125,000." This means that the census data don't tell us anything about people whose income goes from say $ 1 million to $ 2 million. Normally, this isn't very important, but in the 1980s there was a lot of circumstantial evidence of big income gains at the very top. For example, the annual Fortune survey of executive compensation showed a quadrupling in the pay of top CEOs and prices of key trophies for the rich, like apartments in ''good buildings" in Manhattan, skyrocketed.

Rich data. To get a better picture of what was happening in the upper echelons, the CBO and the Fed launched two independent studies. The CBO study involved matching data with information from the IRS to produce a more complete picture of the income distribution. The Fed study examined the distribution of wealth by using a sophisticated sampling procedure to choose more than 3,000 families for extensive interviews.

Both studies discovered that the growth in inequality in America was even greater than suspected. The CBO study found that while a typical American family had seen at best a rise of a few percentage points in income between 1977 and 1989, the real income of families in the top 1 percent more than doubled. The Fed study found that between 1983 and 1989 the net worth of the richest 1 percent of families grew from 31 to 37 percent of all wealth -- an unprecedented shift.

Neither the CBO nor the Fed studies suggested any judgment about whether conservative economic policies had caused the surge in inequality. Nonetheless, conservatives have reacted with fury. Their attack has taken two main forms: First, they assert that any rise in inequality was the fault of Jimmy Carter; second, they denounce the reliability of the numbers and question the motives of anyone who draws attention to them.

The claim that it was all Carter's fault rests on a familiar dating game. The recession of 1979-82 hurt the great majority of American families, while the long recovery benefited almost everyone. Conservatives like to blame the recession on Carter and take credit for the recovery. This is wrong -- both the recession and the recovery were essentially the responsibility of Paul Volcker's Fed. But it really doesn't matter for this issue. The rapid growth in the U.S. economy from 1982 to 1989 was possible because the earlier recession had left so much economic slack. By 1989, the growth spurt was over. And yet at the end of the 1980s boom, middle-income families were at best a few percentage points better off than they had been in 1977, the first year of the Carter administration. The only big gainers were the very well off, and especially the top 1 percent.

The CBO has come under the harshest attack, because it is an agency of the Democratic-controlled Congress. Conservatives have angrily declared that its estimates reflect political bias. In particular, they claim that its large estimate of the income surge among the well-off is misleading, because it includes capital gains on assets. Readers of the Wall Street Journal probably think by now that including capital gains in income is a major sin and that it is the whole basis of the calculation. In reality, well-off people do realize a substantial part of their income in the form of capital gains, so they should be in the calculation. But the main point is that it doesn't make much difference. If you include capital gains, the CBO numbers show a 101.7 percent rise in the income of the top 1 percent, versus 4.5 percent for the middle quintile. If you throw capital gains out, the increase for the top 1 percent is reduced to about 80 percent. That's still 18 times the gain of families in the middle.

That number, by the way, is based on a March CBO memorandum on the income distribution controversy that the Wall Street Journal trumpeted as a ''divorce" from my original calculation and a demonstration that the distribution of income had been ''remarkably stable." The memo actually confirms my calculation, revising it slightly upward to 70 percent, before suggesting some alternative measures. The important point is that readers of the Journal were falsely led to believe that these alternative measures changed the basic story -- unless you think that a situation in which the incomes of the top 1 percent rise by 80 percent, while those of middle-income families rise less than 5 percent, represents ''remarkable stability."

Poor reading. The Fed study has also been attacked. Conservative polemicist Alan Reynolds argued in a Wall Street Journal Op-Ed article that since the top 1 percent of a sample of 3,000 families contains only 30 families, the results were unreliable. In fact, the Fed used a sophisticated, two-stage sampling procedure that allowed it to ''oversample" the wealthy; the estimate of average wealth for the top 1 percent was actually based on more than 400 families. The important point is that the Wall Street Journal printed a column attacking the Fed study written by an ''expert" who apparently didn't understand the report he was criticizing.

Republican Rep. Richard Armey of Texas has offered another argument: He points out that the wealth of families with more than $ 50,000 annual real income rose more slowly than average wealth. But as conservatives themselves love to point out, the fraction of families earning more than $ 50,000 rose during the period of 1983-89, from 25 to 30 percent. By using a larger group in his second year than in his first, Armey has dragged down the average, producing a meaningless number.

The attacks on the CBO and the Fed, then, have involved a mix of falsification (the Wall Street Journal), misreading (Reynolds) and bad math (Armey). This is typical of most political debates. More ominous, however, are signs that the administration is trying to suppress information.

In early May, the Census Bureau released a report on low-wage workers, those who do not make enough to bring them above the poverty line even if they work full time. This report showed that the number of such workers increased sharply through the supposedly prosperous 1980s. In contrast with the promptness with which the bureau usually reports results, this report's release was delayed for three months after its completion. When it was finally released, the procedure was peculiar. Census reports invariably are accompanied by a press release and usually by a press conference. Both were omitted in this instance. If this was not a case of the supposedly nonpolitical Census Bureau giving in to political pressure to try first to hide a report, then get it out with minimal attention, it was a very good imitation.

Growing inequality is a real national problem. Unfortunately and alarmingly, it seems that conservatives have already decided on their answer to that problem: Hide it from the public.

Originally published, 6.1.92