AIER, Great Barrington – Week 9 – The Rich Get Richer and the Poor Get Poorer, Or Do They?

Callum Hudson

It was a busy week at AIER as I continued to do research for Mr Magness’s upcoming research report, Inequality in America.  This report combines two research papers by Phil Magness and Vincent Geloso, one that was released in 2017 and another that is currently being finalised. 

The previous paper, How Pronounced Is the U-Curve? Revisiting Income Inequality in the United States, 1917-1945 attacks a well-known paper on rising inequality by Thomas Piketty and Emmanuel Saez, whose inequality figures have been greatly publicised and purported by the media and many economists.  The common narrative is that income inequality declined around 1940 and has been rising steeply since 1980, which reinforces the narrative people want to believe, “the rich get richer and the poor get poorer”.  Mr Magness’s paper questions the quality of the data and the mathematics used to equalise the tax returns across time so that they can be comparable.  There are numerous issues with the data recorded by the IRS, such as too few tax returns to calculate income shares in earlier years and changes in income recording standards at the IRS.  Magness and Geloso make more appropriate and accurate adjustments to account for discrepancies within the data.  The results show a much flatter curve, indicating that income inequality did not have the rapid decline between 1917 and 1945 as previously suggested.   

The second paper, which will be finalised in the coming days, compares state reported income to federal reported income and shows a mass under-reporting of income at the federal level in the lower income brackets.  This causes the top income shares to be inflated at the federal level.  Piketty and Saez’s results come from federal reported income.  I had been helping collect data for the above paper over the past few weeks. 

The majority of this week I spent researching issues that the media and academic papers report as being caused by the “rising” level of inequality within the United States.  From the undermining of democracy to the increase in crime, from low economic growth to unaffordable housing, the infamous rise in inequality is the apparent culprit.  The second half of the week I prepared a short summary of my research for Mr Magness to use in his research report. 

On the weekend Micha, my fellow Mannkal scholar at the AIER, and I went sightseeing around Great Barrington with Mr Magness.  We went to the past president, Martin Van Buren’s house and national historic site and the Thomas Cole national historic site.  It is unbelievable how quickly the past nine weeks have gone, it is sad to think that I only have three weeks left of my internship.  I look forward to making the most of my last three weeks at AIER.