Not your grandpa’s inequality

By Robert J. Samuelson

It’s not the 1920s. One common line in the debate over economic inequality is that the income gaps between the rich and everyone else have reverted to levels not seen since the ’20s or earlier. The conclusion is damning. It implies that we’ve lost nearly a century of social progress. But as economist Gary Burtless of the Brookings Institution shows, it’s “flatly untrue”: Inequality isn’t as great now as in the ’20s. This is history’s real lesson. Although the debate over inequality is legitimate and important, we shouldn’t distort it with misleading and overwrought rhetoric.

Start with a thumbnail portrait of the 1920s economy. It may be that, by some statistical indicators, inequality was great. But at the time, what most Americans experienced was sweet prosperity. Recessions, after the severe 1920-21 slump, were mild. Unemployment was low. New technologies spawned mass markets. From 1919 to 1929, car ownership rose from 6.8 million to 23.1 million. Annual radio sales jumped 1,300 percent from 1922 to 1929.

“The boom was built around the automobile, not only the manufacture of vehicles, but tires and other components, roads, gasoline stations, oil refineries, garages, and suburbs,” wrote the late economic historian Charles Kindleberger. “Electrical appliances — radios, refrigerators, vacuum cleaners — unknown at the start of the decade, were commonplace by 1929. Another innovation was in motion pictures, with talkies introduced in 1926. . . . While impressive, the boom was not frenzied, except perhaps in stock market speculation.”

The figures that have invited comparisons between now and then come from economists Thomas Piketty, author of the controversial book “Capital in the Twenty-First Century,” and Emmanuel Saez of the University of California at Berkeley. Using tax records, they have estimated that today the richest 1 percent of Americans receive roughly 20 percent of the nation’s pretax “market income,” mainly wages, salaries, dividends, interest and other business income. The richest 10 percent account for about 45 percent of “market income.” These shares mirror those of the 1920s.

From this and other studies, two tenets of conventional wisdom have emerged. First, today’s income distribution is as lopsided as it was in the 1920s. Second, most income gains in recent decades have gone to the people at the top; incomes for most middle-class and poor Americans have stagnated.

Not so, argues Burtless in a recent essay.

The trouble with “market income,” he notes, is that it ignores taxes, most fringe benefits (mainly employer-paid health insurance and pensions) and government transfers (Social Security, Medicare, food stamps and the like). All these affect inequality and living standards. So does the slowly shrinking size of U.S. households. Smaller households mean that a given amount of income is spread over fewer people. Per capita incomes rise. Two people with $75,000 are better off than four people with $75,000.

Correcting for these shortcomings alters much of the conventional wisdom, says Burtless. The Congressional Budget Office makes many of the needed changes in its studies of income distribution and tax burdens. It finds that inflation-adjusted after-tax incomes have not stagnated for most groups. For the poorest fifth of Americans, they rose about 50 percent from 1979 to 2010. For the middle 60 percent of Americans, gains over the same period averaged about 40 percent. In any year, tiny increases may be barely detectable; there may even be declines. But over time, gains are significant.

Nor is today’s income distribution as skewed as in the 1920s, says Burtless. We have a welfare state now; we had none back then. “In 1929 government transfer payments to households represented less than 1 percent of U.S. personal income,” he writes. “By 2012 they were 17 percent of personal income. . . . Everything we know about the distribution of government benefits suggests they narrow income disparities.”

The Piketty-Saez estimates of “market income” may have reflected the 1920s’ actual income distribution, because the market was all there was then. Now, its role is tempered. The CBO’s estimate of the top 1 percent’s share of total after-tax income was about 13 percent in 2010 — a huge amount but well short of the Piketty-Saez figure of 20 percent or more. We have not reverted to the 1920s.

Note that Burtless is not contending that inequality hasn’t increased dramatically. It has. By the CBO estimates, the after-tax incomes of the richest 1 percent have tripled since 1979. But just because they’re pulling away doesn’t mean that everyone else is standing in place.

The inequality debate won’t fade soon. The changes in relative incomes are too great. The political and intellectual appeals are too powerful. But in thrashing out what’s happened and why — and what, if anything, to do — we should stick to the facts and avoid careless historical comparisons.

Read more from Robert Samuelson’s archive.