Monday, September 27, 2010

Expect more class warfare

From yesterday’s San Francisco Chronicle:
Soaring unemployment has poured salt into a long-festering economic wound - the widening gap between rich and poor Americans, a trend that has been accompanied by a hollowing out of the middle class.

One unimpeachable view of this wage gap comes from a Federal Reserve report that examined the period leading up to the housing bust and recession, and noted that "income became more 'unequally' distributed over the 1988-2006 period."

A more provocative analysis emerges from research co-written by UC Berkeley economist Emmanuel Saez.

After studying Internal Revenue Service records since 1913, Saez found that the fraction of total income reported by the top 1 percent of tax filers peaked at 23.94 percent in 1928.

Thereafter, income for this elite group fell for decades, only to rise from the 1980s through 2007, when this top strata took in 23.5 percent of all reported income.
Economist Emmanuel Saez, the author of this study, is a left wing progressive that constantly manipulates data to achieve his self serving political views. He’s done this before. Back in 2003, he released the original version of this study (the recently released data reported in the Chronicle is simply an expansion of the original study and not a whole new study) which was lauded by liberal pundits everywhere as hard proof that George W. Bush, the GOP, and capitalism, were wreaking havoc on the middle class. But in a public takedown, Alan Reynolds of the Cato Institute unraveled many of the allegations in Mr. Saez’ study in a well written article for the Wall Street Journal. One of the salient points Reynolds summarizes, and which Saez fails to address in his retort, is that counted in the upper 1% of the Saez study are business profits from S-corporation returns. Needless to say, counting business profits for one group in a study that purports to evaluate the income gap among different groups is going to predictably skew results; this of course, was all conveniently overlooked by Saez and class warfare cheerleaders.

Another important point that Reynolds makes that Saez weakly replied to is the matter of transfer payments: The lower tiers of the income distribution tend to depend more on Social Security checks, disability checks, welfare checks, housing assistance, etc. Since the income data that Saez relied upon does not really take these transfer payments into account as income, the income data for the lower tiers will be much lower; this is simply dismissed by Saez as irrelevant in his response to Reynolds.

Lastly, Saez never acknowledges in his study, or the retort to Reynolds, that many in the lower tiers tend to work fewer hours than the upper echelons (see Income and Wealth by Alan Reynolds, pp.26-27). There are many part-time workers and fewer year-round workers in the bottom 20 percent by income. Saez never takes this obvious reality of those living in the lower distribution into account. Hence, a gnawing income gap appears in the Saez study.

You see these types of studies from time to time all claiming the growing wealth of the upper classes at the expense of the American middle class. I find it curious that these sorts of studies always seem to hit the news cycle right around election time. The original Saez study was released 8-9 months before an election but got much more press as the election date got closer. Now we see the expanded Saez study making the news rounds before mid-terms. Make no bones about it, this newly expanded study will be used as firm and incontrovertible data for left wing politicians to advance their arguments for wealth distribution and higher taxes.


Robin said...

For an update on the debate take a look at

VH said...

Thanks for the link, Robin.