CBO Against Piketty?

Written by: Stephen Hsu

Primary Source: Information Processing

This report using CBO  (Congressional Budget Office) data claims that income inequality did not widen during the Great Recession (table above compares 2007 to 2011). After government transfer payments (taxes, entitlements, etc.) are taken into account, one finds that low income groups were cushioned, while high earners saw significant declines in income.

… The CBO on the other hand defines income broadly as resources consumed by households, whether through cash payments or services rendered without payments.2 Its definition of market income includes employer payments on workers (Social Security, Medicare, medical insurance, and retirement) and capital gains. On top of market income, CBO next adds all public cash assistance and in-kind benefits from social insurance and government assistance programs to arrive at “before-tax income.” Finally, the CBO’s last step is to subtract all federal taxes including personal income taxes, Social Security payments, excise taxes and corporate income taxes to arrive at “after-tax income” or what other government series call disposable income.3 …

CONCLUSION: It is now widely held that inequality increased dramatically in the decades prior to 2007. For example, Piketty and Saez’s research shows that 91 percent of economic growth between 1979 and 2007 went to the wealthiest 10 percent. But when comparing the CBO’s more comprehensive definition of income (including employer benefits, Social Security, Medicare, and other government benefits), 47 percent of growth of after-tax income went to the richest 10 percent.14

Consequently, both methodologies reveal a real income inequality problem.15 But this paper once again shows that the IRS data give a misleading impression of what has happened with income inequality (not growing as fast in the period from 1979 to 2007 and decreasing, not increasing in the years after 2007). While many on the left were unhappy with the first ITIF paper and my earlier work criticizing Piketty and Saez, it is less clear how they will react to this paper.16 On the one hand, the paper argues that inequality doesn’t always rise and that it didn’t since the onset of the Great Recession. On the other hand, it argues for the efficacy of robust income-support and growth policies and ultimately provides a refutation to a critique that Republicans have made of President Obama.

Almost no increase in US Gini coefficient since 1979 once transfer payments are accounted for:

Is it possible that nameless government employees at CBO have done a better job on this problem than the acclaimed economists Piketty and Saez? (What kind of serious statistical researcher uses Excel?!?)

See also Piketty on Capital and Piketty’s Capital.

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Stephen Hsu
Stephen Hsu is vice president for Research and Graduate Studies at Michigan State University. He also serves as scientific adviser to BGI (formerly Beijing Genomics Institute) and as a member of its Cognitive Genomics Lab. Hsu’s primary work has been in applications of quantum field theory, particularly to problems in quantum chromodynamics, dark energy, black holes, entropy bounds, and particle physics beyond the standard model. He has also made contributions to genomics and bioinformatics, the theory of modern finance, and in encryption and information security. Founder of two Silicon Valley companies—SafeWeb, a pioneer in SSL VPN (Secure Sockets Layer Virtual Private Networks) appliances, which was acquired by Symantec in 2003, and Robot Genius Inc., which developed anti-malware technologies—Hsu has given invited research seminars and colloquia at leading research universities and laboratories around the world.
Stephen Hsu

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