From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: No new taxes                  (*) for the rich
Date: Mon, 05 Oct 92 12:05:09 EDT
Organization: IFS Project, University of Michigan
Distribution: na
Reply-To: jwh@citi.umich.edu

In article <2OCT199215540246@nssdca.gsfc.nasa.gov>, bschlesinger@nssdca.gsfc.nasa.gov (Barry Schlesinger) writes:
|> [details deleted]
|> 
|> I computed the average income for each of the quintiles, rather 
|> than the median.  I think that average is the statistic most commonly 
|> used.  Another reason for going to the average is that the use of 
|> discrete incomes in the example, rather than the continuous incomes of 
|> reality can have dramatic effects on a single median point.  

The statistic used in the income studies that I have seen has always
been median income by quintile.  The size of my sample population may
exaggerate the effects of income changes but the principle is the same:
you cannot make judgements about what really happened to people without
looking at the underlying data.  Saying that one income group benefited
while another suffered is dishonest without throughly examining the
underlying demographics.  I have never seen this done by the proponents
of the 'rich got richer' concept.

|> 
|> |> The question of special selection also applies to the years chosen 
|> |> above [1983-1989].  If 1981-1983 are charged to Carter, than 1989-1991,
|> |> when the consequences of 80s economics hit home, should be charged 
|> |> to Reagan.
|> |> 
|> 
|> > I believe the numbers being quoted generally are for the years 1979 to
|> > 1989.  From 1979 to 1983, there was a big decline in lower quintiles.
|> > This decline can be reasonably attributed to Carter's policies.  I
|> > would be interested in seeing the numbers from 1983 to present.  I'll
|> > bet they don't show near the disparity as the 1979 to 1989 figures.
|> 
|> What is really needed is the year-by-year statistics.  That set of 
|> figures will eliminate any set of bias caused by special selection.
|> 

These would be truely useful numbers to see.  Unfortunately, special
interest groups aren't generally interested in an honest discussion of
the facts, they would rather choose their statistics carefully to
'prove' their point.

|> On the new issue of the cause of the recession.  The price of petroleum 
|> skyrocketed because of political events in Iran in 1979, the result of 
|> a previous - and disastrous - bipartisan policy of support for the 
|> Shah of Iran in the face of his unpopularity, leading to a violent
|> revolution and the rule of extremists.  This led to more money chasing
|> fewer goods -- the same amount of oil, and increased costs throughout
|> the economy.  The economy stagnated and the rate of inflation soared. 
|> Carter's Federal Reserve Chairman instituted tight money policies,
|> which had the combined effect of choking down inflation and the
|> economy at the same time.  When inflation finally subsided in the
|> Reagan years as a result of these measures, the economy was able to
|> recover. 
|> 

The Fed did choke down inflation and the economy.  The Reagan tax cuts
helped cushion the effect and pulled the country out of recession 
before inflation had been completely eliminated.  Economic growth is
the best way to cure inflation.  Economic growth means more goods.
A constrained money supply which chases more goods will put a severe
damper on inflation.

|> > To anyone who has even a cursory knowledge of statistics, the arguments
|> > put forth to claim that other factors may have contributed to the
|> > difference are quite reasonable.  Household sizes do change, peoples
|> > incomes do vary with age, people do age.  If someone is going to
|> > make claims that particular policies were largely responsible for
|> > a shift in distribution, it is up to them to show that the other
|> > reasonable factors did not contribute in any meaningful way.  I have
|> > yet to see that claim made.
|> 
|> [again, a lot left in because of the disappearance of the old posts]
|> 
|> If the burden of proof to answer all qualitative objections is on the 
|> authors of a study, then no study could ever be accepted.  Those 
|> arguing that the income shifts are the result of household size and 
|> mobility during individual lifetime must show that these effects are 
|> large enough to produce the observed changes in income distribution to 
|> effectively refute the original study.  Simply to say that these 
|> effects exist, without showing that they are significant is not 
|> enough.
|> 

I'm not saying that a study must address all qualitative objections,
but a valid study will attempt to control for most of them.  Could
you imagine a medical study that didn't try to control for various
factors.  The research would be widely ignored.  It wouldn't be
published in major journals and it wouldn't likely make the evening
news or newspapers.  Economic 'studies' such as the ones commonly
put out by groups such as 'Citizens for Tax Justice', make no attempt
(as far as I can tell) to control for obvious factors which may 
influence their statistics.  They simply look for some 'fact' and
manipulate it to support a predetermined conclusion.

|> 
|> > Income mobility has been studied by various people.  The conclusions
|> > have all been that most people do move around among different quintiles
|> > throughout their life.
|> 
|> But it is still necessary to demonstrate that the effect of this 
|> mobility on income levels is large enough to produce the observed 
|> shifts, using realistic models for this mobility.
|> 

I believe this has been done.

|> 
|> > The arguments that I have seen, however, 
|> > do appear to make both intuitive and empirical sense.  They certainly
|> > raise enough red flags as to make the original claims highly suspect.
|> 
|> Let's look at the kinds of mobility discussed.  First of all, as 
|> people graduate from school, others replace them.  So unless the 
|> income of certain occupations as a class are changing, as long as the 
|> mix of people remains the same, the income mix will be unaffected.  

The replacement is not necessarily one to one.  However that is not
the point.  The point is that recent gradutes will tend to make less
money than people who graduated several years ago.  If you have a large
graduating class, you will have a drag on income statistics as these
people enter the economy.

|> Now, let's look at the the issue of increases in entry level people or 
|> promotions.  If pay were based strictly on seniority, the effects 
|> would be as claimed.  But in other jobs, pay goes with position.  If 
|> too many people are in the age group for promotion, some won't get 
|> promoted.  So, in spite of aging, not everyone moves up.  The job mix, 
|> and hence the income mix, remains the same.  Similarly with entry 
|> level.  If there is a large influx of entry level people and not very 
|> many people above them, some will get promoted rapidly and move out of 
|> the low income brackets. 

Promotion (pay increases) will generally only occur if a person gains
experience appropriate to the new position.  Companies don't generally
have some preallocated number of positions which earn a fixed dollar
amount.  A new hire with little experience is not going to be
paid the same as another person with more experience for the same
labeled position.

|> 
|> In point of fact, the population statistics suggest a decrease in the 
|> number of individuals of entry level age, as the baby bust hits the 
|> 20s.  So this effect would tend to increase the income of the lowest 
|> percentile.
|> 

However, you also have had a recent influx of women who were previously
not working entering the work place.  Lack of job experience will tend
to keep the income level of these people down, at least until experience
is gained.

|> Now, in addition to the job mix, there is the question of individual 
|> mobility.  The contribution of students to the lowest levels has been 
|> cited.  But what fraction are students and what fraction are 
|> pink-collar single mothers in dead-end jobs and what fraction are the 
|> underemployed of Appalachia?  And what are their counterparts at the 
|> higher end, the temporarily rich?  What fraction of people gradually 
|> work their way quintile by quintile, and what fraction enter at a 
|> particular level and stay there until retirement.  A lot of the higher 
|> income people are the doctors and lawyers and business executives who 
|> move immediately into the high paying classes when they get out of 
|> school and stay there until retirement.  If they have invested wisely, 
|> even after.  For many people, once they start work, their income class 
|> is fixed.   
|> 

All good points and all make my point that you have to look deeper
to find more honest answers.  Aggregate income statistics do not
look deep enough to control for the factors you cite.

|> |> >On what criteria are you basing this statement?  Income levels grew
|> |> >for all groups.  More jobs were created.  
|> |> 
|> |> Has the income been corrected for inflation?  The income graphs I've seen 
|> |> indicate stagnation over the past 20 years, with ups and downs.  There
|> 
|> > The reports deal with 'real' income, i.e. income which has been corrected
|> > for the effects of inflation.  Of course, there are different measures
|> >  for inflation.  Using standard CPI, the graph that I'm looking at shows
|> > a decline from 78 to 83 with a rise from 82 to 86 (the last year on the 
|> > chart).  When income is adjusted for CPI and decreasing family size,
|> > the dip and rise still exist, but are smaller.  Moreover, the long term
|> > trend changes from negative to positive.  
|> 
|> A long-term trend needs a longer baseline.  1978-1986 is recession and 
|> recovery.
|> 

Agreed, however any trend needs a starting point.  If the general
trend has been down, and turns up rather dramatically, can you conclude
that the trend is still down, or that it has reached bottom and is
turning around?  Regardless of the long term trend, the results during
the 'bad' Reagan years represented improvement, not further decline.

|> > It seems perfectly reasonable
|> > to me to adjust figures to take into account varying family sizes.
|> > If a family is smaller, it requires less income to achieve a given
|> > comfort level.  If the goal is to determine if people now are better
|> > off than people from years ago, these adjustments need to be made.
|> > An additional change which has occured over the years is the increase
|> > in non-wage benefits and other wage supplements, which are not
|> > counted as family income.  Again, this is reasonable.  If people are
|> > receiving more benefits, such as health insurance, now than they
|> > were several years ago, this can offset a decline in actual salary.
|> > Obviously at some point, a decline in salary will more than offset
|> > the value of the non-reported benefit, but to ignore the benefit
|> > in determining income improvement (or decline) is wrong.  When income
|> > figures are adjusted to take into account decreasing family size,
|> > real median family income trends upward, rising by 20 percent between
|> > 1970 and 1986.  When adjustments are made to account for the
|> > growth in non-wage income, the rise may be over 28 percent.
|> 
|> Adjustments are tricky; economists have argued at great length about 
|> what is reasonable.  

Agreed.  However it seems appropriate to at least acknowledge that
there are other perspectives on the same data that may or may not
concur with a groups 'conclusions'.  Even if the group publishing
the study doesn't acknowledge other conclusions, a good news source
should.  Unfortunately most news organizations simply reformat the
press release and never look for the truth (or a closer approximation
of the truth).

|> > |> was a temporary rise out of the early 80s recession, but that is over,
|> > |> and the longer term pattern shows no permanent resumption in the rise
|> > |> of incomes as existed from the start of World War II to 1973.  Jobs
|> > |> have not been created as fast as the number of people in the job
|> > |> market has increased.  That is why unemployment is up. 
|> 
|> > We're in a recession, that is why unemployment is up.
|> 
|> Unemployment is up; that's why we call it a recession.  A recession is 

No, growth is down, that is why it is called a recession.  Lower growth
generally results in lower unemployment.

|> a title, not a cause.  More to the point, the high employment of 1989 
|> is as atypical of the long term as the low employment of the present.  
|> That's why you have to look at the long term.  If you look long 
|> enough, you'll notice that even the best periods of the past 20 
|> years do not have as full employment as the 50s and 60s. 
|> 

We are also in the middle of an economic restructuring caused mainly
by the growth of computer and information technology.  We are also
not coming out of a major world war.  I'm not saying that you don't
have a valid point, I just think that more context is needed.

|> 
|> > The job mix has changed, no question.  Do you have some references
|> > which show that it is this change in job mix which has affected
|> > income? (whether there is a decrease or increase is a matter of debate)
|> > Looking at income statistics and noting that there has been an alteration
|> > of the job mix does not allow one to conclude that the changeing job
|> > mix caused the change in income statistics.
|> 
|> Nor more than stating that incomes change as the result of mobility 
|> allows on to conclude that mobility is the cause of the changes.  
|> There was a story in the September 25 Washington Post talking about the 
|> disappearance of well-paying manufacturing jobs and their replacement 
|> by poorer paying service jobs.  The experience of one individual was 
|> used as an illustration. 
|> 

What evidence was used to back up this claim?  Many manufacturers now
subcontract out services that they used to do in house.  These jobs
were formerly classified as 'manufacturing jobs' and are now 
'service' jobs.  The job is the same, the pay is the same, only
the classification changed.  There is no doubt that there are
some manufacturing jobs which have disappeared.  There are also
new service jobs which are low paying.  In general, we are in an
economy where education is becoming very important.  Those without
education will certainly suffer.

|> 
|> >The information
|> > that I have posted has generally been finer grained analysis of the
|> > original claims.  It's easy to make sweeping generalizations when
|> > you are looking a aggregate data.  I've tried to show that when
|> > you disaggregate, you find that the original conclusions are not
|> > as easily supported.  If anyone has information on why the information
|> > I posted is not applicable, or has been mistated, please post
|> > those arguments.
|> 
|> The arguments have been qualitative.  While the mobility effects look 
|> plausible, the numbers don't seem to show that they can be the prime 
|> contributor to income disparities.  In addition, many claims for 
|> increasing long-term prosperity are based on special selection.  If 
|> you look over the last 50 years, the last 20 don't look very good to 
|> the average American.
|> 

I think this can largely be attributed to selective memory.  It's
easy to see how 'bad' things are today and glowingly look to the
past at how much 'better' things were.  For some people this may
be true, but I don't believe that on the whole we are worse off
today than 20-50 years ago.  Imagine returning to an era of
high interest rates and high inflation.  Wage and price controls,
etc.  This was 20 years ago.  It doesn't look very good in my
book.  Another example, consider the recent cable TV legislation.
Can our country *really* be that bad off when one of the more
hot topics is whether cable customers are paying too much for
their remote controls (a 'clicker' as one Congressman put it)?


Whew, I've reached the end.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943